The Collapse of Competitiveness Policy?

The Collapse of Competitiveness Policy
By Teryn Norris
May 26, 2010
Published by The Huffington Post

Last week, the flagship federal legislation for U.S. competitiveness containing broad support for science, technology, and advanced education - called the America COMPETES Reauthorization Act of 2010 - collapsed in Congress after it was blocked from passage through the House, despite already being significantly weakened.

Enter the age of American polarization, where bread-and-butter competitiveness and innovation policy is subject to hyper-partisan politics and obstructionism, even in the face of rapidly rising global competition. America COMPETES, which was originally passed with strong bipartisan support under President Bush, may be yet one more casualty of today's extreme political polarization, which according to one major study is at the highest level in over a century.

But beyond the issue of partisanship, this is an alarming wake-up call to how anti-government sentiment and neoliberal economic ideology - which seeks to discredit the role of federal investment in promoting technology innovation and growth - could combine forces and seriously damage our national innovation system in the years ahead.

The United States was a driving force behind the global expansion of prosperity and security in the 20^th century, due in large part to our technological leadership. The collapse of America COMPETES is one of the clearest and most alarming examples in recent history of how this leadership is being threatened - not by some foreign entity, but from within our own country. How did we get to this point, and what lessons might this incident hold?

The Rise and Fall of COMPETES

The America COMPETES Act was originally passed in 2007 with major bipartisan support in response to the National Academy of Sciences report, Rising Above the Gathering Storm. It is widely recognized as the most authoritative assessment of U.S. competitiveness in the past decade, commissioned by Congress and developed by a committee of the country's leading experts in science, technology, and business.

"Having reviewed trends in the United States and abroad, the committee is deeply concerned that the scientific and technical building blocks of our economic leadership are eroding at a time when many other nations are gathering strength," they concluded. "This nation must prepare with great urgency to preserve its strategic and economic security."

To meet this challenge, the COMPETES Act aimed to increase federal investment in science and technology research and development, as well as STEM education. It called for doubling the budgets of the National Science Foundation (NSF), Department of Energy Office of Science, and National Institute of Standards and Technology over seven years, and it authorized the Advanced Research Projects Agency for Energy (ARPA-E) and new STEM education programs across the board. The bill passed with unanimous consent in the Senate and overwhelming support in the House (367-57), and it was quickly signed into law by President Bush.

The original Act only provided a three-year authorization, so it requires renewal this year to meet its goals and expand federal support for energy innovation, including the Energy Innovation Hubs, Energy Frontier Research Centers, and RE-ENERGYSE education program. It passed with strong support through the House Science & Technology (S&T) Committee in late April (29-8 vote) and mounted endorsements from over 750 organizations, including the U.S. Chamber of Commerce and National Association of Manufacturers.

The bill was first brought to the House floor on May 12^th and was on track until Ranking House S&T Committee Member Ralph Hall (R-TX) introduced an amendment that linked a "motion to recommit" to an unrelated anti-pornography amendment, forcing many Democrats to join the minority in blocking the legislation. The bill was brought back on May 19^th, yet even after stripping its authorization level by nearly 50 percent and including the anti-pornography amendment, only 15 Republicans joined Democrats (261-148) and failed to reach the necessary two-thirds majority for passage.

Reflecting on the incident, the American Enterprise Institute's Norman Ornstein wrote in last week's Roll Call, "America COMPETES reauthorization was done in a bipartisan fashion and involves a bill with little division or controversy... Instead of encouraging a constructive relationship with the serious and fair-minded legislators on the Democratic side, they are adding to the traction of their take-no-prisoners counterparts. What a shame."

The Power of Neoliberalism

On the surface, the collapse of COMPETES can be interpreted as a byproduct of today's partisan environment. No doubt this provides a simple and convenient explanation, particularly for the Democratic leadership, and it helps to explain some of the difference between 2007 and today. But there are broader lessons here that can't be ignored.

One good place to start is the statement of Republican policy on COMPETES, which claims it would create "excessive spending levels, numerous new and unnecessary or duplicative programs... our nation's budget deficit has increased 50 percent in three years, these numbers are truly unsustainable... technology commercialization activities in the bill could divert money away from basic research and lead to inappropriate market intervention, resulting in the government picking 'winners and losers.'"

The idea that public investment in developing new technologies and industries is fiscally irresponsible and inappropriate government intervention reflects a broader neoliberal paradigm. Grounded in neoclassical economics, it crystallized during the Reagan administration as a reaction against industrial policy and dominates much of economic policy to this day.

In its most basic form, neoliberal thought claims that the majority of federal intervention in the economy creates inefficiencies and should be minimized. Although more pronounced on the right, these beliefs hold strong sway over the left as well, from Robert Rubin Democrats who helped weaken financial regulation in the 1990s, to many of the country's leading climate advocates who believe the role of government is to put a price on carbon, step back, and allow the market to solve the problem.

Describing public investment as a "clumsy way to develop technology," the Environmental Defense Fund (EDF) states on its cap and trade webpage, "Some have suggested subsidizing clean energy producers and manufacturers to stop global warming. But this puts the government in charge of picking winners and losers - something it doesn't do well... Government investment is important for basic research and development, but government is not nearly as good as the private sector at finding and developing technologies to bring to market."

Indeed, the dominant cap and trade framework supported by today's top green groups and Democratic leadership embodies many core neoliberal principles. Cap and trade is grounded in the assumption that climate policy should simply price carbon through tradable emission allowances, return the vast majority of cap and trade revenue to consumers instead of investing in the clean energy industry, and allow the free market to work its magic. For example, seeking to encourage Republicans to support cap and trade and unite behind the magic of markets, Paul Krugman recently wrote, "modern conservatives express a deep, almost mystical confidence in the effectiveness of market incentives... Why do they think the marketplace loses its magic as soon as market incentives are invoked in favor of conservation?"

