Innovation Policy

In order to assess President Barack Obama’s innovation policy, I apply the test of the three R’s:  Resources, regulation, and rhetoric.  A viable innovation policy should provide enough financial resources for basic and applied research across a wide range of field. Regulators need to avoid imposing new rules on innovative and growing sectors, and adjust or repeal rules that are holding back change. And the President needs to use his formidable powers of persuasion to focus attention on those areas of innovation which offer the U.S the biggest bang for the buck.  After all, innovation drives growth and jobs, especially for a leading-edge economy like the U.S.

Resources

Based on the State of the Union Address, the 2012 budget, and the performance of his administration thus far, I give President Obama’s innovation policy a decent grade for resources. The 2012 budget called for roughly a 5% increase in nondefense R&D outlays, after adjusting for inflation.  That includes gains for the National Science Foundation, the National Institutes of Health, and the Office of Science in the Department of Energy. Combined with the proposal to permanently extend the R&D tax credit, it’s probably the best that could be proposed in the current fiscal and political climate.

Regulation

But the President’s innovation policy, however well-intended, misses the mark on both regulation and rhetoric.  Let’s look at regulation first. His January 2001 executive order on “Improving Regulation and Regulatory Review” mentions innovation as a key goal for regulators. That’s an improvement over the current state of affairs, where most cost-benefit analyses of regulation simply ignore innovation.

The language in the executive order is straightforward, calling for agencies to conduct, “Retrospective Analyses of Existing Rules,” and to “modify, streamline, expand, or repeal” the ones that are “outmoded, ineffective, insufficient, or excessively burdensome.”

That’s a good first step. However, asking agencies to review their own rules, as Obama’s executive order does, is like asking doctors to operate on themselves.  Every President since Jimmy Carter has tried the same tactic, with limited success. Agencies have a natural bureaucratic interest in finding that the regulations they originally approved are in fact working. What’s more, agencies don’t have the resources or the time to collect the data needed to show that a regulation needs to be improved. (Ironically, the Paperwork Reduction Act, a measure intended to reduce the burden of government regulation, means that agencies who want to survey companies affected by a rule have to go through a long process to get OMB approval for that survey).

If we want to provide a better environment for innovation, we need stronger measures to control the accumulation of regulations. Think about tossing small pebbles into a stream. One or two won’t slow the flow of water much. But throw in enough pebbles, and suddenly you’ve dammed up the stream. That, in a nutshell, sums up the American regulatory problem. Taken together, the flow of rules and regulations, large and small, is piling up, making the U.S. economy more sluggish and impeding innovation.  No single regulation is a ‘job-killer’–yet each new rule sets up another hoop that innovators have to jump through, slowing growth.  

That’s why Congress and the Obama Administration need to consider something like a Regulatory Improvement Commission (RIC), an independent body specifically designated to evaluate existing regulations and offer up a yearly package of improvements, changes, and repeals (For more details, see my recent policy memo, “Reviving Jobs and Innovation: A Progressive Approach to Improving Regulation,” Progressive Policy Institute, February 2011).  The RIC would gather input from all stakeholders (not just business or just agencies), and do so in a manner that ensures we protect public health, safety, and the environment.  Then each year RIC would come up with a package of 15-20 regulations to consolidate, change, or repeal.  This fast-track package would need Congressional approval and a presidential signature.

RIC is not about deregulation, or doing an end-run around Congress.  Rather, it’s about acknowledging a very simple truth that both Democrats and Republicans can support:  We need to have a way of keeping our regulatory structure lean and mean.  Right now we have a good system for adding regulations, but no mechanism for reducing or repairing them.

The closest analogy to the RIC would be the temporary commissions that were given the task of deciding which military bases to close in the 1990s and early 2000s. These BRAC (Base Realignment and Closure) Commissions would take testimony, analyze the different possibilities, and come up with a set of base closings and consolidations that Congress had to deal with as a single package.

RIC would be a joint creature of both the legislature and the executive branch. That’s essential if we want to make headway against the onslaught of regulations without losing track of our broader social goals.   

Rhetoric

The other problem with President Obama’s innovation policy is the rhetoric that accompanies it.  He is getting better about stressing innovation as a source of jobs, an important point that escapes many politicians and economist.

However, Obama does not seem to understand that he is focusing too much on the wrong kind of innovation.  In both the State of the Union and the 2012 budget, Obama placed his major emphasis on clean energy as the major source of innovation-related jobs. For example, his budget message called for “encouraging American innovation and investing in research and development—especially in the job-creating industries of tomorrow such as clean energy.” He also repeated the idea that this is our “Sputnik moment,”   calling up images of the space race.

By contrast, the biosciences got only the briefest of mentions in both the State of the Union and the budget. In the State of the Union, he only mentioned biomedical research once (a total of 2 words).  He devoted 69 words to extolling the job- creating virtues of space travel and NASA, and 361 words in favor of clean energy. 

Putting more money into clean tech research is certainly important in the long run, and politically appealing today.  However, the raw truth is that the U.S. has under-invested in clean tech research until recently, and does not have a competitive advantage in that area.  As a result, clean tech cannot be counted on as a source of well-paying jobs in the near-term future.

By contrast, the U.S. does have a competitive advantage in the biosciences, such as biotech. If you think I’m exaggerating, just take a look at the numbers. U.S. companies accounted for 44% of R&D spending by life sciences companies around the world in 2010, according to estimates by Battelle/R&D Magazine.¹  And the U.S. accounts for 70% of government-funded health research around the world.²

By comparison, U.S. support for energy research has been mediocre, at best. U.S. companies account for only 25% of global energy R&D spending by businesses.  And in 2008, before President Obama took office, the U.S. government funding for energy R&D accounted for only 20% of global publicly-funded energy R&D.   

It will take years before the U.S. catches up in clean tech. For now, the right innovation and jobs play is to build on the U.S competitive advantage in biosciences.  The resources are there: The proposed 2012 budget would continue to fund biosciences research at a high level.

However, in order to reap the economic rewards of all the research funds put into the biosciences,  President Obama needs to start emphasizing in his speeches that bioscience innovation is essential for growth and increasing productivity, especially in healthcare.  That sends a clear message to regulators and the rest of the government that biosciences innovation should be encouraged rather than discouraged.

Conclusion

At least judging by the proposed 2012 budget, President Obama is making good on the initial stage of his promise to boost the funding available for innovation. But his rhetorical and regulatory framework need to be sharpened and better honed. That’s the best way to encourage the innovation-driven growth that the U.S. needs.