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Innovation

2011: Year for the Ingenuity Economy

Marrying Economic Growth and Competitiveness with Innovation Spells I-N-G-E-N-U-I-T-Y

Obama in North Carolina Innovation Speech SOURCE: AP Photo/Chuck Burton Obama addresses the interrelated topics of competitiveness and innovation in a speech in Winston-Salem, N.C., Monday, Dec. 6, 2010. It is expected that the president will also touch on the need for America innovation in his state of the union speech in January.

Our nation’s economic growth and competitiveness in 2011 will top the list of things to worry about among policymakers in Washington. The extension of the Bush-era tax cuts for another two years beginning January 1 means the debate over short-term economic stimulus is, hopefully, behind us. Now the fight over fiscal policy really begins. And the debate will focus on how to put our fiscal house in order, not whether we need to do so, which in turn means the term “investment” will be politically loaded—and hotly debated. After all, investment to some means future growth but to others is just federal pork to be cut or blocked.

So let’s delineate what meaningful investment is all about. To do so, investment should be paired with another “I” word: innovation. President Barack Obama’s State of the Union speech and his administration’s expected reiteration of its innovation policy next month will surely focus on economic growth and competitiveness, as will the president’s Fiscal Year 2012 budget, which begins October 1, 2011. And the key to the success of the president’s policy objectives will be how innovation powers our economy and our global competitiveness.

The glide path back to sustainable, broad-based economic growth that delivers full employment over the next decades is fairly straightforward. No one expects a surge in our labor force to drive up productivity, as happened over the past four or five decades as women entered our labor markets in force. Women now constitute half of our labor force, our population is aging, and immigration reform remains so controversial that little progress is expected in 2011. Even historically low interest rates are unlikely to propel a flood of brand-new capital into new investments and jobs—witness the nearly $2 trillion in unspent cash being held by American corporations. And the discovery of an economy-reviving cache of new natural resources (even as we learn to use renewable ones) would be a surprise in the near-to-medium term.

That leaves innovation, the “X” factor that makes capital, labor, and natural resources more productive. Innovation, however, is not solely about “technology.” We instead should use the term “Ingenuity,” with a capital “I,” because Ingenuity is the creation of additional economic value through the creation or recombination of knowledge in any sector, in any place. Ingenuity includes technological advances, of course, but also better product design, better business models, better distribution systems—any combination of known and newly-known insights that add up to a more compelling value proposition.

In a time of tight federal budgets and polarized politics, what can our national government do to spur Ingenuity? Much is obvious. Well-functioning capital markets are important. Additional educational and workforce development opportunities, especially in science and technology, are key. And basic research and development that will not be adequately funded by the private sector needs to remain a top federal priority. In early 2011, however, there are five big steps that the Obama administration and Congress can take to boost American Ingenuity at the federal level or through carefully targeted federal investments without requiring too much new money:

  • Innovation impact assessments by the federal government
  • The federal government as an early innovation adopter
  • Organizing the federal government to be more efficient
  • Federal support for regional economic success strategies
  • More federal support for international trade that drives global innovation

Let’s look at each of these steps in turn.

Innovation impact assessments by the federal government

Federal regulations are scrutinized on many grounds, including their projected costs and economic benefits. But current regulatory requirements do not include an explicit assessment of the impact of proposed action on “innovation.”[i] That should be changed.

Specifically, President Obama this coming year should do what is within his power to require that all regulations reviewed by the Office of Management and Budget expressly ask: “Does the Regulatory Impact Analysis reasonably assess the anticipatable impact on innovation, in the affected economic sector and beyond?” Congress should apply the same standard as necessary through legislation so that all agencies engage in this analysis.

Innovation impacts are not precisely predictable. Indeed, it is the uncertainly surrounding innovation that should be considered carefully by regulators. But the discipline of making this judgment will rightly focus regulatory discussions on long-term growth dynamics and not just short-term outcomes.

The OMB instruction on cost-benefit analysis, for example, calls for an assessment of technological changes but does not “discuss with any sophistication the costs and benefits of alternative regulatory mechanisms for stimulating innovation.”[ii] An Innovation Impact Assessment would require examination of whether a regulatory approach—say the use of auctions versus permits for the distribution of limited resources—constitutes the best available means stimulating innovation outcomes.

The federal government as an early adopter

Innovation comes to market when “early adopters” both demonstrate tangible demand and teach other consumers about the advantages of the products and services arising from innovation. The same principle should guide all government procurement.

By one estimate, the federal government has been purchasing about $350 billion in goods and services each year. Although strides have been made to improve the procurement of technology and to advance our national interests, the scope of procurement reform should be broader—to ensure that governmental purchases serve the national interest in spurring innovation in the American economy.

