Competitiveness

Innovation, including the diffusion of information technology throughout the economy, is key to boosting productivity, which in turn is at the heart of increasing living standards.

Open Forum on U.S. and OECD Innovation Policy

July 21, 2010
Join ITIF for a discussion on innovation policy both in the United States and the OECD with U.S. CTO Aneesh Chopra, Andrew Wyckoff, Karen Kornbluh, Robert Atkinson and others.

Around the globe and here at home policymakers are increasingly recognizing the critical importance of innovation and innovation policy. Not only has innovation become vitally important—for companies and countries alike—in gaining or retaining competitive advantage, innovation is key to solving a host of pressing societal challenges. Moreover, innovation policy is evolving to reflect changes in the innovation system and the increasingly sophisticated approaches of its practitioners. Read more »

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Hatching Innovation

CQ Weekly
Rob Atkinson frames the need for a national innovation policy and addresses critics who say this would be industrial policy.

Everything Should Not be on the Budget Cutting Table: The Case for Expanding Public Investment

July 20, 2010
| Blogs & Op-eds

The International Monetary Fund recently scolded the U.S. government for running large budget deficits. Leaving aside the absurdity of cutting deficits when unemployment is still extremely high, it’s clear that at some point – as joblessness declines toward 5 percent – deficit reduction will need to begin in earnest. But the real question is how to do that. There’s a risk that the Washington economic class – grounded as they are in 20th century neo-classical economics — will fail to balance the twin imperatives of fiscal discipline and public investment.

Indeed the common refrain that has become the new “group think” in DC is that “everything should be on the table” when it comes to addressing the debt. For example, the Bipartisan Policy Center’s Debt Reduction Task Force says, “everything should be on the table.” Even President Obama, who has at least rhetorically talked about the need for increases in public investment and fought to include public investment in the stimulus, now says that everything should be on the table. Other groups echo this intellectually easy, but intellectually simplistic, position. Pete Peterson’s Concord Coalition likewise calls for “applying budget discipline to all parts of the budget.” The New America Foundation’s Committee for a Responsible Budget supports a budget freeze on all discretionary spending. For these budget hawks, subsidies to farmers to produce crops that aren’t needed fall in the same category as funding for the National Science Foundation to advance science and technology critical to our nation’s future: they both cost money and both should be cut.

The Government’s Role

But there are some things that governments do – on the tax and spending sides – which drive productivity, spur innovation, improve health, clean up the environment and create other benefits that most certainly should not be on the table. The National Commission on Surface Transportation Financing (which I had the honor of chairing) recently highlighted a federal highway and transit funding gap of nearly $400 billion over the next five years. Increased federal support for highways and transit would lead to significantly greater societal benefits (reduced traffic congestion, higher productivity) than the costs in revenues. Yet some groups wave the budget red flag to oppose expanded infrastructure investment, even if increased user fees, such as the gas tax, pay it for. As ITIF has demonstrated, increasing the Research and Experimentation Tax Credit from 14 to 20 percent would return $9 billion more to the Treasury than it would cost. And as ITIF and the Breakthrough Foundation have shown, solving climate change requires significant increases in federal support for clean energy innovation, but the benefits (saving the planet) are massive.

If neo-classical-inspired budget hawks want everything to be on the table, liberal Keynesians want to put practically nothing on the table, except higher taxes on the wealthy and business. For example, economist Jamie Galbraith would take entitlement reform off the table. His solution: pray the Chinese keep lending us money. Likewise, Jeff Faux, founder of the liberal Economic Policy Institute argues that, “The deficit projections no more reflect a crisis of “entitlement” overspending than they reflect a ‘crisis’ in any other category of spending, like military spending or agricultural subsidies. Sensible governance understands that the fact that a program area is expanding does not make it the source of fiscal imbalance. But with entitlements off the table, you can’t solve the government’s fiscal problems simply by raising taxes on the rich.

