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Creating Jobs by Investing in Innovation

U.S. Jobs Have Always Come From Innovation—Here’s How They Can Again

SOURCE: AP/Tim Roske President Barack Obama delivers a speech on innovation at Hudson Valley Community College in Troy, N.Y.

As the debate in Washington pivots this week from deficit reduction to job creation, progressives and conservatives will be vying to convince the American people that they have the best plan to get America working again. But any jobs plan will fall flat if it doesn’t lay out a strategy for investing in innovation.

Conservative proposals largely echo now-defunct Reagan-era thinking that tax cuts alone can spur the private sector to create jobs. Yet effective corporate tax rates are lower today than they were under President Reagan and are certainly much lower than many of our competitor nations. The same is true of the effective tax rate for top-, middle-, and low-income families. Tax cuts neither created the jobs of the past nor will they create the jobs of the future. Investing in innovation will.

“In America, innovation doesn’t just change our lives. It is how we make our living.” —Barack Obama, Jan. 2011

Innovation is what has created the bulk of American jobs today and it will most certainly be the force that creates the jobs of tomorrow. America is home to the world’s best jobs and most prosperous economy quite simply because we’ve invented and made the things that the world wants to buy. And then we’ve invented ways to make those things better, faster, and cheaper.

The cotton gin, the transcontinental railroad, interchangeable parts, assembly line manufacturing, the automobile, the airplane, the personal computer, the photovoltaic solar cell, GPS technology, the Internet, the mapping of the human genome, the iPhone—these inventions and the companies that produce them have directly or indirectly supported millions of American jobs. As President Barack Obama said in his 2011 State of the Union address, “In America, innovation doesn’t just change our lives. It is how we make our living.”

History is quite clear on the importance of innovation to sustained job creation. The nations that have leveraged the fruits of science and technology for greater social and economic good have led the world in well-paying jobs and standard of living.

Robert Solow’s Nobel Prize-winning attribution of more than half of all economic growth in America since World War II to technological progress has been echoed by everyone from career academics to the Department of Commerce to the National Academies to the Organisation for Economic Co-operation and Development to the White House.

In the 21st century, innovation is what produces wealth and creates jobs. The Kauffman Foundation finds that nearly all net job creation in the economy comes from innovative startup firms that are less than five years old. Meanwhile older, larger firms tend to shed net jobs on average. They went so far as to call such innovative businesses “almost solely the drivers of growth” in the economy. Meanwhile, the Department of Commerce found that innovation leads to higher wages; average compensation per employee in innovation-intensive sectors of the economy increased nearly two and a half times faster than the national average between 1990 and 2007.

Traditionally, America has led the way in seizing the economic opportunity of innovation. In past times our systems of intellectual property and taxation made it easy for businesses to invest in innovation and capture some of the benefits. Our investments in education, basic science, research and development, and infrastructure made possible the technological innovation that put our economy on the cutting edge.

Our public investment in the human genome project, for example, had a return on investment of more than 14,000 percent in terms of economic output per federal dollar invested since 1988, and has led to the creation of millions of biotech jobs that could not have existed without it. Similarly, a seemingly tiny investment of the Defense Advanced Research Agency, or DARPA, spawned the Internet, giving rise to billions of dollars in economic activity, new businesses, and, more importantly, new ways of doing business.

But the 21st century is different. Science and technology haven’t just changed the way we live and do business; they’ve also changed the way we understand and invest in innovation itself—and we haven’t kept up. And while other countries have been more nimble in adapting their policies to keep up with the cutting-edge economy, our investments have begun to lag.

Since the 1960s our federal rate of investment in research and development as a percentage of gross domestic product has declined steadily: from 1.3 percent to 0.9 percent. American students have fallen to 25th place in mathematics ability among the industrialized democracies of the Organisation for Economic Co-operation and Development. Most telling, the American Civil Society of Engineers gives American infrastructure almost failing marks: “D+” on energy, “D-” on roads, “C” on bridges, and “D-” on drinking water, with an overall grade point average of “D.”

These investments in education, in R&D, and in physical infrastructure are needed to ensure companies have access to the talent, markets, funding, and ideas necessary to drive innovation. America’s underinvestment in physical and institutional infrastructure—from undereducated workers to low broadband penetration to the very roads on which companies transport goods—is eroding the competitiveness of U.S. industries and costing jobs and economic leadership.

Meanwhile, other nations have looked critically at the building blocks of innovation and invested strategically to enhance their competitive position. Governments across Europe and Asia have invested in science, technology, engineering, and math education for their children and young workers; in worker retraining programs for the existing workforce; and in fostering regional innovation ecosystems and industrial clusters. They’ve also invested in gathering the metrics and data that their policymakers need to make good innovation policy and have coordinated their governments’ efforts around the interrelated innovation functions of industry, trade, and technology.

While governments of the rest of the major economies of the world are already competing to create jobs through innovation in the 21st century global economy, the United States does not seem to fully recognize it is in competition.

But with Washington finally turning its eye toward the important priority of job creation, perhaps it is time to seize the opportunity to retool our policies to be competitive in the cutting-edge economy of the 21st century. But make no mistake, policy alone cannot produce innovation. Hardworking Americans must do that. But policy can help create the economic and social conditions that promote innovation.

