Government’s Historical Role in Innovation

December 20th, 2011 at 12:03 pm

This oped makes an important point, one I’ve also made in those endless, uninformed debates about why the government shouldn’t pick winners, and how markets know best, and all that gov’t can do is cuff the invisible hand, yada, yada.

In fact, you can’t find an important economic innovation wherein the federal government hasn’t played a key, developmental role.  This piece focuses on energy exploration, in this case, fracking for shale gas (more on that below):

Many often point to the shale gas revolution as evidence that the private sector, in response to market forces, is better than government bureaucrats at picking technological winners. It’s a compelling story, one that pits inventive entrepreneurs against slow-moving technocrats and self-dealing politicians.

The problem is, it isn’t true.

The breakthroughs that revolutionized the natural gas industry — massive hydraulic fracturing, new mapping tools and horizontal drilling — were made possible by the government agencies that critics insist are incapable of investing wisely in new technology.

You can go back to the Revolutionary War and find government’s fingerprints on innovations from machine tools to railroads, electricity transmission, transistors, lasers, the internet, GPS, and every aspect of energy exploration and development (this book is a great source for such information).

“We don’t pick winners” is not only a canard that reveals a lack of historical perspective.  It’s a great way to thwart American global competitiveness because there’s simply no question that other economies, advanced and emerging, are not the slightest bit hamstrung by such ideological myths.

Why?  Because there’s a market failure here:

..the private sector alone cannot sustain the kind of long-term investments necessary for big technological breakthroughs in the midst of volatile energy markets and short-term pressure to produce profits.

Let me be clear that I am not endorsing fracking, which is considerably more environmentally controversial than this article allows (they admit to worrying about its impact).  But if we don’t learn this lesson about gov’t’s role, or if we let the failure of Solyndra shut us down, we’ll fail to develop the energy alternatives that must ultimately replace fossil fuels.

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12 comments in reply to "Government’s Historical Role in Innovation"

  1. readerOfTeaLeaves says:

    Did you mean ‘endless UNINformed’ debates, rather than ‘uniformed’ debates?

  2. Matthew Stepp says:

    Jared – Great piece. Glad folks are pushing the active role gov policy plays in developing the very technologies we use every day and need in the future. It’s an important point that reframes the budget debate and the backlash after Solyndra.

    Highlighting your final comment on government investment – check out a report I coauthored with my colleagues at the Breakthrough Institute called “Taking on the Three Deficits”

    It gets right at the point your making in the context of the current budget austerity and deficit mood of policymakers.

    Cheers –
    Matthew Stepp
    Clean Energy Policy Analyst
    Information Technology and Innovation Foundation

    • Peter H says:

      I don’t see how this relates to Solyndra. Solyndra was not an engineering firm or R&D firm. It was a manufacturing firm, and I think there is a good case to make that the government shouldn’t be making loans or loan guarantees to manufacturers, or anyone really for that matter.

      The report you link to is interesting, but I don’t understand why the cumulative balance of trade over a period of time is an important statistic. I understand its use as a flow, but unlike the national debt, it lacks the characteristics of a stock (since the debt is fixed and measurable, and the balance of trade is not). So the summation of balance of trade over time makes little sense to me as an important metric.

      Further, you state that “The trade deficit creates a drag on economic growth and represents a hidden tax on future generations of Americans who will have to pay it off by running trade surpluses that stem from expanded exports and/or reduced consumption of goods and services.”

      That’s just not true, and hasn’t been since the gold standard (and was only arguably true then). Trade imbalances are rectified by exchange rate movements, and a trade deficit lowers the value of the USD relative to other currencies, but does not become a debt for future generations.

      • Matthew Stepp says:

        Peter –

        Re: Solyndra. I was speaking to the backlash after Solyndra, in which investments in clean energy innovation broadly have been under attack. That’s very relevant to this discussion as there is a lack of understanding of where next-gen tech comes from, the role of the government, and even further the fact that there is going to be failure in innovation policy.

        Separate to that are the merits of investing in Solyndra’s innovative manufacturing process for solar PV, which speaks to what the government should be investing in rather than whether the government should be investing at all.

        Re: Stock of Trade Balance as metric. You’re absolutely right from a purely economic analytical perspective, but the idea here is to provide a sense of the problem – the U.S. is consuming a lot more than it’s producing and that’s a fundamental economic issue. It’s very much a narrative tool.

        Re: Economic impact of trade deficit. A trade deficit, like you say, will lower the value of the dollar, which will result in future generations paying more for the growing amount of imports it is consuming. So future generations will in fact either consume less (because it costs more) or produce more to re balance trade. Either way, it impacts future generations. So I’m not saying it’s a debt to pay off, but a real economic impact that future generations will realize because of our current trade deficit.