All Spending Is Not the Same

What’s behind this widespread unwillingness to prioritize investment? Budget hawks fear that sparing one item from the chopping block will only validate the demands of interest groups to exempt their pet programs. In addition, many adhere to a neo-classical economics perspective, which holds that government plays a negligible role in economic growth and should be neutral with regard to private sector activity. In the purest form of this thinking, everything is on the table, because nothing is more important than anything else. To paraphrase Michael Boskin, a neo-classical Bush I economist, a dollar of public investment on computer chips has the same societal value as a dollar spent on potato chips. But government should be anything but neutral. Science and infrastructure funding is more valuable than farm subsidies. Government support for research in computer chips is more valuable than support for potato chips.

For liberals, reducing spending on entitlements will not only harm working Americans, but will also reduce economic growth, since Keynesian doctrine holds that growth comes from increasing aggregate demand – meaning pump more money into the economy, period.

In contrast, an innovation economics approach to the budget distinguishes between spending on consumption and spending on investment. For innovation economics advocates, all spending (either on the tax or expenditure side) should be on the table, and all investment (on the tax and expenditure side) should be off the table.

Tax, Cut and Invest

The last time Washington paid attention to deficits was in the first Clinton term. At that time PPI Vice President Rob Shapiro wrote a series of reports with the title, “Cut and Invest.” The notion was that we should cut unnecessary spending and use a significant share of the savings to invest in the nation’s future, including education, infrastructure and research. That was the right message then and it is the right message now. Although today, such a report might be best titled, “Tax, Cut and Invest.” To solve the budget deficit in a way that enables the significant increases needed in investment, we need to raise some taxes, cut some spending and increase some investment.

The general outline should look like this: On the tax side, we should let the Bush tax cuts on the wealthy expire, including: dividend taxes, estate taxes (above a certain modest size) and top marginal rates. We should increase the gas tax by at least 15 cents a gallon (and index it to inflation) and at the same time institute a carbon tax. We should consider a border-adjustable business activity tax. We should eliminate the home mortgage interest deduction. (Home ownership has many societal benefits, but as we see from other nations without these large tax incentives, nations can get high levels of home ownership without wasteful subsidies.)

On the spending side, we need to deal with entitlements, including: progressive indexing of Social Security benefits and increasing the retirement age, continued health care reform — particularly focused on driving innovation to cut costs and cutting entitlements to farmers — farm subsidies. This should be a gradual process to spread the pain over time.

And most importantly, we should significantly expand investments. We need to expand investments in education and training, science and research, technology (including, but not limited to clean energy) and physical infrastructure. In order to ensure that companies in the U.S. are globally competitive and create jobs here at home, we need to expand corporate tax expenditures. For example, create a new corporate competitiveness tax credit that would include a much more generous credit for research and development, and a credit for business investments in workforce training and new capital equipment, especially software. Making these investments will cost money in the short run. But they will also generate returns to the economy and the government in the long term. In economic downturns, successful corporations don’t cut key investments because they know that these investments are vital to gaining market share and competitive advantage in the moderate term. Governments should think the same way.

So let’s stop talking about putting everything on the table and instead recognize that not only do investments need to be off the table, they need to get more from what’s on the table.

Is America Suffering an Innovation Gap?

July 9, 2010
ITIF President, Rob Atkinson, appear on the show, Ideas in Action with Jim Glassman. On the show he discusses the state of innovation in America today.

According to some measures, America has fallen below Iceland as a leader in developing new technologies. What is the state of innovation in America today? What policies should the private sector, the government and the American university research system institute to ensure America remains a leader in innovation in the future? ITIF President, Rob Atkinson discusses the state of innovation in America today on the show Ideas in Action with Jim Glassman. Read more »

Book Discussion with Clyde Prestowitz: "The Betrayal of American Prosperity"

June 30, 2010

Please join ITIF on Wednesday, June 30 as Clyde Prestowitz, President of the Economic Strategy Institute, discusses his latest book, “The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era.” Read more »

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Testimony on Innovation and Commercialization in America

June 22, 2010
| Testimony and Filings

ITIF President Robert Atkinson's testimony before the Senate Commerce, Science, and Transportation subcommittee on Competition, Innovation, and Export Promotion, outlines the declining leadership of U.S. scientific commercialization and the steps we can take to become more globally competitive.

