Off track: America's economy is losing its competitive edge, and Washington hasn't noticed.

• Author: Wallace-Wells, Benjamin

There is a moment in the lifespan of every cool new gadget--two years after Bill Gates buys one, a year and a half after the popular press gets wind of it--that its price drops enough to show up in significant numbers on the shelves at Best Buy, the electronic superstore. At this instant, the product becomes accessible for middle class Americans, something they can imagine themselves buying, and so these electronics stores have become temples to innovation, the place most Americans go to get as close to the cutting edge as most of them dare. On weekend afternoons, Best Buy is as bustling as a souk, full of grandmothers and little kids tooling around with digital video cameras and geeked-out salesmen explaining to the moms that the cell phones in their hands have nearly the computing power of desktop PCs. But it's the men who are the most transported, moving from department to department with gawky reverence. At a Best Buy I visited recently in Alexandria, Va., I watched one dad gaze in wonder at row upon row of giant plasma televisions--elegant silver-framed screens that seemed not just to capture the way the world looks, but to improve upon it. He watched bees extract honey from flowers, and spiraling footballs drop into the hands of receivers, and you could almost see a two-part thought process play out over his face: First, If I wait a year, these sets will be half the price. Second, Screw it, I'm buying one now!

But there was something else I noticed: Whereas a decade ago the most creative, groundbreaking stuff came from Silicon Valley, now it all seemed to come from overseas. The plasma televisions were from Korea; the computer-like cell phones were from Finland; the feature-packed digital cameras were from Japan.

During the last six months, we have begun, quietly, to enter a newly tense moment, with university presidents, business leaders, and columnists delivering ominous-sounding reports and editorials about the threat to American innovation posed by a freshly competitive world--the renewed vitality of western Europe, Japan and Korea, and the ravenous growth of China and India. "We no longer have a lock on technology," David Baltimore, a Nobel laureate and the current president of the California Institute of Technology, wrote recently in the Los Angeles Times. "Europe

is increasingly competitive, and Asia has the potential to blow us out of the water."

What worriers like Baltimore are beginning to grasp is that these changes are emerging just as the American economy is being made more vulnerable by the movement of manufacturing and service jobs overseas. As a result, we've become increasingly dependent on maintaining our edge in discovering the new technologies and applications that create whole new industries--just as other countries are closing that gap.

This is a fundamentally new threat. In the '70s and '80s, Japanese and European firms adopted American technology and made key improvements in process and design to shave cost and increase quality. Now, foreign companies are making many of the most important breakthroughs themselves. This shift is part of a change in strategy: instead of copying our innovations, foreign governments have decided to copy our very model of innovating. They have studied our centers of invention, the Silicon Valleys and Research Triangles, where university scientists, venture capitalists, high-tech entrepreneurs, and educated, creative workers, many of them from overseas, congregate. These creative centers, our competitors have learned, were the result of federal policy--decades of investment in basic scientific research; patent law changes that allowed universities to capitalize on discoveries made in their labs; financial reforms that gave rise to the venture capital industry; and immigration laws that opened the door to talented foreigners.

Over the last decade, our competitors have implemented similar policies at home: They have built universities, reformed financial markets, invited in immigrants, and made the development and adoption of new technologies national goals. Now, they're reaping the benefits. The technologies behind plasma screens emerged have been refined and expanded in labs under a research partnership between the Korean government and the electronics maker Samsung. Europe established its lead in mobile phones when European countries set a single standard for mobile communications (American firms are hobbled by lower-quality spectrum and three competing standards).

Foreign competitors are edging out the United States not just in today's snazzy consumer goods, but in the technologies that will define the marketplace in the years to come. Most economists and new economy thinkers believe that the likeliest candidate for the Next Big Thing is the research being done in nanotechnology, a catch-all term for the manipulation of matter at the molecular level. Nanotechnology could someday be used to repair broken DNA to prevent cancer, create supercomputers the size of pinheads, or fabricate building materials 150 times the strength of steel. American scientists have been tinkering with nanotechnologies for 20 years. But some of the most cutting-edge research today is coming from overseas. Last August, Israeli scientists announced that they'd managed to develop manipulable nano-wires, tiny organic tools they could use to rearrange atoms and conduct electricity over microscopic spaces, a breakthrough a leading MIT nanotechnologist admitted American researchers had been chasing "for many years" In September, Japanese scientists announced that they would soon be able to use nano-engineering to build a computer chip 30 times more powerful than Intel's best. The breakthrough led American analysts to conclude that the United States was beginning to lose the race to bring nanotechnology products to market.

The worry of economists and business leaders is not simply that Japan, Israel, or South Korea will beat us, like one football team does to another. It is, more precisely, that we'll...