The Intellectual Basis of U.S. Trade Policy Trench Warfare

January 26, 2015
| Reports

At its core, trade policy is based in economics. And despite what many economists claim, economics is not a science. And, as with economics, intellectual approaches to the issue of trade differ substantially. These approaches reflect differences in economic doctrine among economists, policymakers and others. This paper postulates and describes three competing economic doctrines that shape the current U.S. trade debate: the predominant neoclassical doctrine (NC), the oppositional neo-Keynesian doctrine (NK), and the emerging innovation economics (IE) doctrine. The IE doctrine (IE) not only more accurately reflects the reality of the 21st century global innovation economy but offers the best opportunity for creating at least some actionable consensus on trade policy moving forward.

The three competing doctrines are:

1. The  Washington free trade consensus grounded in neoclassical economics: The NCs’ primary rationale for and defense of free trade is allocative efficiency, because it privileges this over all else. In this doctrine, free trade lets the global economy allocate production on the basis of nations’ inherent comparative advantage: the belief that countries all have an inherent advantage in some kind of production relative to others. Thus, because all trade is voluntary, no two parties will trade unless they can both improve their welfare, especially consumer welfare, by obtaining things for which they do have a comparative advantage. In this sense, nations do not compete with each other economically.  In addition, even one-sided trade (free trade by the U.S., mercantilist by others) increases U.S. welfare.  By definition then, measures that hinder trade (e.g., countervailing duties, anti-dumping duties, tariffs, non-tariff barriers, etc.) even if used to pressure mercantilist nations to adopt free trade measures reduce allocative efficiencies for both nations involved.

2. The protectionist impulse grounded in Neo-Keynesian economics: Because neo-Keynesians privilege worker, as opposed to consumer, welfare they are resistant to and skeptical of globalization and trade, especially with low-wage nations. Rising demand based on rising worker incomes drives growth and trade, especially with low-wage nations, and might lead to downward pressures on some wages and therefore limit opportunity. Thus, just as NCs will go to great lengths to deny any negative economy-wide impacts from trade, NKs will do the same with regard to the benefits of trade. NKs oppose virtually all new trade agreements, and prefer stronger labor and environmental standards for other nations, assuming that if corporate costs go up in other nations, American workers will benefit. Similarly, NKs oppose stronger enforcement of some kinds of trade rules against foreign mercantilism, especially if those rules (such as IP protection and investor protections) are designed to enable multinational companies in the United States to become more competitive.

3. The qualified free trade support grounded in Innovation Economics: Because IE’s see innovation as the key driver of growth, they embrace global trade in part because trade enables larger markets, which in turn help spur innovation in innovation-based industries with high fixed costs but relatively low marginal costs of production. For IEs nations competitive advantage must be created and constantly fought for.  As a result, they recognize that not all trading regimes, even if they maximize short-term U.S. consumer welfare, are structured in ways that boost productivity and innovation of firms in the United States. Indeed, some policies that improve consumer welfare (e.g., low currency values in foreign nations, export subsidies, etc.), are harmful to competitiveness, productivity and innovation. In a similar vein, IEs oppose policies such as weak intellectual property rights that might increase short-term consumer welfare but would harm innovation in the medium-term. In this sense, IEs see globalization and trade as a key tool for productivity and innovation, but only if the global trading system is structured in ways that limit mercantilist policies and if the United States embraces active national competitiveness policies.

In short, Washington’s trade policy debate is like World War I trench  warfare.  Both major sides (NC and NK) are committed to their  doctrinal views with neither side willing to give an inch for fear of total victory for the other side. Each side is sure that if they just speak more loudly they can prevail on the latest trade policy skirmish. But like an increasing number of other policy areas, this kind of Manichean thinking – the belief by NKs that trade and globalization is largely a force for ill and by NC’s that it is a brilliant and liberating force – serves to obscure reality and hold back progress.