With such skepticism of public investment in clean energy technology - even among the country's leading environmental groups - it's little wonder that the Waxman-Markey American Clean Energy & Security Act would invest so little of its cap and trade revenue in the clean energy industry (it was largely written by the U.S. Climate Action Partnership, of which EDF is a member). Waxman-Markey would only increase the federal energy research and development budget by one or two billion dollars per year, with weak incentives for low-carbon energy technology development and deployment.

"This is a dangerous omission," concluded Nobel Laureate Burton Richter, who led a group of over 30 other Nobel Laureates in submitting a letter to President Obama last year to decry the lack of technology investment in Waxman-Markey. "This stable R&D spending is not a luxury," they wrote. "It is in fact necessary because rapid scientific and technical progress is crucial to achieving these goals, and to making the cost affordable." Unfortunately, most of these voices were lost amidst the political posturing, and in fact the new Kerry-Lieberman American Power Act would provide even less for technology.

The Role of Public Investment

Neoliberal ideology is quickly becoming a form of unilateral American disarmament in the face of growing international competition. The blockage of the COMPETES reauthorization comes when U.S. competitors are making swift advances and massive federal investment in technology development and deployment, unshackled by such politics and orthodoxy. The problems identified in Rising Above the Gathering Storm have gotten worse, not better, in part because many programs authorized in the original COMPETES Act were never funded.

The U.S. is falling behind in a number of strategic sectors and especially the clean energy industry, as we documented in "Rising Tigers, Sleeping Giant." Along with established clean energy leaders in Europe, Asian nations are prepared to establish first-mover advantage over the U.S. through robust public investments in research and innovation, manufacturing, and deployment. To secure their advantage, the governments of China, Japan, and South Korea are expected to collectively out-invest the U.S. by a more than three to one margin over the five-year period from 2009-2013, if current and proposed policies are fully enacted.

Identifying this clean energy gap between the U.S. and Asia, a recent study by Deutsche Bank noted "generous and well-targeted incentives" in China and Japan, crediting the presence of a "comprehensive and integrated government plan, supported by strong incentives" as key reasons why they have established a low-risk environment for investors and successfully stimulated high levels of private investment in clean energy. According to Pew and New Energy Finance, this totaled $35 billion in China in 2009, nearly double the United States. In contrast, the investment firm noted, we are a "moderate-risk" country since we rely on "a more volatile market incentive approach and has suffered from a start-stop approach in some areas."

Contrary to many claims, federal investment has in fact played a critical role in developing and deploying a range of game-changing technologies, as we documented in "Case Studies in American Innovation." And mounting evidence suggests the federal government significantly under-invests in R&D. In an article for The Quarterly Journal of Economics titled "Measuring the Social Return to R&D," two Stanford economists concluded that "the optimal share of resources to invest in research is conservatively estimated to be two to four times larger than the actual amount invested by the U.S. economy. The extent of underinvestment is substantial, and could well be much larger."

Federal investment in technology is especially important for sectors like clean energy and health services, which are critical public goods. The National Institutes of Health is a major R&D priority for the federal government, receiving approximately $30 billion per year for biomedical research, and it is regarded as one of the world's best research bodies. In 2000, a report from a Joint Economic Committee of Congress found a 25 to 40 percent total annual rate of return on NIH investment, and found that public funding was "instrumental" for 15 of the 21 drugs with the highest therapeutic impact on society introduced between 1965 and 1992.

Clearly, public investment in technology innovation is fundamentally different from other types of government spending. The Republican minority claims that American COMPETES has "truly unsustainable" spending levels, yet these investments would lead to new technologies, new industries, and new growth, and therefore greater federal tax revenue over the long-term. This kind of investment is not only a strategy for U.S. competitiveness and security, but also for long-term deficit reduction. Opposing it is fiscally irresponsible.

Building the Innovation Movement

The United States did not win the space race with a tax on cars. We did not invent the Internet by enforcing a cap and trade system on fax machines, nor did we create the personal computer by slapping a price on typewriters. These technologies and many others, from nuclear power to biotechnology, were largely developed by direct federal investment in technology, particularly through the Department of Defense. Those who suggest we can simply rely on indirect market mechanisms to compete in the 21st century fail to understand the history of technology innovation and competitiveness, and they risk damaging our global leadership.

The neoliberal movement remains powerful on both the right and left. Whether the COMPETES incident is an outlier or trend remains to be seen, but efforts to dismantle the federal innovation system may only grow stronger as concerns about the national debt and entitlement spending rises in the years ahead. What we know is that unless the government improves and expands its investments in science, technology, and advanced education - unless we can reinforce our position as the global innovation nation - our problems across the board will only become worse.

Building the economic and political case for a strong national innovation system backed by major federal investment, and directly challenging the neoliberal orthodoxy that continues to limit effective innovation and industrial policy, must gain renewed attention and urgency. Rejecting a proposal like COMPETES in this manner should be anathema in the United States, and federal investment in science and technology innovation should hold the same privilege as the Department of Defense when it comes to budget priorities.

At the end of the Second World War, President Roosevelt wrote a letter requesting recommendations from Vannevar Bush, the first presidential science advisor and co-leader of the Manhattan Project, for the creation of a new federal enterprise for science and technology. "New frontiers of the mind are before us," the president wrote, "and if they are pioneered with the same vision, boldness, and drive with which we have waged this war we can create a fuller and more fruitful employment and a fuller and more fruitful life." Today, in the face of great national challenges, we must defend and strengthen the federal innovation system once more.

Teryn Norris is Director & Founder of Americans for Energy Leadership, Senior Advisor at the Breakthrough Institute, and Public Policy student at Stanford University.