To this end, we should reject the artificial debate between short-term prices and the long-term encouragement of innovation, especially since innovation and productivity improvements are key drivers in driving prices down. That the two goals are compatible is proven every day by the private sector, with its adoption of cutting-edge information technology and biotechnology, and even at times in health care and renewable energies.

When the Pentagon purchases a new weapons system, it includes in its evaluation the ability of the seller to meet the long-term needs of our national defense. Indeed, the Internet itself is a commercial offshoot of the Pentagon’s desire for a redundant communications network. The same opportunities exist for civilian procurement, including the ability to build upon the current Small Business Innovation Research program to ensure procurement opportunities for innovative small- and medium-sized companies.

In fact, Europe has taken just this kind of attitude toward procurement, positioning government as a “lead customer.” As one European expert explains, “Innovation is often initiated by changing customer requirements. Public procurement could play a vital role in fostering innovation.”[iii] The United Kingdom, for example, has adopted an explicit policy to foster innovation-based procurement and has applied it to governmental tasks as varied as boosting hygiene and pathogen detection for its Department of Health, improving online education, and even disposing of worn-out mattresses and pillows from its prisons in a way that decreases costs and reduces landfill volumes.[iv]

The United States, with much greater buying power, should not lag behind. For instance, a barrier to the commercial adoption of renewable energy can be its initial cost. To give one example, energy derived from wind was estimated last year to cost 50 percent more than energy from coal.[v] But the cost of the first unit of any high-technology product is prohibitively expensive; think of what it would cost to build just a handful of new computers. That’s why a legitimate goal of governmental procurement is to drive down the cost of new energy sources by stimulating new innovation and allowing the creation of scale efficiencies. But the lesson is a broader one, and should be applied to all forms of governmental procurement from all sources of supply.

Organizing the federal government to be more efficient

I spent much of 1995 as a Department of Commerce employee, in opposition to the proposed abolition of the Department of Commerce. That was the right thing to do. But governmental organization doesn’t last forever, and now it’s important to squeeze every ounce of additional efficiency out of governmental operations.

One important proposal is to reconstitute the pieces of the Department of Commerce and other executive branch agencies into a new Department of Business, Trade, and Technology composed of relevant parts of “the Department of Commerce with trade and business-focused agencies and offices, including the Office of the United States Trade  Representative, the Small Business Administration, the Export-Import Bank of the United States, the Overseas Private Investment Corporation, and the U.S. Trade and Development Agency.”[vi] That should be on the table.

Another approach would be to reorganize the approximately 164 federal economic development programs, which carry a total budget in the Obama administration’s FY2011 budget request of about $173.5 billion. That includes economic development programs in the Departments of Agriculture, Commerce, and Labor. Multiple programs engaged in similar activities would deliver more bang for the buck if they were coordinated and shared a common purpose. What we need in the 21st century are “economic success strategies.”

The difference from traditional “economic development” circa the 20th century is that an “economic success strategy” cannot focus just on a building or a highway or on a research institution or a business incubator or on worker training, though each is important. Success requires that each element work in harmony with the others. That cannot be achieved either by “stovepiped” or “siloed” federal efforts by individual departments and agencies or through federal efforts that fail to be tightly aligned with local and regional conditions and strengths. Thus, the president should use his full executive power to create a “virtual” economic growth agency, and should seek congressional authorization to make that reorganization permanent.[vii]

Federal support for regional economic success strategies

We know now that industries clustered in different economic regions of our nation register higher employment as well as higher growth of wages, more businesses, and more patents.[viii] Thus, support for regional economic success strategies aligned with place-based competitive strengths is a pragmatic, bottom-up, fiscally leveraged, bipartisan approach that works on a simple economic principle—local leadership can best determine how to deploy the inherent advantages of an economic region to boost business growth and job creation. And that local leadership includes not just (and definitely not primarily) local, state, and federal policymakers but also corporate and small business leaders, community leaders and nonprofit organizations, and institutions of higher education, including community colleges.

The basic fiscal principle underlying this regional economic development strategy is leverage—by creating incentives for private parties to coordinate their pre-competitive activity and share R&D and other infrastructure resources, an initial public investment can be leveraged at a 4-to-1, 5-to-1, or even 10-to-1 ratio. And, by federal budget standards, the total amount of spending would be very low, representing less than 1 percent of the federal innovation budget, while empowering the federal government to help frame national priorities, fund competitive awards to self-designated regions, and facilitate local strategic development, especially by spurring access to private capital.

Indeed, evidence abounds that private capital is unavailable in sufficient quantity for the task of boosting broad-based regional economic development and innovation, which is why the federal government also needs to play a convening role for capital, via public-private partnerships, to boost the amount of capital available. The Obama administration has already made important strides through efforts by agencies that include the Departments of Agriculture, Energy, and Commerce, and the Small Business Administration. Now the time has come to establish ongoing support for economic strategies that demonstrably work.

