Innovation Policy around the World: United States: A Strategy for Innovation

Innovation Policy around the World

DIANA FARRELL

THOMAS KALIL

United States: A Strategy for Innovation

The administration’s comprehensive approach includes research, education, infrastructure, a conducive market environment, and a quest to meet national needs.

On September 21, 2009, President Obama released his Strategy for American Innovation, which he unveiled in a major policy address that he gave in Troy, New York. The goal of the strategy is to establish the foundation for sustainable growth and the creation of quality jobs. Although the private sector is responsible for job creation and developing new products, services, and processes, the strategy identifies three critical roles for the federal government. First, the federal government must invest in the building blocks of innovation, such as fundamental research, human capital, and infrastructure. Second, the government must create the right environment for private-sector investment and competitive markets by, for example, promoting exports, reforming export controls, encouraging high-growth entrepreneurship, ensuring that financial markets work for consumers and investors, protecting intellectual property rights, and promoting regional innovation clusters. Third, the government should serve as a catalyst for breakthroughs related to national priorities such as clean energy, health care, and other grand challenges of the 21st century.

Despite the U.S. economy’s historic strength, its economic growth has rested for too long on an unstable foundation. Explosive growth in one sector of the economy has provided a short-term boost while masking long-term weaknesses. In the 1990s, the technology sector climbed to new heights, only to fall back to earth at the end of the decade. The tech-heavy NASDAQ composite index rose more than 650% between 1995 and 2000, but then lost two-thirds of its value in a single year.

After the tech bubble burst, a new one emerged in the housing and financial sectors. The formula for buying a house changed. Instead of saving to buy their dream house, many Americans found they could take out loans that by traditional standards their incomes could not support. The financial sector willingly propped up real estate prices, funneling money into real estate and finding innovative ways to spread the credit risk throughout the economy. Between 2000 and 2006, U.S. house prices doubled while the financial sector grew to account for fully 40% of all corporate profits.

This too proved to be unsustainable. House prices lost a quarter of their value in two and a half years. The housing decline and accompanying stock market collapse wiped out more than $13 trillion in wealth in 18 months. The bursting of the bubble based on inflated home prices, maxed-out credit cards, overleveraged banks, and overvalued assets wreaked havoc on the real U.S. economy, triggering what is expected to be the longest and deepest recession since World War II and driving the unemployment rate to its highest level in a quarter century.

This type of growth isn’t just problematic when the bubble bursts; it is not entirely healthy even while it lasts. Between 2000 and 2007, the typical working-age U.S. household saw its income decline by nearly $2,000. As middle-class incomes sank, the incomes of the top 1% skyrocketed. This phenomenon has a number of causes, but among them were the rising asset prices and the proliferation of financial sector profits.

A short-term view of the economy masks underinvestments in essential drivers of sustainable, broadly shared growth. It promotes temporary fixes over lasting solutions. This is patently clear when looking at how U.S. education, infrastructure, health care, energy, and research—all pillars of lasting prosperity—were ignored during the last bubble.

Education. Too many children are not getting the world-class education they deserve and need to thrive in this new innovative economy. Despite research documenting that quality matters greatly in early childhood education settings and that investments in high-quality early learning have the highest potential rates of return, the federal government lacks the level of investment needed to transform the quality of and enhance access to early education for the youngest children. Studies show that there is a school-readiness gap as early as kindergarten between children from the highest socio economic background and their less affluent peers.

Americans have neglected to provide their children with the rigorous curriculum and instruction needed to prepare them for college and careers. By the end of high school, African American and Latino students have math and reading skills equivalent to those of 8th grade white students. Across the nation, the students with the greatest need for a qualified and effective teacher are also exactly those students most likely to be taught by teachers who lack sufficient background in the subject they teach. The problems persist when students look toward continuing their education past high school. The average tuition and fees at public, four-year institutions rose 26% between the 2000-2001 school year and the 2008-2009 school year. As a result, whereas 94% of U.S. high school students in the top quintile of socioeconomic status continue on to postsecondary education, barely half of those in the bottom quintile do so. Because of the rising costs of four-year institutions, many Americans are turning to community colleges for quality higher education. Yet the federal government has historically underinvested in community colleges, giving them one-third the level of support per full-time equivalent student that it gives to public four-year colleges.

