The Government Plays a Crucial Part, but Federal Investment Choices Depend on Politics as Much as Policy
The Semiconductor Industry Association, whose products power electronic devices from computers to cars and which serves as a premier example of U.S. technological prowess, honored three lawmakers last month for their leadership in American innovation. The group praised Zoe Lofgren, a House Democrat from Silicon Valley, and Michael McCaul, a House Republican from high-tech Austin, along with Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, for their particular roles in promoting the federal government’s range of support for science, research and development activities.
Coming from an industry that grew out of the private efforts of scientists at AT&T’s Bell Laboratories in the 1950s and then thrived on military and other government contracts — including the Defense Department’s contributions to creation of the Internet — such an endorsement of continued and enhanced federal support for innovation speaks volumes about how much even successful scientific and technological enterprises say they depend on Washington.
It’s instructive that American semiconductor manufacturers, who remain the leaders in their global industry, still see a need for direct government research assistance and tax incentives to pursue innovative developments, as well as changes in immigration law and education programs designed to help fill their talent pool.
And in recent pronouncements, President Obama has focused new attention on the government’s role in guarding American competitiveness with the rest of the world by declaring that “winning the future” will be the objective of the few targeted spending increases he is pushing in this year’s intense budget battle with Congress.
“None of us can predict with certainty what the next big industry will be or where the new jobs will come from,” the president observed in his State of the Union address in January. “We’re the nation that put cars in driveways and computers in offices, the nation of Edison and the Wright brothers, of Google and Facebook. In America, innovation does not just change our lives; it is how we make our living.”
Obama is among those who see a critical role for government in paving a path to creation of the next new thing. Washington already spends tens of billions of dollars every year promoting innovation. It relies on both targeted and broad-brush tax breaks to give companies an incentive to develop new technologies. And it directs additional money to universities, government-sponsored laboratories and companies for specific scientific and technological purposes.
But Congress has neither an overarching plan for when and where to invest in new ideas, nor a consensus view on how best to accomplish its goals.
Many lawmakers — Republicans particularly, but far from exclusively — tend to prefer the tax code as a means to stimulating innovative research in the corporate world. They see tax breaks as less intrusive and less likely to violate what some criticize as a tendency to “pick winners and losers.”
Others — Democrats mostly, but not entirely — favor the direct spending route, at least in addition to tax breaks to target money to areas where innovation is considered likely to pay significant dividends.
In either case, ideology as much as an appreciation for scientific inquiry often colors decisions about where the government should be involved. And while the upshot in the minds of some is that the United States is being left behind in the race for innovative ideas, so far that has not changed the debate on Capitol Hill.
The political overlay frustrates those who aim to focus Washington’s attention more closely on the demands of the 21st century, not to mention the perceived competitive threat from abroad.
One such unhappy advocate is Robert Atkinson, the founder and president of the Information Technology and Innovation Foundation (ITIF). His fledgling Washington think tank tries to navigate the ideological waters to promote government support for innovation in many forms and with a broad range of ideals.
Overcoming ideological hurdles and concerns about the level of government spending is difficult, Atkinson says. “What we’re saying is, ‘Well, let’s see, we better balance the budget deficit so we better not invest in new innovation,’ ” he lamented in an interview last year. “Or the left is saying, ‘Well, we don’t want to do anything on the corporate tax side, because that’s helping these Benedict Arnold corporations.’ And the right is going, ‘We don’t want to do anything on innovation policy, because that’s industrial policy.’ ”
ITIF sponsored a conference on the future of American competitiveness last month to illuminate some of those hurdles, and in his presentation to the conference, Atkinson recited a plethora of measurements by which the United States currently falls short. Among the items on his list, he cited these statistics:
• The United States was last among 40 countries over the past decade in improving its ability to innovate.
• Although America still spends billions on research and development, the U.S. share of global R&D fell to 33 percent from 39 percent over the past two decades.
• In an indication of where the country’s interests lie, U.S. colleges and universities in 2009 awarded more undergraduate sports-exercise degrees than electrical engineering degrees.
To Atkinson and like-minded advocates, these are problems that reflect long-running trends and will require a sustained effort to overcome. It was almost exactly the point that Obama had made in his State of the Union message: “To win the future, we’ll need to take on challenges that have been decades in the making.”
Taxonomy of a Credit
When companies talk about federal support for innovation, often the first thing they mention is the tax credit for business-financed research, development and experimentation.
The credit has been around in various forms for 30 years, but it has always been a temporary element of the tax code. Usually, the R&D credit, as it is commonly known, is enacted for a year or two at a time. It was most recently renewed last December to cover qualified expenses retroactively for 2010 as well as through 2011.
This credit, which was worth an estimated $6 billion to companies in fiscal 2010, is highly prized by companies. And even though lawmakers keep the credit on a short leash, it is generally favored on Capitol Hill. Bills to make the popular provision permanent are introduced routinely, but have yet to gain traction — possibly because the credit serves as a convenient engine to drag other temporary tax breaks into law year after year.
The president likewise sees value in the credit as a means toward boosting innovation. In his February budget request, Obama embraced both making the credit permanent and expanding it, at an estimated cost of $106 billion over the next decade.
