So You Want Green Energy, New Medicines and Flying Cars? You Need the Federal Government

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Everyone who's anyone is publishing manifestos, blogs, e-books, and the like, warning that innovation and growth is over. Economists Tyler Cowen and Robert Gordon have received notoriety for asserting that stagnation is the new norm. The American Enterprise Institute worries that "The Computer Revolution is Already Over." The Founders Fund, a VC firm whose partner includes noted entrepreneur Peter Theil, published a manifesto "What Happened to the Future: We Wanted Flying Cars and Instead got 140 Characters" (a reference to Twitter). It complains that "venture investing shifted away from funding transformational companies and toward companies that solved incremental problems or even fake problems." And now the Economist cover story is titled "Innovation Pessimism: Has the Ideas Machine Broken Down?"

Amazingly, others have taken the exact opposite view that innovation is accelerating (see the work of Erik Brynjolfsson and Peter Diamandis). It is interesting that the most popular work on this topic in the last year is so polarized, ranging from we are in the midst of the greatest innovation revolution ever to innovation is all over. I guess hyperbole sells.

The real answer is a little less dramatic but no less important. We are not collapsing, but we are certainly not keeping pace with our global competitors and the United States is at a real risk of losing the race for innovation advantage. This is not for a lack of ideas, or talent or the turning of historical cycles, as many of the manifesto writers have argued. One big reason is staring us right in the face: the lack of consistent government R&D funding and support of innovation and technology.

What the "stagnationists" seem to forget or ignore is that over the last 30 years the federal government has been dramatically underinvesting in research and development. The U.S. ranks just eighth among OECD countries in R&D as a share of GDP. A key reason is that federal R&D investment grew in constant dollars at just 0.3 percent per year from 1987 to 2008. To restore federal support for research as a share of GDP to 1987 levels, federal funding would have to increase by almost $110 billion per year. Just imagine where U.S. (and global) innovation would be if the federal government had invested 3 trillion dollars more into R&D than it did over the last 30 years.

Contrary to the beliefs of many, innovations do not spring from the mind of young entrepreneurs living in garages in Silicon Valley and funded by rich VCs. This fundamentally gets the innovation model wrong. Almost no entrepreneurs discover things fundamentally new, at least while working on their own nickel. Rather, in the words of Isaac Newton, they stood on the shoulders of giants. In this case the giants were those scientists and engineers funded by society, through tax payer largess, that created the building blocks that led to many of the technological breakthroughs we have today.

Think of innovation this way. Technological innovation requires inputs (e.g., discoveries, data sets, technical standards, technical tools, and other knowledge) and the federal government plays a huge role in generating those inputs. Now think of these inputs as constituting a large mountain of knowledge. Entrepreneurs poke around the mountain looking for knowledge that they can turn into something that will add value to society (defined as something people will pay money for). Without entrepreneurs, the knowledge mountain remains fixed. But without the federal government, the knowledge mountain will be reduced to a molehill, leaving entrepreneurs with significantly less knowledge to mine. Instead they will create "140 characters" re-using knowledge that already exists. (note: Twitter is clearly a cool innovation, but it is not enough).

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