To break this stalemate, the Keynesian left will have to once and for all embrace U.S. integration into global markets and accept “natural” loss from trade.  But the NC right and center will have to abandon their focus on short-term consumer welfare and their naive, textbook beliefs that markets are perfect, wonderful things without failure or political distortion. This will mean recognizing that nations compete; that trade can be negative sum; that if markets apply to goods and services, they also have to apply to currency; and that the only way to save the soul of the global trading system is to first risk going down the protectionist road – by taking aggressive trade enforcement actions in the service of pressing other nations to roll back their mercantilist regimes. And all sides will need to put their shoulder to the political wheel and advocate for a new national trade enforcement and competitiveness strategy that will enable enterprises in the United States to win in global competition.

The Limits of the Knowledge-Based Capital Framework

January 20, 2015
| Reports

Knowledge-based capital (KBC) investment refers to business spending on knowledge-related assets such as R&D, managerial competence, and advertising that incurs future returns for firms. However, many forms of KBC, or intangible capital as it is also known, have to date been absent from national economic accounting, and many advocate their inclusion as an important step toward a better understanding of our changing economy. Unfortunately, the KBC framework as currently conceived suffers from a number of fundamental problems: in particular, it wrongly assumes that that firms are rational investors, glossing over differences in returns to different types of capital, and it oversimplifies the aggregation of capital from the firm level to the national level. These issues need to be overcome before the KBC framework should be applied to economic theory and policy.

The KBC framework as currently promoted by its advocates suffers from two key challenges. First, by incorporating the neoclassical assumption that firms invest rationally in all capital with a positive net return, the framework effectively assumes that all classes of capital spending have the same return for firms and thus the same effect on economy-wide productivity. This assumption obscures more than it reveals. The inclusion of all forms of knowledge capital risks leading policymakers to give short shrift to certain kinds of physical capital, particularly ICT capital, that research has shown plays an outsized role in driving productivity and innovation. At the same time, the KBC framework overvalues whole classes of intangible investments that have little or no impact on growth, such as architectural designs, or that can actually destroy economic value, as we have seen in the case of investments in new financial products.

Second, the KBC framework assumes that the sum of benefits to firms from investments can be aggregated to national levels. There are a number of reasons why this may not be the case, particularly for intangible capital investments in things like advertising and brand development, in large part because much of the benefits are zero-sum in nature with one firm’s benefit coming at the expense of another.

In order to incorporate intangibles into national accounts in a more useful and accurate manner, the following changes should be made to the framework:

It should focus on the types of capital that do the most to drive productivity instead of making an artificial tangible/intangible distinction. Emphasizing KBC sends a misleading message to policymakers: that intangible capital is inherently good and tangible capital is in the “buggy whip” category. The right message, instead, is that investments must be understood first and foremost by the contribution they make to economy-wide productivity and innovation. This should be true regardless of their tangibility.  

In addition, more careful attention should be paid to the problems inherent in aggregating firm-level expenditures into national accounts, as intangibles present a particularly tricky problem due to the peculiarities of market structures. A more careful distinction needs to be made between positive- and zero-sum investments at the national level, and develop more robust estimates of the actual net value created. The value of advertising spending is particularly difficult to pin down objectively. As firms compete for a fixed supply of attention using theoretically costless information, the link between individual and aggregate benefit is elusive. As a concept KBC may be somewhat better linked to international competitiveness than to simple productivity comparisons.

Finally, additional adjustments to methodology should be made, including: finding more accurate ways of valuing human capital, reconciling important differences in international economic systems that can lead to distorted and misleading international comparisons, and including the value of prosumer capital.

Coase and WiFi: The Law and Economics of Unlicensed Spectrum

January 12, 2015
| Reports

In 1959, economist Ronald Coase argued for innovative and needed change to the system of spectrum allocation, challenging the prevailing “command and control” model in favor of one based on property rights and auctions. Today, many continue to not only rely on Coase’s insights to support spectrum auctions over command and control, but also invoke Coase’s writings as almost sacred texts opposing any use of spectrum for unlicensed purposes. We believe that this is an inappropriate reading of Coase and that his economic insights provide strong support for unlicensed, as well as licensed, spectrum. Indeed, Coase was primarily attacking a model of governmental command and control that was in dire need of modernizing. But Coase surely never intended his work to be used to support rigid and doctrinaire thinking about spectrum.