Infrastructure. The nation’s physical and technological infrastructure has been neglected, threatening the ability of U.S. businesses to compete with the rest of the world. The American Society of Civil Engineers assigns a “D” to the country’s physical infrastructure. In 2007, drivers on clogged U.S. highways and streets experienced more than 4.2 billion hours of delay and wasted 2.8 billion gallons of fuel. The United States once led the world in broadband deployment, but now that leadership is in question. Wireless networks in many countries abroad are faster and more advanced. The U.S. electrical grid is still based on the same model employed immediately after World War II. Power interruptions and outages cost individuals and businesses at least $80 billion each year.

Healthcare. U.S. health care costs have been allowed to spiral out of control, squeezing individuals and businesses at a time when they are feeling pressure on all sides. Since 2000, health insurance premiums have increased about 60%, 20 times faster than the average U.S. worker’s wage. At the same time, the number of uninsured Americans has jumped by 7 million to 46 million. Overall, health care is consuming an increasing amount of the nation’s resources. In 1970, health care expenditures were 7% of GDP; now they are 16% of GDP and at this rate will hit 20% of GDP by 2017.

Energy. The U.S. economy has remained dependent on fossil fuels, exposing consumers and businesses to harmful price shocks, threatening economic and national security and resulting in a missed opportunity to lead the clean energy economy of the future. Between 1999 and 2004, the production tax credit for renewable energy was allowed to expire on three separate occasions. In each subsequent year (2000, 2003, and 2004) new wind capacity additions in the United States fell by more than 75% from the year before. Instead of focusing on finding ever more fossil fuels, other countries made aggressive investments in renewable energy, thus creating jobs and growing domestic energy sources.

R&D. The United States has compounded its long-term economic challenges by ignoring essential investments in high-technology research that will drive future growth. During the past four decades, federal funding for the physical, mathematical, and engineering sciences has declined by half as a percent of GDP (from 0.25% to 0.13%) while other countries have substantially increased their research budgets.

Competitive, high-performing regional economies are the building blocks for national growth, and the administration is stepping up its efforts to cultivate regional economic clusters across the country.

Despite this underinvestment in key drivers of growth, the U.S. economy remains the most dynamic, innovative, and resilient in the world. The United States still has world-class research universities, flexible labor markets, deep capital markets, and an energetic entrepreneurial culture. Americans are twice as likely as adults in Europe and Japan to start a business with the intention of growing it rapidly. The United States must redouble its efforts to give its world-leading innovators every chance to succeed. It cannot rest on its laurels while other countries catch up.

Amidst the worst recession since the great depression, the administration’s initial economic objective has been to rescue the economy. The nation has taken, and will continue to take, bold and aggressive steps to stabilize the financial system, jumpstart job growth, and get credit flowing again. But as the economy stabilizes, the United States is moving on from rescue to recovery. Reflecting on the lessons of the past, the nation must rebuild a new foundation for durable, sustainable expansion in employment and economic growth.

Innovation is at the core of that new foundation. Robert Solow won the Nobel prize in economics in part by showing that factors other than capital intensification, in particular human knowledge and technology, accounted for almost 90 percent of the growth in U.S. output per hour in the first half of the 20th century. Economic growth research shows that human skill and innovation are the most powerful forces for improving prosperity over the long-run, which is exactly what we need.

Given its importance, the process of innovation cannot be taken for granted. It begins with the development—of a new product, service or process. But it does not end there. To create value, a new idea must be implemented. Thus successful innovations will diffuse throughout an economy and across the world, affecting various sectors and sometimes even creating new ones. A diffused innovation must then scale appropriately, reaching an efficient size at which it can have a maximal impact.

