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Ask Not What Innovation Can do for You; Ask What You Can do for Innovation

North American X-15A-2

Nobel prize-winning economist Robert Solow is purported to have once said that “innovation is manna from heaven.” It may be in terms of its wonderful effects on our lives, but innovation doesn’t just fall from the sky. Innovation comes from one place: hard work and sacrifice.

Why do we care about innovation? Does anyone really want to pass on today’s medicines, computers, cars,  and planes to their kids? Hey kids, you get the same world we have, we didn’t improve it through innovation. Of course not. Despite the amazing innovations of the day, and the great benefits they provide us, any rational person wants what Samuel Gompers, the first head of the AFL, said he wanted: more (more wages for workers) and “when it becomes more, we shall still want more. That’s what most people want when it comes to innovation. But there’s a catch.

If we want more (then), have to have less (now). In other words, since innovation comes from hard work (e.g., investment) it means that we have to consume less today to get more innovations tomorrow. Someone has to spend the time doing the hard work of inventing and innovating. And if they are doing that, it means they aren’t producing haircuts, cars, and restaurant meals for us to consume today. We don’t consume today the fruits of the work of scientists or engineers. If we are lucky, we consume the fruits of the labor sometime in future in the form of innovation.

A nation focused only on the present generation would not invest in the future. Why pay higher taxes and prices to support government and corporate investments in research, education, and infrastructure when the benefits accrue to future generation? In other words, innovation is fundamentally a selfless act: it’s about giving up some of our current consumption for future innovation benefits, some of which, at least, will benefit our children.

You might say, “so what.” Here’s what. There is a growing selfishness and preference for current consumption today in America and around the world. And this plays out it in the two critical drivers of innovation: creation of knowledge (e.g., research and development) and the presence of large markets to ensure adequate revenue to reinvest back into knowledge creation. Both are under threat today.

With knowledge creation, the federal government plays a key role, both through direct funding of R&D and indirect through the R&D tax credit. And today both are in trouble.

From WWII until the 1970s, the United States led the world in investment in research. The post-War generation heeded the call to sacrifice for innovation and we owe them an enormous debt of gratitude. But now, with 2.8 percent of GDP devoted to research and development (R&D), the United States ranks just eighth among countries tracked by the Organization for Economic Cooperation and Development (OECD) in R&D intensity, behind Israel, Finland, Sweden, Korea, Japan, Denmark, and Switzerland. Each of those countries has a R&D intensity greater than 3 percent, while Finland leads the way with an astounding R&D intensity of 4.3, followed by Finland and Sweden with exceptionally strong rates of 4.0 and 3.6 percent, respectively. Compared with these countries’ commitment to investing in R&D, the United States is lagging considerably. As noted, the primary reason for this decline has been a decrease in federal funding. In the first decade of the 2000, federal investment in R&D as a share of GDP was just 44 percent of levels in the 1960s (1.75 percent versus 0.77 percent). In fact, from 1987 to 2008, federal R&D investment grew at just 0.3 percent per year in constant dollars—much lower than its average annual growth of 4.9 percent from 1953 to 1987—and ten times lower than the rate of GDP growth over that period. Among thirty-six nations, the United States ranked only twenty-eighth in the growth of government investment in R&D from 1999 to 2009, with a growth rate 17 percentage points below the average of the other nations.

And given the current “me now” political climate in Washington, things are only going to get worse. The sequester is likely to cut will result in a cut of $12.5 billion to federally funded R&D in 2013, with further cuts accumulating to $95 billion when compared to 2011 funding levels through 2021. And this is off of a baseline of zero increases in the federal R&D budget. And given the unwillingness of Congress to cut entitlements or increase taxes (ie., to cut current consumption), the likelihood of continued cuts in federal support for knowledge creation remains high. But at least old people will have low taxes and generous benefits. On the R&D credit front its not as bad, but its not good. As ITIF has shown, the U.S. R&D credit ranks just 27th in generosity, way behind other nations. Many other nations are willing to sacrifice for the innovation future. America looks like it’s not.

The second major driver is large markets, and large markets depend in part of global protection of intellectual property. If people can use the fruits of innovation without paying for it, by definition there is less revenue to invest in innovation. And we see a global threat to IP protection, with nations and consumers wanting to get innovation for free. Why pay for movies, books, music, drugs, or other IP when you get it for free. Why do the hard work of building innovation based industries in your country when you can just force the companies that did the hard work and took the risks of investing in innovation to give you the knowledge. We see this in many nations in areas as diverse as turning a blind eye to music and movie piracy (e.g., Italy), requiring forced tech transfer for market access (e.g., China) or forced licensing of drugs at low costs (e.g., India). These nations want to free ride on the innovation that is has already been developed and not contribute anything to the development new innovation (just like the enablers of Internet piracy in the U.S.).

So in this sense, both the left and the right in America are complicit in this: The left with its insistence that stealing is “fair use” and that we shouldn’t enforce the rights of IP holders, either here in America or overseas, especially developing nations; and the right with its view that increased taxes is a threat to Americans. It’s time for Americans to, in the words of Fleetwood Mac, not just “don’t stop thinking about tomorrow” but to “start sacrificing for tomorrow.” If we do, “it’ll be better than before.”

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  • The discretionary portion of government budgets is increasingly being cannibalized by the cost of entitlements — Social Security, Medicare, Medicaid and other programs that transfer income from some people to enable elderly, poor, sick, hungry, homeless, and other people to ‘consume’.

    What reforms of entitlement programs are you recommending to free up resources for the kind of investments you advocate?

  • Martinay

    Yes, IP needs to be protected. But whose IP is it anyway? If it arises directly or indirectly from public investment (in infrastructure like universities or research facilities or in people like research grant-holders), then the investment is being made by taxpayers. That means the IP – or a fair share of the IP – should stay in the public realm.

    Otherwise you have the taxpayer taking the risks and private companies getting the benefits.