This paper examines the support for a new interpretation of Coase, concluding that a mix of both unlicensed and licensed spectrum is well grounded in Coase’s economic pragmatism. There is a wide range of possible ways to define rights in spectrum use; we should craft those rights in such a way that minimizes the costs of arranging the most socially beneficial outcome. Given the tremendous benefits of both licensed and unlicensed applications, we need a spectrum policy grounded in Coasean pragmatism, not Coasean doctrine. 

Policy makers should not take an overly-narrow focus on one particular type of efficiency (allocative efficiency) of one particular input (radio spectrum).  Using this to focus only on auctions gives short shrift to the obvious and growing value of unlicensed services all around us. Services utilizing unlicensed spectrum are valuable contributors to the economy and should not get short shrift based on misunderstood doctrine.

It is common to think of unlicensed as a gap-filler, as an efficient way to fill guard bands with low-power devices that are unlikely to cause interference to licensed services. While this can be a great opportunity to maximize the use of spectrum, offering up only narrow slices of spectrum is not what unlicensed services deserve. Policy makers should consider new, dedicated unlicensed bands where possible. 

The potential for economic growth through new unlicensed platforms, services, and devices is greatest when large, contiguous blocks of harmonized spectrum with simple service rules are available. Wherever possible, we should avoid creating specialized rules to protect particular incumbents from interference, allowing for simpler, cheaper equipment. All and all, this offers the best potential to maximize spectrum use, which is what professor Coase was really after.

The Myth of America’s Manufacturing Renaissance: The Real State of U.S. Manufacturing

January 12, 2015
| Reports

To listen to most pundits and commentators, U.S. manufacturing has turned a corner and is roaring back after the precipitous decline during the 2000s. Long gone are the dismal days when manufacturing jobs and output were lost due to foreign competition. Higher foreign labor costs, cheap oil and gas here at home and automation are combining to make America the new global manufacturing hub: at least according the now dominant narrative. Indeed, the term “manufacturing renaissance” is used to describe this new state of affairs.

However, as a new ITIF report shows, the data do not support such a rosy scenario.  In fact, at the end of 2013 (the most recent year available) real manufacturing value added (the best measure of the health of U.S. manufacturing) was still 3.2 percent below 2007 levels, despite GDP growth of 5.6 percent. Moreover, there are still two million fewer jobs and 15,000 fewer manufacturing establishments than there were in 2007. Much of the growth since 2010 appears to be caused by a cyclical recovery as demand, particularly for motor vehicles and other durable goods, returns. In fact, 72 percent of jobs gained and 187 percent of the heralded real value added growth in manufacturing between 2010 and 2013 came from transportation sector or primary and fabricated metals.

It is true that some jobs are being brought back to the United States. However, reshoring numbers are modest and the manufacturing sector is also still sending jobs overseas, roughly at the same rate. While this new equilibrium between companies coming and going is certainly an improvement over rapid off-shoring, it is hardly indicative of a renaissance.

At the end of the day, much of the renaissance story is based around several misconceptions about U.S. cost advantages, including incorrect assumptions surrounding Chinese wage growth and productivity, global shipping costs, the role of the U.S. dollar, the importance of the shale gas-driven energy boom, and American productivity growth. The pervasive belief that these factors will drive production back to the United States with little real assistance constrains the possibility of real legislative action to support American manufacturing. The report addresses and refutes the following misconceptions: 

Myth: China’s rising labor costs will soon match U.S. wage

Fact: Chinese wages, while rising rapidly, are still estimated to be just 12 percent of average U.S. wages in 2015. Chinese labor productivity growth and its infrastructure push to open the interior for production reduce the impact of Chinese wage growth.

Myth: Global shipping costs are unusually high, making it easier for the United States to produce more for U.S. and European markets.

Fact: Undersupply led to skyrocketing global shipping costs in 2008. However, today shipping costs are back to normal after falling by 93 percent in a six month period in 2009.

Myth: The Shale Gas boom gives U.S. manufacturing a substantial advantage

Fact: Reduced costs for shale energy has had an impact only on energy intensive industries, and then only a minor one. For 90 percent of the manufacturing sector, energy costs are lower than 5 percent of shipment value. The benefits are largely restricted to the petrochemical sector and drilling operations.