The full process, from development to diffusion to scaling, has many variables and many inputs. Ideas often fail before they make it through the full chain. But those that do can create value and jobs while improving people’s lives. It is essential for the nation’s long-run prosperity that innovations be allowed to flourish and progress along this chain. And here government has a fundamental role to play.

The appropriate role for government

Although it is clear that a new foundation for innovation and growth is needed, the appropriate framework for government involvement is still debated. Some claim that the laissez-faire policies of the past decade are the right strategy and that the recent crisis was the result of too much rather than too little government support. This view calls for cutting government regulation and gutting public programs, hoping the market will take care of the rest.

However, the recent crisis illustrates that the free market itself does not promote the long-term benefit of society and that certain fundamental investments and regulations are necessary to promote the social good. This is particularly true in the case of investments for R&D, where knowledge spillovers and other externalities ensure that the private sector will underinvest, particularly in basic research.

Another view is that the government must dominate certain sectors, protecting and insulating those areas thought to be drivers of future growth. This view calls for massive, sustained government investment supported by stringent oversight, dictating the type and direction of both public and private investments through mandates and bans.

But historical experience in this country and others clearly indicates that governments that try to pick winners and drive growth too often end up wasting resources and stifling innovation. This is in part due to the limited ability of the government to predict the future, but also because such exercises are distorted by lobbyists and rent seekers, which are more likely to favor backward-looking industries than forward-looking ones. In the United States such failures at picking winners and losers most prominently include the Synthetic Fuel Corporation, a $20 billion project in the 1980s that failed to provide the promised alternative to oil.

Therefore, the Obama administration rejects both sides of this unproductive and anachronistic debate. The true choice in innovation is not between government and no government, but about the right type of government involvement in support of innovation. A modern, practical approach recognizes both the need for fundamental support and the hazards of overzealous government intervention. The government should make sure individuals and businesses have the tools and support to take risks and innovate, but should not dictate what risks they take.

The United States proposes to strike a balance by investing in the building blocks that only the government can provide, setting an open and competitive environment for businesses and individuals to experiment and grow, and by providing extra catalysts to jumpstart innovation in sectors of national importance. In this way, we will harness the inherent ingenuity of the American people and a dynamic private sector to generate innovations that help ensure that the next expansion is more solid, broad-based, and beneficial than previous ones.

A strategy for U.S. innovation

For local communities and the country at large to thrive in this new century, the nation must harness the spirit of innovation and discovery that has always moved the country forward. The United States must foster innovation that will lead to the technologies of the future, which will in turn lead to the industries and jobs of the future.

President Obama has already taken historic steps to lay the foundation for the innovation economy of the future. In the American Reinvestment and Recovery Act alone, the president committed more than $100 billion to support groundbreaking innovation with investments in energy, basic research, education and training, advanced vehicle technology, innovative programs, electronic medical records and health research, high speed rail, the smart grid, and information technology. His commitment also includes broader support in the Recovery Act and in his fiscal year (FY) 2011 budget on initiatives from education to infrastructure. The president’s commitment is not limited to government funding but extends to important regulatory and executive actions such as patent reform, coordinated fuel efficiency standards, net neutrality, permit policy for offshore wind farms, and the appointment of the government’s first chief technology officer. The Obama innovation strategy has three parts: investing in the building blocks of innovation, promoting competitive markets that spur productive entrepreneurship, and catalyzing breakthroughs for national priorities.

Investing in the building blocks of American innovation. President Obama is committed to making investments that will foster long-term economic growth and productivity, such as R&D, a skilled workforce, a leading physical infrastructure, and widely available broadband networks. This commitment is evident in the Recovery Act, which provided an $18.3 billion increase in R&D, the largest increase in our nation’s history. Recognizing the need for long-term and sustained investments in R&D, President Obama has pledged to complete a planned doubling of the funding of three key science agencies: the National Science Foundation (NSF), the National Institute of Standards and Technology, and the Department of Energy’s (DOE’s) Office of Science. In an address at the National Academy of Sciences, the president called for the public and private investment in R&D to surpass 3% of GDP, which would exceed the level achieved at the height of the space race. As the president noted, “science is more essential for our prosperity, out security, our health, our environment and our quality of life than it has ever been before.” To encourage private sector investment in R&D, the president has proposed making the research and experimentation tax credit permanent.

