America is Falling Behind in Subsidizing Innovation

A Brookings Fellow told the Congressional Joint Economic Committee that the U.S. is at a technological disadvantage to other industrialized nations due to a declining focus on government-funded research and development (R&D). Michael Greenstone explained in the July 27 hearing the historical importance of R&D funding:

“R&D is one category of spending that develops and drives these new technologies. However, private sector firms are prone to focus their R&D on “applied” projects, where the payoff to their bottom line is likely to accrue only to them… In contrast, government can sponsor the kind of “basic” research projects that seek wide-ranging scientific understanding that can affect entire industries, rather than individual firms.”

Government-sponsored research projects are legendary. The Defense Advanced Research Projects Agency (DARPA) is credited with developing technology for the GPS and the internet. Basic research projects provided necessary developments to fuel the development of innovative businesses in technology and manufacturing.

Yet with U.S. trade policy moving away from an export model, a practice that has been upheld by every president since Jimmy Carter, R&D has fallen dramatically. “Our world market share of exports produced by high technology industries dropped from 20% to 12% between the 1990s and 2005…China’s market share has more than doubled from 8% to 19%,” said Greensone.

America’s technological standing has slumped as a result. As a share of gross domestic product, U.S. funding for research and development has decreased from over two percent in the early 1960s to roughly one percent today. And while federally funded research centers like the National Institutes of Health and National Science Foundation keep the U.S. as the world leader in medical research, energy research leaves something to be desired. The U.S. ranks 12th among OECD nations in government funding for energy technology, spending .01 percent of GDP between 2004 and 2008 according to OECD figures. Compare that to Japan or Korea, where outlays for energy research are seven times higher. Even Mexico spends more as a share, to the tune of .025 percent of GDP. Says Greenstone:

“The conclusion from these figures is simple: without greatly expanded investments in U.S. energy research and development, we will not be poised as a leader in energy innovation. This greatly decreases the chances that we will be able to reduce our dependence on fossil fuels and fundamentally decarbonize the U.S. energy sector. Further, it decreases the chances that the coming revolution in the energy sector will aid our global competitiveness.”

A 2009 report by The American Prospect detailed the sobering reality of America’s lackluster technological base within the energy industry. “What about the promise of the solar industry? There was only one American company (First Solar) among the top 10 worldwide in photovoltaic-cell production in 2008… the United States accounted for only 5.6 percent of global production of photovoltaics in 2008, down from 30 percent in 1999.” A look into wind energy showed only one U.S. company in the top ten internationally.

It is true Obama pledged to double our exports over five years, even going so far as to invite prominent CEO’s to head a task force to secure his promise to U.S. manufacturers. With an emphasis on domestic production, greater funding for homegrown industries is the logical next step. But the trade deficit keeps growing, even as exports have increased 17 percent compared to last year. And strangely, the U.S. dollar has risen in value against competing currencies, increasing the cost of American-made products at a time when domestic consumption is still hampered by the recession.

The relationship between R&D funding and domestic production cannot be overstated. A Milken Institute report showed one high-tech manufacturing job in California gives rise to 15 additional jobs outside the factory. It’s not only about national prestige; a well-funded R&D program is one of the best chances the U.S. has of overcoming this jobless recovery.

Mikhail Zinshteyn is a staff writer for Campus Progress. You can e-mail him at mzinshteyn@googlemail.com.