Myth: Currency fluctuations will fix the trade deficit

Fact: In the long-term, macroeconomic theory states that currency valuation should fix trade deficits. However, the United States has been running a trade deficit since 1975, and the trade imbalance is wider than ever. The dollar is currently at a comparable level to where it was during the 2000s, when job losses accelerated, and has proven unable to fix the United States’ persistent trade deficit.

Myth: Superior U.S. productivity growth will restore jobs

Fact: U.S. productivity is not increasing faster than that of other industrialized countries, and is growing much slower than China and South Korea.

In summary, to realistically assess U.S. manufacturing, it is important to have a clear idea of where we are. The debate on U.S. manufacturing should not be informed by anecdotal evidence, promotional consulting reports, or reports from think tanks with an agenda of keeping bad news from dampening support for further global integration. From an in depth analysis of available data on U.S. manufacturing workforce, value added, and productivity, U.S. manufacturing is shown to be in state of moderate, cyclical growth and not experiencing a renaissance.

The 2014 ITIF Luddite Awards

January 5, 2015
| Reports

Technological innovation is the wellspring of human progress. Despite this, a growing array of interests – some economic, some ideological – now stand resolutely in opposition to innovation.  Inspired by Englishman Ned Ludd, who led a social movement in the early 19th Century to destroy mechanized looms out of fear that the Industrial Revolution was going to ruin his way of life, today’s “neo-Luddites” likewise want to “smash” current technology. However, while for the most part these advocates no longer wield sledgehammers, they do wield something much more powerful: bad ideas. Neo-Luddites have worked to convince the public and policy makers alike that technological innovation is something to be thwarted. Indeed, the their target is broad, including genetically modified organisms, new Internet apps, smart electric meters, health IT, big data, and increasingly productivity itself. In short, they want a world in which risk is close to zero, losers from innovation are few, and change is glacial and managed.

These aren’t just interesting social and political developments. Rather they go to a central challenge of our time: the need to rapidly increase living standards and quality of life. For without society supporting risk taking and the constant and rapid introduction of new technologies neither goal will be accomplished. Fostering an environment in which innovation can thrive means first and foremost actively rejecting the increasingly vocal chorus of “neo-Ludditism” that pervades Western societies today. Indeed, if we want a society in which innovation thrives, replacing neo-Ludditism with an attitude of risk taking and faith in the future needs to be at the top of the agenda. (To determine how friendly you are toward technological innovation, go to and take the test).

To highlight the worst neo-Luddite ideas that if followed would lead to reduced human progress, ITIF is releasing its first annual Luddite Award nominations to recognize the ten organizations and or individuals that in 2014 have done the most to smash the engines of innovation. Based on your votes, we will announce the Worst Luddite of 2014 on February 5. Please review the following ten nominations and then cast your vote

The National Rifle Association Opposes Smart Guns

The Vermont Legislature Passes Law Requiring GMO Food Labeling

Arizona, Michigan, New Jersey, and Texas Take Action to Prevent Tesla From Opening Stores to Sell Cars Directly to Consumers

The French Government Stops Amazon From Providing Free Shipping on Books

“Stop Smart Meters” Seeks To Stop Smart Innovation in Meters and Cars

Free Press Lobbies for Rules to Stop Innovation in Broadband Networks

New York State Cracks Down on Airbnb and its Hosts

Virginia and Nevada Take On Ride Sharing

The Media and Pundits Claiming That “Robots” Are Killing Jobs

The Electronic Frontier Foundation’s Opposition to Health IT

Was JFK Wrong? Does Rising Productivity No Longer Lead to Substantial Middle Class Income Gains?

December 16, 2014
| Reports

The runaway success of Thomas Piketty’s Capital in the Twenty-First Century has increased the discussion of growing income inequality and what, if anything, should be done to reduce it. In addition to the book, Piketty has worked with Emanuel Saez in producing a series of computations on changing American incomes. Their claims are stark and widely cited to the point where they have become the received wisdom: between 1979 and 2007 (the last year before the onset of the Great Recession), over 91 percent of income gains due to productivity growth since 1979 has been captured by the wealthiest 10 percent of the population. This left just 9 percent of the economy’s expanded output for the bottom 90 percent of the population who only managed a meager real income growth of 5 percent while GDP per person for all Americans, including the top 10 percent, was rising 74 percent.