The president’s FY 2011 budget provides a 5.9% increase in civilian R&D, with significant increases for biomedical research supported by the National Institutes of Health, the physical sciences and engineering, and multiagency research initiatives such as the U.S. Global Change Research Program. The administration is also working to increase the impact of this investment by providing greater support for university commercialization efforts, for high-risk, high-return research, for multidisciplinary research, and for scientists and engineers at the beginning of their careers. For example, the NSF’s FY 2011 budget proposes to double the Partnerships for Innovation program, which will help universities move ideas from the lab to the marketplace. Under the leadership of Regina Dugan, the Defense Advanced Research Projects Agency has embraced its mission to sponsor revolutionary, high-payoff research. The National Aeronautics and Space Administration is pursuing a bold new approach for space exploration and discovery, and will dramatically increase its support for game-changing technologies such as advanced engines for launch and in space travel, super light-weight structures, robotic missions, new entry systems, space resource processing, and radiation protection for people and space systems.

To help ensure that the United States has a world-class workforce with 21st century skills, President Obama has launched a series of initiatives to reform the educational system. The Department of Education’s Race to the Top program is providing more than $4 billion in funding to support a national competition among states to improve schools. As part of his FY 2011 budget, the president is proposing an additional $1.3 billion for Race to the Top and will expand the program to include local school districts. In November 2009, the president launched the Educate to Innovate initiative to encourage more boys and girls to excel in science, technology, engineering, and mathematics (STEM) subjects. He committed to hold an annual science fair at the White House with the winners of national competitions in science and technology. As he noted, “If you win the NCAA championship, you come to the White House. Well, if you’re a young person and you’ve produced the best experiment or design, the best hardware or software, you ought to be recognized for that achievement, too.” Companies, foundations, and nonprofit organizations have already pledged $500 million in financial and in-kind support for this effort. Volunteers are signing up for grassroots initiatives such as National Lab Day, which will match teachers with scientists and engineers to bring hands-on science projects into the classroom.

Furthermore, President Obama has set a national goal of once again having the highest proportion of college graduates in the world. To reach that goal, he has proposed nearly doubling the amount of Pell grant scholarships available to 9 million students. He signed into law the $2,500 American Opportunity Tax Credit for college and is now working to make it permanent to give families $10,000 over four years for college. He has proposed a $12 billion American Graduation Initiative to help community colleges improve their quality, work with businesses, improve transfer rates, and support working students.

To connect people and businesses, the president has made large investments in the nation’s roads, bridges, transit, and air networks. The Recovery Act made large investments in the smart grid, high-speed rail, and the nation’s highways and mass transit systems. The president’s FY2011 budget includes $4 billion for a National Infrastructure Innovation and Finance Fund to support projects of regional or national significance, an additional $1 billion for high-speed rail, and a more than 30% increase for the Next Generation Air Transportation System. This will improve the efficiency, safety, and capacity of the aviation system by moving towards a more accurate satellite-based surveillance system.

The Obama administration is committed to expanding access to broadband networks. This is essential for economic growth and job creation. It also has the potential to reduce energy consumption through telework, allow working adults to acquire new skills through online learning, improve communications networks for first responders, and foster rural economic development. The Recovery Act provided $7.2 billion for broadband grants and loans through the Department of Commerce and the Department of Agriculture, and the Federal Communications Commission is hard at work on its National Broadband Plan.

To foster the next wave of innovation in information and communications technologies, the administration is supporting research in areas such as cybersecurity, cyber-physical systems, efficient programming of parallel computing, quantum computing, and nanoelectronics that will extend the rapid rate of progress known as Moore’s Law for decades to come.