There is no question about what we need to do to create jobs, turn around our economic stagnation, and create optimism for American families and businesses. We know that we cannot simply give tax breaks to big corporations and expect the benefits to trickle down. Instead, we need to invest in the building blocks of innovation and empower the next generation of innovators, entrepreneurs, and motivated, everyday working Americans to “trickle up” and invent their own destinies.

What are these building blocks? Science Progress and the Center for American Progress’s Doing What Works project aim to answer these questions in a series of papers to be released over the course of the next four months. These papers will address six major areas where making smart, progressive investments in innovation can lay the foundation for job creation and future growth.

First, we need skilled, able, and empowered workers who can do and create the kinds of jobs the innovation economy demands. So we must invest in better education in science, technology, engineering, and math from primary school through postsecondary. We must invest in worker retraining programs to help the smart, educated, and out-of-work individuals learn new skills and adapt to the rapidly changing demands of the innovation economy. And we must reform our immigration policies so the best and brightest are encouraged to stay here and lend their creativity to the collective genius of our nation.

A forthcoming paper by my Center for American Progress colleagues Louis Soares and Steve Stiegleder will address some of the gaps in our current education and workforce training policies and what we can do to fill them and ensure that American workers are well-trained to innovate and compete in the global 21st century innovation economy.

Second, a robust system of fundamental science research is a must for a country that seeks to be competitive in the cutting-edge 21st century economy. This means funding fundamental science and research and development in universities and federal labs, and creating wise incentives for the private sector to continue to do the same. Our forthcoming paper from University of Southern California Vice Provost for Innovation Chrisztina “Z” Holly will address this.

Third, innovation isn’t just about invention and discovery, just as critical is the application of invention and discovery to economic good. For this we must invest not just in fostering an active base of science and research but also in the machinery necessary to harvest its fruits and refine them into the juice that fuels economic growth. This means investing in institutional infrastructure that helps regional and national networks of investors, researchers, manufacturers, and customers come together to create new markets, new industries, and new jobs around innovative technologies and business models. Our forthcoming paper on manufacturing and the players in innovation networks by University of North Carolina-Chapel Hill professor Maryann Feldman will address this.

Fourth, we need free-flowing financial capital to fund all of the actors in these networks of innovation. For that we need to review and simplify the corporate tax code while strengthening the research tax credit and new markets tax credits. We also need to overhaul and integrate federal funding and loan programs, such as the confusing alphabet soup of programs such as the SBIR, STTR, TIP, SBIC, SBCDC and i6 programs that drive technology innovation, startup formation, and regional economic development. Our forthcoming paper by Science Progress contributor and former senior Department of Commerce official Jonathan Sallet and me about designing a Department of Competitiveness will speak to this.

Fifth, the free flow of ideas is critical to sustaining innovation. While the United States invented the modern patent system, our intellectual property apparatus has grown rusty and is in dire need of reform. We must increase the independence of the U.S. Patent and Trademark Office to manage its own accounts and increase the speed with which companies can apply for and receive patents, while addressing structural problems with our patent system itself that hinder innovation. Professor Arti Rai at Duke University and the University of Michigan’s Brian Kahin’s forthcoming paper in our series will speak to this issue.

Sixth, we need a government that is equipped to engage with the 21st century innovation dynamics that will determine who will win the future. We need a government agency able to gather and analyze the data relevant to 21st century innovation policy. We also need an agency that can use that information to better coordinate currently siloed activities in trade policy, technology policy, economic development policy, and workforce development policy. Our forthcoming paper about reorganization of federal statistics efforts by George Washington University professor Andrew Reamer as well as the paper by Jonathan Sallet and me on trade, technology, and economic development efforts will explore this issue in more detail.

Last, world-class physical infrastructure is necessary for firms to access markets and suppliers. We must return our deteriorating schools, roads, bridges, and levees to their once-world-class state. We also must invest in making broadband Internet and the economic opportunity it affords more accessible to all communities. My colleague at CAP, Donna Cooper, will be unveiling three papers on these topics later this year.

These elements for creating jobs through innovation may seem disparate and complex in the world of the 15-second political sound bite but they outline a compelling narrative for job creation and growth that is both effective and progressive.

The Reagan-era concept that government can create jobs simply by lowering taxes and getting out of the way is moot in a globally competitive innovation economy where our competitor nations are out-investing us in all of the building blocks of innovation. But what will succeed it in the coming year, decade, and generation is yet to be seen.

Progressives have an opportunity to create a new narrative for growth and job creation. Innovation and progress are intertwined. Investing in the building blocks of innovation means fulfilling the progressive vision for America. It means investing in educating our children, investing in training our workers, investing in science, reforming immigration, making government work more effectively, and investing in the present and future wellbeing of the productive middle class.

“The government can create jobs by investing in innovation” can fill the void in American politics left by self-destruction and intellectual bankruptcy of “the government can only cut taxes and get out of the way to create jobs.” The president set the stage for this new innovation-oriented message in his 2011 State of the Union address when he said “the first step to winning the future is encouraging American innovation.” Tonight he has a chance to play the opening number.

Sean Pool is the Assistant Editor for Science Progress.

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