Why does this matter? Because if it’s actually true that productivity no longer benefits most workers, then why should elected officials do the hard work of advancing pro-productivity policies like corporate tax reform, investment in science and technology, and the development of sector-based productivity strategies. Better to concentrate their efforts on policies to redistribute gains to the bottom 90 percent.

Piketty and Saez and other advocates of the message that productivity no longer benefits average American workers are wrong. Lower and middle class workers have gained and are likely to continue to gain going forward from increases in productivity.

If progressives want to help raise the incomes of average American workers, a robust economic growth strategy with a strong focus on the key drivers of productivity growth – technological innovation and digital transformation of the economy – will be critical. This does not mean that other strategies to ensure more equal distribution of that productivity (e.g. higher minimum wages, more progressive taxes, universal health care, and the like) are not needed to more closely match median and average income growth. But the lesson from this analysis is that progressives ignore productivity growth at their own peril, and more importantly, at the peril of average working Americans.

The Middle Kingdom Galapagos Island Syndrome: The Cul-De-Sac of Chinese Technology Standards

December 15, 2014
| Reports

Read the Chinese translation of the executive summary.

China has made the development of indigenous technology standards, particularly for information and communications technology (ICT) products, a core component of its industrial development strategy. China has done so believing that indigenous technology standards will advantage China's domestic producers while blocking foreign competitors and reducing royalties that Chinese firms pay for foreign technologies. But, by using indigenous rather than global technology standards for ICT products, China risks engendering a “Galapagos Island” effect that isolates Chinese ICT products, technologies, and markets from global norms, as Japan experienced to the significant detriment of its ICT sector.

This report explains why the development and adoption of global, interoperable technology standards matters. It then explores Japan’s experience with the “Galapagos Island Syndrome,” explaining how that nation’s isolation from global technology markets ultimately inflicted significant damage to an industry that had once been among Japan’s most vibrant.

The report then turns to examining China’s standards development approach and identifies four central shortcomings: 1) it risks picking the wrong standard; 2) it risks delays in standards development (often caused by bureaucratic inefficiency or rivalry) that cause both missed market and economic growth opportunities; 3) it encourages a belief that Chinese markets alone are of sufficient scale; and most importantly 4) even when and if it does succeed in developing indigenous standards, it risks the Galapagos Island  effect that isolates China’s ICT products and markets from global ones. 

The report concludes by offering recommendations for how China can improve its approach to standards development in a way that benefits China’s ICT enterprises, China’s consumers of ICT products, and even the broader global economy. Among other recommendations, it notes that:

  • China should adopt an “open participation model” in product standards development processes and frameworks that is transparent, open, and non-discriminatory for all stakeholders.

  • China should remove policies that inappropriately withhold access to standards-development organizations (SDOs) or other Chinese standards-making forums based on where a company or organization is headquartered.

  • China should align its standards (including national, industrial, and provincial standards) with international standards and use international standards as the basis of Chinese standards and regulations wherever practical. China should not make minor alterations to existing international standards with the intent of developing a China-only standard. 

  • Technology that is not developed or registered in China should still be considered for inclusion in Chinese standards. 

  • Wherever the majority of the rest of a global industry sector has developed a voluntary consensus standardization forum as the preferred venue for the development of certain ICT standards, Chinese industry should join the rest of the sector in the development and use of those standards.

The Worst Innovation Mercantilist Policies of 2014

December 8, 2014
| Reports

Innovation is a central driver of growth. As a result, an increasing number of countries are seeking to become innovation leaders. Unfortunately, the methods that many choose are grounded in “innovation mercantilism”: a strategy that sees technology-based exports as the key to success while relying on distortive and protectionist tactics to achieve that goal. These practices do not just damage other economies; they damage the entire global innovation system, leading to less innovation and productivity. Moreover, they often do not even help the countries embracing the practices, instead, mercantilist policies lead them to neglect the greater opportunity to spur growth by raising the productivity of all sectors of their economies, not just a few high-tech ones.