Promoting competitive markets that spur productive entrepreneurship. The Obama administration believes that it is imperative to create a national environment that is ripe for entrepreneurship and risk taking and that allows U.S. firms to compete and win in the global marketplace. The administration is pursuing policies that will promote U.S. exports, support open capital markets, encourage high-growth entrepreneurship, invest in regional innovation clusters, and improve the patent system. The administration also strongly supports public sector and social innovation.

In his 2010 State of the Union address, the president set a goal of doubling U.S. exports over the next five years, which will support 2 million jobs. The president’s FY 2011 budget provides a 20% increase for the Department of Commerce’s International Trade Administration (ITA). As part of the National Export Initiative, a broader federal strategy to increase U.S. exports, ITA will strengthen its efforts to promote exports from small businesses, help enforce free trade agreements with other nations, fight to eliminate barriers to the sales of U.S. products, and improve the competitiveness of U.S. firms. The president has also directed that the National Economic Council and the National Security Council to review the overall U.S. export control system, directing them to consider reforms that enhance U.S. national security, foreign policy, and economic security interests. Although the United States has one of the most robust export control systems in the world, it remains rooted in the Cold War era of more than 50 years ago. It must be updated to address today’s threats and the changing economic and technological landscape.

One of the lingering difficulties of the recession is that it is difficult for many small businesses to access the capital they need to operate, grow, and create new jobs. To encourage high-growth entrepreneurship, the president is proposing $17.5 billion in loan guarantees for small businesses, increased incentives for small businesses to invest in plant and equipment, and a permanent elimination of capital gains taxes for investors that make long-term investments in small businesses.

Competitive, high-performing regional economies are the building blocks for national growth, and the administration is stepping up its efforts to cultivate regional economic clusters across the country. The president’s budget supports growth strategies based on stronger regional clusters of innovation through funding in the Economic Development Administration, the Small Business Administration, the Department of Labor, the Department of Education, and the DOE. For example, in early 2010 the administration announced a $130 million competition for an Energy Regional Innovation Cluster. This pilot project is designed to spur regional economic growth while developing energy efficient building technologies, designs, and systems. This will allow a region to develop a strategy that includes support for R&D, infrastructure, small and medium-sized enterprises, and workforce development.

The administration is committed to ensuring that the U.S. Patent and Trademark Office (PTO) has the resources, authority, and flexibility to administer the patent system effectively and issue high-quality patents on innovative intellectual property, while rejecting claims that do not merit patent protection. Currently, patent applicants wait almost three years on average to receive their patents. The president’s budget would improve processing times by providing the PTO with a 23% increase to hire additional staff and modernize IT infrastructure.

Innovation must occur within all levels of society, including the government and civil society. The administration is committed to increasing the ability of government to promote and harness innovation. The administration is encouraging departments and agencies to experiment with new technologies such as cloud computing that have the potential to increase efficiency and reduce expenditures. The federal government should take advantage of the expertise and insight of people inside and outside the government, use high-risk, high-reward policy tools such as prizes and challenges to solve tough problems, support the broad adoption of community solutions that work, and form high-impact collaborations with researchers, the private sector, and civil society.

The administration launched the White House Open Government Initiative to coordinate open government policy, support specific projects, and design technology platforms that foster transparency, participation, and collaboration across the executive branch. The initiative has achieved many important milestones, including publishing government data online to make it easy for anyone to remix and reuse; challenging thousands of federal employees to propose ideas for slashing the time required to process veterans’ disability benefits; releasing information on executive branch personnel and salaries; and making it easier to track the performance of the government’s IT spending.

Catalyzing breakthroughs for national priorities. President Obama is committed to harnessing science, technology, and innovation to unleash a clean energy revolution, improve the health care system, and address the grand challenges of the 21st century.

