Beyond Demand: The Supply-side Benefits of Military Spending

World War II gets credit for dragging the United States out of the Great Depression. Despite all the clear negatives of having to become embroiled in such a conflict, the demand created during the war resuscitated an economy that had been dormant since the crash of 1929.

Today, the military continues to demand high levels of labor, investment, goods, and services. And this demand still plays a role in supporting the U.S. economy. Military spending provides its personnel and suppliers with the resources to purchase additional goods and services from others, and so on.

However, according to former Federal Reserve Chairman Ben Bernanke, it is the supply side, not the demand side, through which U.S. military spending creates benefits for the U.S. economy.

These supply-side benefits are primarily created not by spending on current strength of arms, but by investing in capabilities for the future. Chiefly, this comes through defense R&D. Not all the benefits of new technology developed by the military are constrained to the defense sector. Instead, they “spill over” to the private sector. At a recent event hosted by the Brookings Institute focused on defense spending

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High-Growth Entrepreneurship for Development: Report of a Roundtable with Michael Dell

Policymakers around the world have increasingly come to realize that entrepreneurship, particularly high-growth entrepreneurship (HGE), is critical for economic development in nations at all levels of development. That is one reason the United Nations Foundation asked Michael Dell, founder and CEO of Dell Inc., to be the Global Advocate for Entrepreneurship and to work closely with the Foundation and its Global Entrepreneurs Council to help shape and advance a global entrepreneurship agenda.

To inform the Council’s thinking, Michael Dell led a meeting in Washington, DC, on December 2, 2014, hosted by 1776, a cutting-edge “accelerator” to help technology-based entrepreneurs translate their ideas into growing businesses. The meeting participants included tech-based entrepreneurs and policymakers, and I was asked to participate and serve as rapporteur.

Michael Dell opened up the roundtable with a discussion of proposed policy mechanisms to spur high growth entrepreneurship, including ensuring access to capital, technology, talent, and markets. The following is a summary of the themes and recommendations from the discussion.

The Nature of Technology-Enabled Entrepreneurship Opportunities

Policymakers around the world are interested in HGE because they understand that technology opportunities driving this type of entrepreneurship have exploded.

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Study of Patents Shows Importance of Fed-Funded Research

A new report from Battelle based on methodology from the Academy of Radiology Research shows how federal R&D funding succeeds in producing patents. The report examines essentially all federal R&D, including not only the Department of Defense and the National Institutes of Health but also the Department of Energy, the National Science Foundation, NASA, and other agencies. It finds that, per patent, public-sector agencies provide a return comparable to private-sector ones—or even cheaper. Recent public sector budget cuts, therefore, can be expected to significantly hurt our scientific progress.

The agencies vary significantly in terms of how productive they are and how successful their patents are. Some agencies in particular, such as the National Institute of Biomedical Imaging and Bioengineering (NIBIB) have exceptional records for producing research that is widely useful: NIBIB is estimated to spur an additional $578.2 million, or 25 patents, for every $100 million in R&D expenditures. The DoD and NASA, on the other hand, are less efficient at producing patents at only around 2-3 patents per $100 million in R&D expenditures. (although, as the report notes, defense spending is more likely to be classified and thus not

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New Administration Budget has Smart Proposals for Boosting R&D

The U.S. corporate tax system hasn’t had a major overhaul since the early 1980s, and it’s getting long in the tooth. One part that is particularly dated is the research and experimentation (R&E) tax credit provision. The new 2016 administration budget makes some important changes to the R&E credit. The credit was first implemented as a two-year trial run over 30 years ago in 1981, and has been renewed continually since then, eventually adding an updated “alternative simplified credit” (ASC) as the old credit became too unwieldy in many instances. Despite proven success as shown in many academic studies, however, the credit is continually forced to be renewed. The new administration proposal takes the obvious step of making the credit permanent, eliminates the outdated “traditional” credit making a stronger ASC the sole form of the credit, and incentivizes R&D in universities startups by increasing the amount of the credit that companies can claim for outside R&D expenditure.

While the R&E credit has evolved over the past three decades, both its core structure and its temporary span have stayed the same. It is clearly out of date: the law still

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The Need for an AGOA Renewal

The African Growth and Opportunity Act (AGOA) is set to expire in September 2015, and last week at the United States-Africa Business Forum, President Obama pitched the idea of an early renewal, building on the growth of the Administration’s “Doing Business in Africa Campaign.”  AGOA is the cornerstone of U.S. trade and investment with Africa; over its 14 year history, the program has contributed to a doubling of U.S. trade with Africa.  In 2013, U.S. goods imports from sub-Saharan Africa under AGOA and the Generalized System of Preferences (GSP) program totaled $26.8 billion, more than three times the amount in 2001, the first full-year of AGOA trade.

Indeed, by providing duty-free entry into the United States for almost all African products, AGOA has helped expand and diversify African exports to the United States, while at the same time fostering an improved business environment in many African countries through streamlined eligibility requirements. These eligibility requirements remain important in the renewal process though, as part of increasing the desirability of African countries as a business destination lies in making sure that these nations have an environment that fosters growth and investment. Congress

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Let USTR Do Its Job

Last week, the U.S. House of Representatives passed a bill funding the federal trade agencies that also called for more oversight of them, including the addition of language aimed at preventing the Office of the U.S. Trade Representative (USTR) from negotiating trade agreements that might open up the U.S. government procurement market to enterprises from other countries. The amendment language, part of the fiscal year 2015 Commerce, Justice, Science (CJS) Appropriations bill, consists of one sentence, “[n]one of the funds made available by this Act may be used to negotiate an agreement that includes a waiver of the ‘Buy American Act.’”