        • Peter H says:

          Re: Trade deficits

          The people who lose from a lower dollar are not future generations (assuming wages keep pace with inflation), but is current holders of dollars or dollar denominated assets, who see their assets lose value. This only affects future generations in as much as they will inherit fewer assets (or assets with a lower real value. Trade deficits are much more akin to spending saved money than incurring debt, in that the value of present real assets is diminished, rather than the flow of future income being diminished.

          The study you’re presenting at minimum implies strongly that it is an economic analysis. It severely undermines the credibility of the study to treat trade issues the way you do. To sacrifice accuracy to “give a sense of the problem” is I think a very poor way to go about things. Accuracy matters a great deal, and oftentimes, an inaccurate analysis is worse than none at all.

          Re: Solyndra/scientific investment

          I think most of the clean energy programs done by DoE are at minimum poorly structured, and in large part wasteful. They target (as you pointed out in your paper) consumption, not research. Subsidizing the manufacture of existing technologies in solar or wind does not spur innovation. It just spurs manufacturing of existing technology, subsidizing the consumption thereof. Executing that subsidy through a loan program as opposed to grants is just a question of very poor structure (and of DoE trying to avoid honest accounting, since they can project a high repayment rate unconnected with reality).

          If the government is going to invest in research, it should do so directly through government labs and/or grants to researchers. Loan programs to private industry are not investments in innovations; they’re boondoggles.

  3. Brian Ritz says:

    Basically the argument is: I know we need government to spur innovation. I know this because some great innovations in the past have been made with government influence.

    For this to be valid, you must prove that those innovations would have never happened without government. Otherwise, the second part above is just a statement of historical fact, not an argument for an active role for government in innovation.

    • Mike says:

      You don’t have to prove that those innovations would never have occurred without government support, only that they would have happened later. That fact seems to be obvious. Columbus-government funded. Lewis & Clark-government funded. The entire space program until a few years ago-government funded. The internet-government funded. And it’s just business sense. What private firm is willing to put billions of dollars toward a completely unknown and unproven idea because there’s a small chance it will create a global paradigm shift?

      There aren’t many (if there are any at all) big breakthroughs that originated from the private sector.

      • Jared Bernstein says:

        Exactly. See the last two slides here (especially second to last one) for a list of the widely accepted market failures that establish the role for government in this space.

        Now, that doesn’t mean gov’t will get it right. There’s gov’t failure too (see current Congress). However, such failure is driven not by liberal’s on a mission to expand gov’t’s role, but by lobbyists distorting the process and decisions.

      • Brian Ritz says:

        Your point that you must only prove that innovations would have been made later is well taken. However, its important to remember there is still a cost to making innovations earlier, which still must be weighed against the benefits of making the innovation earlier.

        In your example of discovering the Americas, there were huge externalities to the voyages–every trading firm in Europe benefitted from the discovery. Combine those externalities with the relatively low cost compared to the potential huge (post hoc) benefits, and I’ll grant that government involvement was more optimal than non-involvement in that case.

        My main point was this: deciding governements role in innovation takes much deeper thought than was demonstrated in the blog post. It’s quite possible that Jared has put in deep thought, but the specific argument presented in this blog post for governments role in innovation is weak. You and Jared, in reply to my comment, expounded a little bit about externalities and market failure; that is a much better argument, although there’s still a debate to be had about the relative costs and benefits of those market failures. 

        Just don’t fall into the trap of saying, “There aren’t many (if there are any at all) big breakthroughs that originated from the private sector; therefore, government must have an active role in markets to bring about the optimal level of innovation.” That’s sloppy reasoning. The conclusion does not follow from the premise, because, as Alex Tabarrok (@atabarrok) tweeted, “Govt fingers in so many pies it’s easy to say govt responsible for all good things. All bad things also.”

  4. Tom in MN says:

    This is about taking risks and the government is the best way to spread those risks out. As Paul K. says, the government is an insurance company with an army and investing in innovation can be thought of as future insurance.

  5. Alex Trembath says:

    In addition to the Washington Post op-ed, the Breakthrough Institute has just published the results of our investigation charting the decades-long support the federal government provided to the gas industry, from massive hydraulic fracturing and the Eastern Gas Shales Project in the 1970s, through the 1980s with the Section 29 unconventional gas tax credit and DOE’s first demonstrated multi-fracture air-drilled directional well, to the 1990s with microseismic imaging tools and direct financial support for Mitchell Energy in their first horizontal well. Follow this link to view the results of our investigation:

    As Dan Steward, former VP at Mitchell Energy, put it, “[DOE] did a hell of a lot of work, and I can’t give them enough credit for that. DOE started it, and other people took the ball and ran with it. You cannot diminish DOE’s involvement.”

    The history is clear: the natural gas industry as we know it today relies heavily on technological innovations and techniques pioneered over several decades by the federal government. The partnership and support of the government does nothing to diminish the valuable R&D, exploration, and risk-taking performed by Mitchell Energy. As with microchips, cellular technology, the Internet, jet turbine engines, and nuclear power, the story of natural gas is another example of the private sector taking blockbuster government innovations and turning them into a highly profitable and successful industry.