To support U.S. leadership in clean energy while tackling the threat posed by climate change, the administration is making major investments in energy efficiency, the smart grid, renewable energy, advanced vehicle technology, next-generation biofuels, and nuclear energy. For example, the president’s FY 2011 budget provides $5 billion in tax credits to spur manufacturing of clean energy technologies and $40 billion in loan guarantee authority for nuclear energy, energy efficiency, and renewable energy projects. These loan guarantees will help prove the technical viability of various promising technologies in the early stages of their commercial deployment so that they can later thrive in the marketplace without government support. It provides $300 million for the Advanced Research Projects Agency-Energy, which is charged with supporting projects that can transform the way we generate, store, and utilize energy. It also provides support for RE-ENERGYSE, a DOE/NSF educational effort to inspire tens of thousands of young Americans to pursue careers in clean energy.

Another important presidential priority is health care. Broad use of health IT has the potential to improve health care quality, prevent medical errors, increase the efficiency of care provision and reduce unnecessary health care costs, increase administrative efficiencies, expand access to affordable care, and improve population health. The Recovery Act provides more than $19 billion in investments to support the deployment of health IT, such as electronic health records. The Office of the National Coordinator for Health Information Technology and the Centers for Medicare and Medicaid Services are working to ensure that health information technology products and systems are secure, can maintain data confidentially, can work with other systems to share information, and can perform a set of well-defined functions.

Finally, the administration believes that grand challenges should be an important organizing principle for science, technology, and innovation policy. They can address key national priorities, catalyze innovations that foster economic growth and quality jobs, spur the formation of multidisciplinary teams of researcher and multi-sector collaborators, bring new expertise to bear on important problems, strengthen the social contract between science and society, and inspire students to pursue STEM careers. The president’s innovation strategy sets forth a number of grand challenges, such as solar cells as cheap as paint, educational software that is as compelling as the best video game and effective as a personal tutor, and early detection of diseases from a saliva sample. The National Economic Council and the Office of Science and Technology Policy are encouraging multisector collaborations to achieve these grand challenges that might involve companies, research universities, foundations, social enterprises, nonprofits, and other stakeholders.

The administration is working closely with the National Academy of Engineering (NAE) on this initiative. The NAE has identified 14 engineering grand challenges associated with sustainability, health, security, and human empowerment, such as providing access to clean water, engineering better medicines, securing cyberspace, and restoring and improving urban infrastructure. These grand challenges are already beginning to have an impact on undergraduate education. Twenty-five universities have decided to participate in the Grand Challenge Scholars Program. Undergraduate students at these campuses will be able to tackle these problems by integrating research, an interdisciplinary curriculum, entrepreneurship, international activities, and service learning.

The way forward

Thanks to President Obama’s leadership, the administration has made large strides in developing and implementing an ambitious innovation agenda. This commitment to investing in America’s future that was evident in the Recovery Act continues in the president’s most recent budget, with sustained support for research, entrepreneurial small businesses, education reform, college completion, and a 21st century infrastructure.

The administration is working with a wide range of stakeholders to identify the most promising ideas for implementing and further refining its innovation strategy. There are active interagency working groups on issues such as prizes and challenges, regional innovation clusters, research commercialization, spectrum reform, broadband, open government, and standards. The National Science and Technology Council is leading multiagency research initiatives in dozens of critical areas such as aeronautics, genomics, green buildings, nanotechnology, quantum information science, robotics, and information technology. Through the President’s Council of Advisors on Science and Technology, the administration is able to receive high-quality advice from the nation’s leading scientists, engineers, and innovators on issues such as health IT, advanced manufacturing, clean energy, and STEM education.

The United States has always been a nation built on hope, the hope that it can build a prosperous, healthy world for today and for posterity. These long-standing aspirations depend critically on farsighted investments in science, technology, and innovation that are the ultimate act of hope and will create the most important and lasting legacies.

The United States is still the land of the future. It has held that honor since this continent was discovered by a daring act of exploration more than 500 years ago. It has earned it anew with each passing generation because U.S. scientists, entrepreneurs, and public officials have understood the importance of applying the power of curiosity and ingenuity to the biggest economic and societal challenges.


Diana Farrell is deputy director of the National Economic Council. Thomas Kalil is deputy director for policy of the Office of Science and Technology Policy and senior advisor for science, technology and innovation of the National Economic Council.