The Eight Worst Mercantilist Policies in 2014 Are:

  • China: Abused its anti-monopoly law by instigating capricious investigations against foreign multinationals in order to protect domestic firms.
  • China: Threatened the long-term viability of the global solar industry through massive and unfair subsidies to Chinese-owned solar companies.
  • India: Issued a patent rejection for the cancer drug Abraxane.
  • India: Introduced new telecommunications equipment tariffs.
  • Indonesia: Prepared legislation that requires foreign Internet companies to store user data locally.
  • Nigeria: Proposed “Guidelines for Local ICT Content Development.”
  • Russia: Implemented localization requirements on Internet service companies.
  • Spain: Passed legislation taxing Internet news aggregators for publishing snippets of articles in search results.

10 Policy Principles for Unlocking the Potential of the Internet of Things

December 4, 2014
| Reports


The Internet of Things encapsulates the idea that ordinary objects—from thermostats and shoes to cars and lamp posts—will be embedded with sensors and connected wirelessly to the Internet. These devices will then send and receive data which can be analyzed and acted upon. As the technology becomes cheaper and more robust, an increasing number of devices will join the Internet of Things. Though many of the changes to everyday devices may be subtle and go unnoticed by consumers, the long-term effect could ultimately have an enormously positive impact on individuals and society. A connected world is capable of anything from improving personal health to reducing pollution to making industry more productive. The Internet of Things offers solutions to major social problems, but this vision of a fully connected world will not be achieved without initiative and leadership from policymakers to promote its deployment and avoid pitfalls along the way.

The potential size and scope of the Internet of Things is enormous, with over 16 billion devices estimated to be in use today, and many more to come. By 2020, the total worldwide count is expected to reach over 40 billion. This growth is visible across practically every industry. By 2020, the number of wearable devices will surpass 100 million, the number of Internet-connected cars will exceed 150 million, and the number of connected wireless lights will reach 100 million—to name just a few.

The magnitude of the benefits brought by the Internet of Things is also impressive, and this technology may improve nearly every aspect of life. Consider the benefits of smart homes. Connected devices that automatically regulate electricity usage based on whether anyone is home can cut energy usage and bills. Smart meters can send dynamic price signals to smart appliances to reduce peak energy consumption. Connected sensors can improve home safety by detecting fires and other emergencies more quickly and reliably than traditional methods, alerting authorities sooner. Blinds that automatically detect and filter out sunlight, smart heating and cooling systems that can maintain different rooms at different temperatures, and lighting that automatically adapts to time of day and can be controlled from a smartphone will make home life more comfortable than ever before.

Connected devices can also provide consumers important new insights about their health and fitness. Companies are designing wearables for every stage of life from smart “onesies” with embedded sensors that help parents monitor their infants’ health to activity sensors that allow elderly adults to live safely and independently. Wearable biometric monitors can help individuals track their health, monitor chronic medical conditions, and improve health care outcomes. In addition, fitness trackers such as FitBit and Nike FuelBand can help consumers be more active and engage in healthy behaviors.

Local leaders can help build smart cities by integrating the Internet of Things into public buildings and infrastructure, including roadways, transit systems, and utilities. These technologies can help make cities safer, more sustainable, and more resilient while also providing new economic opportunities for their residents. For example, networked sensors can monitor the structural integrity of bridges and highways in real time to prevent catastrophes from happening and encourage cost-savings through timely preventative maintenance. And, intelligent transportation systems can make roads safer, facilitate traffic flow, and make public transportation more efficient.

Industries that restructure their practices around the Internet of Things can improve productivity and sustainability. With everything from networked assembly lines that track every screw turn to ensure quality control and safety to connected supply chains that reduce downtime and ensure transparency in material sourcing, the Internet of Things will increase industry competitiveness. The increased capacity for data collection from the Internet of Things brings benefits as well. Insurers can use actuarial models that factor in data from connected devices to better understand risk and reduce costs for their customers. Companies can monitor and enhance the safety of their workers in real time and prevent accidents.

Overall, global spending on the Internet of Things is predicted to grow to approximately $3 trillion by 2020. Of course, any capital equipment represents a cost, not a benefit. In that businesses and consumers purchase technology only if benefits exceed costs and because many benefits extend beyond the immediate purchasers to the entire network, the overall economic benefits from the Internet of Things will be even more significant.

