Forget Roads and Rebates: Why the Stimulus Should Invest in Innovation and Productivity

January 5, 2009 |

On January 21st, immediately after assuming office, Barack Obama's first priority will be passing an economic stimulus package that will provide the economic kick-in-the-pants necessary to avoid the next Great Depression. There's nearly unanimous consensus that a major stimulus investment is needed to stave off economic disaster. How the next administration plans to fit this stimulus into a larger economic revitalization plan, however, is still unclear.

So far, there's plenty of focus on traditional methods of stimulus: tax cuts to spur consumer spending and traditional infrastructure investments to rebuild roads and bridges. Unfortunately, a short-term focus on roads and rebates won't be enough to stave off a new depression or put our economy back on track. Instead, we must focus on investments that can both act as short-term stimulus and improve the long-term productivity of the US economy. And that means investing in innovation.

As Janet Rae-Dupree wrote in the New York Times on Saturday:

"As usual, [when it comes to stimulus,] the devil is in the details. And innovation advocates fear that if the devil runs amok, a short-sighted emphasis on jobs over long-term productivity may bog down the economic recovery."

A narrowly focused stimulus plan that doesn't build a bridge to sustained economic growth will not put the American economy back on track. Now is not only a time for repairing roads, but also a time for investments in sustained American prosperity and competitiveness. It's encouraging that this is a view shared by Obama's new chief economic advisor, Lawrence Summers. Summers, who will head Obama's National Economic Council, wrote in the Washington Post last week about the critical need for investments in long-term growth:

"Investments in an array of areas -- including energy, education, infrastructure and health care -- offer the potential of extraordinarily high social returns while allowing our country to address some long-standing national challenges and put our economy on a solid footing for years to come."

There is a growing consensus that the best way to put the economy on solid footing is to invest in innovation. Innovation certainly meets the short-term objectives of job creation and can create whole new industries. Innovation drives cost reductions, and as Kevin Efrusey, a Silicon Valley venture capitalist said in the Times, "When anything becomes cheaper, we consume a lot more of it. The overall economic effect is, you create and expand entire new industries and employment goes up."

But innovation is also an incredible driver of long term economic growth as well, making it the right candidate for a smart stimulus. In fact, as Breakthrough's Teryn Norris argued in November, productivity improvements are the primary driver of new economic growth, making productivity the rightful centerpiece of a new American growth strategy. As Teryn writes,

"Productivity growth reflects multiple factors -- technology, management, human capital -- but the biggest factor is technology. Indeed, the dominant role of technological development in economic growth has been well-documented ever since Nobel Laureate Robert Solow published his seminal 1956 paper in "The Economic Record," which demonstrated that technological progress drove at least 80% of economic growth in the United States between 1909 to 1949."

And as the Times points out, a 1995 study by the Organization for Economic Cooperation and Development similarly concluded that "periods of high productivity ... were correlated with periods of high job growth throughout the last half of the 20th century."

As Fred Block put it in Breakthrough's "Special Innovation Issue," what we need today is "stim-novation":

"Choosing smart stim-novation policies assures that some of the stimulus package represents a long term investment in expanding the economy's capacity. The only sure foundation for long-term prosperity is enhancing our ability to invent and deploy new technologies that save labor, save capital, and save energy."

Stim-novation expands upon the traditional criteria for economic stimulus: that it must be timely, targeted, and temporary. Robert Atkinson, president of the Information Technology and Innovation Foundation, calls for "a fourth adjective -- transformative -- [which] may be the most important. Transformative stimulus investments...lead to economic growth that wouldn't be there otherwise."

One area that could particularly benefit from federal stim-novation is energy. Achieving energy independence and overcoming climate change are urgent national challenges, and major investments targeted at making clean energy cheap by bringing down the price of clean, low carbon technologies are critical. Making clean energy cheap is an innovation project--innovation in the lab, but more importantly, innovations that will not happen until we try bringing these technologies up to commercial scale.

Barack Obama is poised to take office in little more than two weeks. As the nation looks forward to a new era of American governance, so to should the administration look forward and invest in the long term productivity of the American economy.