Watch Dr. Atkinson's Testimony

Divorce Washington at Your Peril, Silicon Valley

June 15, 2010
| Blogs & Op-eds

Washington, D.C. and Silicon Valley are separated by 3,000 miles and vastly different cultures. But if the Valley itself and, more broadly, the U.S. economy are to thrive, then Washington and Silicon Valley need to appreciate each other more than they currently do. From my perch inside the Beltway, I’d like to offer some words of advice for the Valley.

First, I salute your entrepreneurial and organic spirit. It has helped transform the world and create jobs and wealth. But while Washington doesn’t always understand what Silicon Valley does or needs, you need to abandon the myth that Washington had nothing to do with your creation.

Remember: the Internet emerged from the Defense Department’s Advanced Research Projects Agency (ARPA). Oracle got started doing work for the Central Intelligence Agency and Intel sold much of its early output to the Pentagon. Sergey Brin was working on bibliographic research with an National Science Foundation (NSF) grant when he conceived Google. The founders of Genentech and other Bay Area biotech firms relied in part on federal research money to universities. Granted, these and many other companies became forces in the market independent of government, but does anyone really think that the federal dollars that flowed into Stanford, U.C. Berkeley and the Lawrence Livermore Lab had nothing to do with the Silicon Valley of today?

Second, whatever tangential role the feds played years ago, many in Silicon Valley agree with Michael Arrington, editor of the widely read blog Tech Crunch, that it was time for Washington to “just leave Silicon Valley alone.” Oh really? No need for a more generous research and development tax credit? What about intellectual-property infringement? Are the busy people creating and running the companies in the Valley going to lead the charge for cracking down on IP theft in countries like China? What about federal funding for research? I don’t need to tell you that a lot of the best minds and ideas that end up in your companies were trained and/or nurtured at these prestigious California institutions, where federal money flows in from NSF, the Department of Energy, the National Institutes of Health and others. Imagine where the Valley will be in the future without the public private/partnerships and government research dollars. The countries with the fastest broadband are the ones in which government invested in the networks.

Third, don’t kid yourselves — while success in the IT industry in the past might have depended on private companies simply commercializing and marketing their good innovations, success going forward depends on robust public-private partnerships. Intelligent transportation systems, the smart electric grid, mobile payments, digital signatures, health IT and, of course, broadband all represent transformative changes in how we live and work. The commercial opportunities for private companies will be huge, but can companies alone lead the way? Probably not. As we have shown in a report, other nations are ahead of us in all these areas and it is because of smart public private IT partnerships. Only when government commits to the historic redesigns of how we travel, communicate, share data, conduct commerce and use energy will the vast commercial opportunities become accessible for Silicon Valley companies.

Fourth, don’t assume that if government simply loosens up H-1B visa restrictions and lowers taxes, everything else will take of itself. Yes, we need to be able to attract and retain the best minds in the world so we are not starved for talent in the U.S. And yes, we should lower corporate taxes to compete for mobile, high-value-added jobs with countries that have lower effective corporate tax rates. We need to make our R&D credit more generous (we now rank 18th among OECD countries) and should explore tax incentives tied to investment and workforce training workers. But it’s important to note that these countries are matching tax cuts with proactive government efforts to marshal resources to establish leadership in IT and other key economic sectors. Silicon Valley is hanging its fate on a very narrow reed by focusing on worker visas and taxes, and giving short shrift to the many other ways where government plays an integral role in its future.

That leads to the fifth and final piece of advice: Play a more active role in shaping policy in Washington that is good for the country and good for Silicon Valley. Rather than wishing the government would simply cut taxes and leave, get behind government efforts to make innovation a more central part of economic policy. Support more robust investments in national laboratories and university research. Stand up for government efforts to kick start the development of “platform technologies” like the smart grid and intelligent transportation systems. Lead the charge for a better trade policy that defends U.S. innovators against foreign technology mercantilism. Silicon Valley has been the chief beneficiary of Washington’s research and vision, and stands to gain the most from these policies going forward.