As technological barriers decrease and adoption of the Internet of Things takes off, its potential benefits depend in part on how policymakers respond to this technology. There are four main approaches policymakers could employ regarding the Internet of Things:

1. Precautionary regulations: Some policymakers focus on the potential risks associated with the Internet of Things and want to regulate it accordingly. These policymakers believe that preemptive regulations will increase consumer trust and therefore increase adoption, but the reality is that heavy-handed rules would likely imposes costs, limit innovation, and slow adoption.

2. No intervention: Some policymakers resist laws and regulations for the Internet of Things because they believe the free market operating independently of government interventions achieves the maximum possible consumer benefit. However, by avoiding all interventions, policymakers miss the opportunity to proactively support the deployment of the Internet of Things.

3. Indigenous innovation: Some policymakers view the Internet of Things as an opportunity to create export opportunities for domestic firms. These policymakers may endorse policies that hinder foreign companies from competing in the domestic market, such as adopting national technical standards rather than adopting international ones. Such policies are anti-competitive and create fragmented markets for the Internet of Things.

4. Technology champions: Some policymakers have taken a proactive role in accelerating the development and deployment of the Internet of Things, such as by funding research on sensor networks, creating pilot projects for smart cities, preventing over-regulation of wearable health technologies, and providing incentives for smart grid deployment. These policymakers see government as a critical partner in promoting the benefits that come from using these technologies.

Recognizing why the first three approaches are wrong is crucial to developing sound policy for the Internet of Things. Its status as an emerging innovation necessitates the “technology champions” approach in order to create a policy framework that is fully cognizant of its benefits, allows for future innovation, and responsibly protects against misuse without restricting its capacity to deliver social, civic, and economic benefits.

10 Policy Principles for the Internet of Things:

  1. Chart the course for adoption.
  2. Lead by example.
  3. Look to partnerships to overcome obstacles.
  4. Reduce regulatory barriers and delays for getting smart devices to market.
  5. Minimize the regulatory cost of data collection.
  6. Make it easy to share and reuse data.
  7. Relentlessly pursue better data.
  8. Reduce the “data divide”.
  9. Use data to tackle hard problems.
  10. Where rules are needed to protect consumers, keep them narrow and targeted.

The Challenges for America’s Defense Innovation

November 21, 2014
| Reports


From WWII to the 1957 launch of the Soviet Sputnik to the 1980s defense buildup, U.S. defense investments in research and development not only promoted American security and safety but made a major contribution to U.S. innovation and economic leadership, assisting in the development of a host of industry-defining technologies from the Internet to GPS to the laser. Yet since the end of Cold War, federal funding for R&D, including defense R&D, has increased much more gradually and recently has actually declined. In addition, the 2013 sequestration – which mandated automatic spending cuts numerous programs including defense research initiatives – has exacerbated the challenge.
This report takes a closer look at America’s defense innovation ecosystem, assessing the current state of U.S. military expenditures compared to historical averages and our international competitors. It then analyzes the impact of the sequestration and limited budgets, the decline of the industrial base for defense needs, and the erosion of domestic innovation generally on the health of the defense research enterprise. The United States defense system is still the most innovative in the world, but that leadership is not assured and is in danger of failing. This decline in leadership will not only impact defense innovation and capabilities, but also overall commercial innovation and U.S. competitiveness.


From WWII to the 1957 launch of the Soviet Sputnik to the 1980s defense buildup, U.S. defense investments in research and development not only promoted American security and safety but made a major contribution to U.S. innovation and economic leadership, assisting in the development of a host of industry-defining technologies from the Internet to GPS to the laser. Yet since the end of Cold War, federal funding for R&D, including defense R&D, has increased much more gradually and recently has actually declined. In addition, the 2013 sequestration – which mandated automatic spending cuts numerous programs including defense research initiatives – has exacerbated the challenge.

This report takes a closer look at America’s defense innovation ecosystem, assessing the current state of U.S. military expenditures compared to historical averages and our international competitors. It then analyzes the impact of the sequestration and limited budgets, the decline of the industrial base for defense needs, and the erosion of domestic innovation generally on the health of the defense research enterprise. The United States defense system is still the most innovative in the world, but that leadership is not assured and is in danger of failing. This decline in leadership will not only impact defense innovation and capabilities, but also overall commercial innovation and U.S. competitiveness.