Despite the degree to which the credit is favored by lawmakers, there is not a great deal of evidence showing that it works terribly well. A 2008 review of studies of the credit by the Congressional Research Service showed that companies generally benefited dollar-for-dollar for the amount of tax credits they received. But there was little evidence, CRS said, to suggest that companies greatly boosted their investment in research and development activities because of it.
Using data from the National Science Foundation (NSF), the CRS report said “the credit delivered no more than a modest stimulus to domestic business R&D investment from 1997 to 2005.” Specifically, the study said the provision might have boosted R&D spending by as much as 3 percent annually over the period.
The implication is that companies do not engage in much extra research spending because they qualify for the tax break. Some critics blame the fact that the credit is not permanent, so companies do not plan ahead because they assume that the benefit will be available. Others say the credit — which is designed to reward R&D spending above a “base” amount — needs to be redesigned to more clearly encourage increased investment, should be larger and should be payable even to companies that owe no net tax.
Atkinson is one critic who says the tax credit is generally too small, especially in relation to the sort of support provided by other countries. While the United States pioneered the credit under President Ronald Reagan, he says, most developed countries pay companies more through their R&D credits. Over the past decade, Atkinson told the recent ITIF conference, U.S. companies with operations overseas increased their foreign research spending two and a half times as fast as they raised their domestic spending.
Writing in Basic
If the R&D tax credit generally attracts bipartisan support, another major leg of federal assistance for scientific inquiry — direct spending on basic research — tends mostly to attract the votes of Democrats.
Congress certainly supports large amounts of health care research through the National Institutes of Health and other agencies. Research into all manner of energy- and transportation-related projects also periodically attracts the interest of lawmakers. And the Pentagon routinely spends billions of dollars on research into military applications, some of which eventually find their way into widespread use.
But it is the unfettered inquiry into the unknown — which scientists typically say offers the best opportunity for innovative leaps — that gets only limited support from Congress. ITIF notes that after adjusting for inflation, the average annual growth rate for federal R&D investment was 4.9 percent from 1953 to 1987, but just 0.3 percent from 1987 to 2008.
Likewise, companies devote most of their research spending on development of those things that are assumed to have the potential for commercial success from the outset.
From 1991 to 2008, according to ITIF, basic research as a share of corporate R&D spending fell by 3.6 percent, and applied research — which takes basic research another step but doesn’t guarantee the potential for an actual product to sell — fell by 3.5 percent. Companies did boost spending on actual product development by 9.8 percent.
That is why innovation advocates wonder where the money to develop the next transistor will come from. Bell Labs is gone, and companies are mostly directing their research money into commercial applications.
To counter this concern, Congress voted in 2007 to consolidate most federal programs that support basic science and science education — authorizations for the NSF and the National Institutes for Science and Technology, for example — into what is known as the America Competes Act. The idea was to give science more visibility and to provide a more coherent approach to federal support for scientific research.
When that law came up for renewal last year, however, House Republicans balked at continuing existing programs for five more years and at raising authorized spending levels. Late in December, a compromise was reached and Congress cleared a three-year extension of basic science programs. But while the Senate passed the bill by unanimous consent and House Democrats were unanimous in their support for the measure, only 16 House Republicans voted yes and 130 voted no.
Then, at the beginning of this year, House Republicans used a spending bill for the current fiscal year to proposed big reductions in basic science. The American Physical Society, which represents physicists, sent out an alert warning that the NSF’s budget would be cut by almost 10 percent from fiscal 2010 levels and that the budgets of NIST and the Energy Department’s Office of Science each would be cut by about a third.
The Public Factor
Scientists, who routinely say the NSF is critical to the advancement of science, decry efforts to curtail what they see as an already too-pinched federal commitment to science. Innovation advocates share that view, and much of the public, which tends to be enthralled by the promise of scientific advancement, also may agree.
There is not a great deal of detailed information about public attitudes toward the government’s support for research and innovation. But what surveys have been done tend to suggest that Americans generally embrace the idea of Washington promoting scientific inquiry.
For example, a Pew Research Center survey of 2,001 adults in April and May 2009 showed that roughly three-fourths of the respondents believed that federal government spending on both basic science and on engineering and technology generally “pay off in the long run.” Fewer than one in five of those surveyed said such federal programs “aren’t worth it.”
Three out of five respondents said government spending on science is “essential for scientific progress.” Majorities of every ideological group agreed with that statement, except for self-identified conservative Republicans. By a margin of 48 percent to 44 percent, conservatives said “private investment will ensure that enough scientific progress is made even without government investment.”
Separate Pew surveys consistently have shown that about as many Americans support increased government spending on scientific research as favor holding the line on such activities. Over the years, relatively few Americans polled say they favor reduced spending on science.
Innovation advocates continue to be dismayed by the lack of a comprehensive strategy for government involvement in innovation and by the pendulum swings in congressional support for science. But some are also hopeful that Congress will find ways to be both more supportive of a federal role in innovation and to make the federal government’s involvement more effective. One provision of the America Competes Act aims to do that.
The law directed the Commerce Department to study the nation’s economic competitiveness and capacity for innovation, with an eye toward making policy recommendations for a comprehensive innovations strategy.
While some dismiss such studies for generating paperwork that merely gathers dust, others see this effort as a long-needed evaluation of where the United States is in the world today and where it needs to be.
Although this inquiry has just begun, the department has created a website at commerce.gov/competes. The department is actively soliciting comments on its proposals. And the study is due to be completed by Jan. 4, 2012.