The 1933 Buy American Act (BAA) requires the U.S. federal government to prefer U.S. products for all goods, but not services. The BAA applies to goods acquisitions over the micro-purchase threshold of $3,000. Under the BAA, all goods for public use (articles, materials, or supplies) must be produced in the United States, and manufactured items must be manufactured in the United States from U.S. materials. The BAA creates a price preference that favors “domestic end products” from American firms in U.S. federal government contracts for:

  • Unmanufactured products mined or

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Reviewing USTR’s 2014 Special 301 Report

Yesterday, the Office of the U.S. Trade Representative (USTR) released its annual Special 301 Report, citing 37 countries for inadequate and ineffective protection of intellectual property. The listing included:


Priority Watch List: Algeria; Argentina; Chile; China; India; Indonesia; Pakistan; Russia; Thailand; and Venezuela; and

Watch List: Barbados; Belarus; Bolivia; Brazil; Bulgaria; Canada; Colombia; Costa Rica; Dominican Republic; Ecuador; Egypt; Finland; Greece; Guatemala; Jamaica; Kuwait; Lebanon; Mexico; Paraguay; Peru; Romania; Tajikistan; Trinidad and Tobago; Turkey; Turkmenistan; Uzbekistan; and Vietnam.


The 2014 report highlights continuing threats global U.S. intellectual property rights holders’ face in countries throughout the world. And because IP and innovative industries are so vitally important to the U.S. economy — for example, a Department of Commerce study estimates that in 2010, copyright-intensive industries accounted for $641 billion in value-added to GDP and 5.1 billion jobs — it is necessary to make sure the IP enforcement remains a priority for foreign policymakers.

USTR made minimal changes to the country designations from the 2013 Special 301. In fact, the ten countries listed on the Priority Watch List (PWL) remain completely unchanged. The only changes to

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Both Guns and Butter? New Study Shows Innovation Benefits from Military Procurement

For much of the postwar era the United States led the world in technology, which brought significant economic benefits to the nation. That leadership was due in large part to generous federal government funding for R&D, much of it channeled through military spending. That this occurred during the Cold War was no coincidence: as William Janeway argues in Doing Capitalism in the Innovation Economy, nations have historically been unable to muster the political will for significant spending on innovation without it being part of a “national mission,” since such spending means giving up current consumption for uncertain future benefits.  In the last half of the 1800s, nation building provided the mission for America—just as that does now for China.  But after the late 1940s the animating mission that helped drive technology innovation was winning the Cold War, which we did.

The threat from the Soviet Union meant that Americans were willing to sacrifice present consumption for the good of the nation–in this case keeping the world safe for freedom and democracy. And it meant we did what it took to win—and that meant innovating. The fact that Lockheed’s Skunk

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Taylor Swift

We Are Never Ever Getting Back Together

A few days ago, Marvin Ammori published a piece on Slate titled, “Hollywood’s Copyright Lobbyists Are Like Exes Who Won’t Give Up”, in reference to  the House Judiciary Subcommittee on Courts, Intellectual Property and the Internet holding a hearing regarding the Digital Millennium Copyright Act (DMCA) notice and takedown system. In it, he alleges that the hearing’s existence, created to discuss the potential of voluntary initiatives among copyright stakeholders, is proof of a conspiratorial secret resurgence of the Stop Online Piracy Act (SOPA).

Ignoring the ludicrous nature of this claim — does every hearing that every committee holds in the entirety of the U.S. Congress have some secret ulterior purpose now? — his argument is demonstrably false.  Let’s start with the facts: the DMCA notice and takedown system is the process by which content creators notify service providers that they are illegally distributing content.  In exchange for working collaboratively with rights holders, service providers receive a “safe harbor” from prosecution. The House Judiciary subcommittee hearing tomorrow is an opportunity to discuss voluntary initiatives among stakeholders to curb piracy, not a chance to propose new legislation (and in case anyone

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ITIF hosts Dr. William Janeway

Economist, venture capitalist, and co-founder of the Institute for New Economic Thinking Dr. William Janeway stopped by ITIF this week for a discussion about his new book, Doing Capitalism in an Innovation Economy. Dr. Janeway presented a compelling view of the economy and touched on a number of important issues along the way.

Janeway explained that the government plays a critical role in innovation by providing research funding through institutions such as DARPA and the NIH, by leveraging the buying power of the federal coffers, and by creating policies that encourage business investment in R&D. Economists have long understood that private markets fail to allocate adequate resources to innovation and research: the benefits are too hard for individual corporations to capture. For this reason, policies like the R&D tax credit and public investment in basic research have long been uncontroversial.

Contrary to what recent high-profile failures like Solyndra might lead people to believe, government policies to spur innovation in the United States have had great success. This is apparent in the vast amount of money the private sector has poured into IT and Biotech businesses based on initial

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