More federal support for international trade to drive global innovation

If we can’t sell or reap the legitimate rewards of what America invents, then we are suffering a deadweight loss that harms the U.S. economy and the ability of U.S. companies to export. The Obama administration is taking important steps to ensure open markets to U.S. ingenuity, negotiating a free trade agreement with South Korea and cracking down on intellectual-property theft, for instance. But there are other steps that need to be given priority as international trade issues.

Today’s Internet economy stands at an “inflection point” in which new forms of economic organization are possible because of modularity and interoperability of technologies.[ix] That makes international data flows important to global trade, justifying the application of trade policy, including dispute resolution, to international implications of even domestic Internet regulation. When a foreign nation blocks its users from reaching the Internet, for example, the impact is not just domestic; that action also disrupts international data exchanges.

Similarly, when the U.S. economy creates forms of innovation desired around the world, whether in movies and music, biotech, agriculture, or any other arena, the actions of foreign governments need to be examined for their potential impact in limiting the success of U.S. knowledge-based industries. This includes the unfair protection of their domestic innovation industries, which can take the form of improper subsidies to innovation-based industries or attempts to force the relocation of U.S. businesses and/or technology.

And this isn’t just about punishing our trading partners when they game the international trading system at our expense. There is a potential upside as well. Our ambassador to the European Union, William Kennard, recently called for Europe and the United States to work together to coordinate regulatory policies and standards for new products, conduct joint research and development, and create and connect transatlantic innovation clusters,[x] an important reminder that U.S. competitiveness can also be boosted through “win-win” strategies with our international partners.

Ingenuity to improve U.S. economic growth and competitiveness

These are five, not necessarily easy, parts of a successful Ingenuity policy. If implemented as a package, the Obama administration and Congress could make government more efficient and more favorable to innovation, increase the chance of U.S. economic success through bottom-up strategies, and clear the path for international success. “Yankee ingenuity” arose as shorthand for America’s historic record of “improvisation, adaption and overcoming of dire straits when faced with a dearth of materials.”[xi] Added to the global strengths of the U.S. economy, an extra dose of Yankee ingenuity is just what we need in 2011.

Jonathan Sallet is Special Advisor to the Center for American Progress’s Science Progress project on Regional Innovation Clusters and a partner in the Washington, D.C., office of O’Melveny & Myers LLP, where he practices in the integrated legal strategies practice group. The opinions expressed in this article do not necessarily reflect the views of O’Melveny or its clients, and should not be relied upon as legal advice.


[i] See, for example: The White House, “Agency Checklist: Regulatory Impact Analysis,” available at http://www.whitehouse.gov/sites/default/files/omb/inforeg/regpol/RIA_Checklist.pdf.
[ii] Stuart Benjamin and Arti Rai, “Structuring U.S. Innovation Policy: Creating a White House Office of Innovation Policy” (Washington: The Information Technology & Innovation Foundation, 2009).
[iii] Jan Bungartz, “Fostering Innovation Through Public Procurement,” PRO INNO Europe, November 4, 2010, available at http://www.proinno-europe.eu/inno-grips-ii/article/fostering-innovation-through-public-procurement.
4 Office of Government Commerce, “Driving Innovation Through Public Procurement,” available at http://www.ogc.gov.uk/documents/OGC09-0679_InnovationBrochure.pdf.
[v] Matthew L. Wald, “Cost Works Against Alternative and Renewable Energy Sources in Time of Recession,” The New York Times, March 28, 2009, available at http://www.nytimes.com/2009/03/29/business/energy-environment/29renew.html.
[vi] John Podesta, Sarah Rosen Wartell, and Jitinder Kohli, “A Focus on Competitiveness: Restructuring Policymaking for Results” (Washington: Center for American Progress, 2010), available at http://www.americanprogress.org/issues/2010/12/pdf/competitiveness.pdf.
[vii] Another important “virtual” agency that could be created would be a grouping of the government’s various statistical programs. Ibid.
[viii] Jonathan Sallet, “Innovation Policy in Tough Times on Tight Budgets: The Case for Regional Innovation Clusters,” Science Progress, October 8, 2010, available at http://www.scienceprogress.org/2010/10/innovation-policy-tight-budgets-and-tough-times/.
[ix] Peter F. Cowhey and Jonathan D. Aronson, Transforming Global Information and Communication Markets: The Political Economy of Innovation (Cambridge: MIT Press, 2009).
[x] Ambassador William E. Kennard, “Partnership for Innovation,” December 15, 2010, available at http://useu.usmission.gov/kennard_oped_121510.html.
[xi] “Ingenuity,” Webster’s Online Dictionary, available at http://www.websters-dictionary-online.com/definitions/ingenuity?cx=partner-pub-0939450753529744:v0qd01-tdlq&cof=FORID:9&ie=UTF-8&q=ingenuity&sa=Search#906.

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