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The Feds and High-Tech Innovation: Can Washington Pick Winners?

David Callahan

Few would disagree that the United States needs to stay on the cutting edge of science and technology in order to remain a global economic powerhouse. Stop innovating in today's high-tech era and we'll be left behind by those countries that do.

Where there is ever less agreement, though, is what the proper role is for government in helping to spur innovation. No surprise there, since everything government does is now being fiercely contested.

Libertarians basically think that government shouldn't have any role at all in promoting technological innovation. They argue that only the free market knows how to choose "winners" -- e.g., the technologies and industries that will become successful. Government can't do this competently because, among other things, it will make choices based on political factors -- like who gave money to certain politicians or hired enough lobbyists to get their way.

To be sure, there is something to the libertarian critique. Our government does tend to do the bidding of big money and also of very well-organized interest groups. If government has a budget for science and technology, you can get bet that a lot of hands will want to be in that cookie jar.

So I get the dangers here. On the other hand, though, the historic record suggests these risks are worth it: The government has played a very constructive role in scientific and technological breakthroughs and what we need now -- amid fierce global competition -- is a bigger, not a smaller, public role in this area.

Government can and does support innovation in a few different ways.

First, the Feds spend money directly on scientific research, which now stands near a historic high as a percentage of GDP. The Obama Administration's most recent budget requests $140.8 billion for Federal R&D, a little more than half of which is for defense R&D and the rest of which goes for energy, health, space, and academic science. As Fed Chair Ben Bernanke explained last year:

The primary economic rationale for a government role in R&D is that, absent such intervention, the private market would not adequately supply certain types of research. The argument, which applies particularly strongly to basic or fundamental research, is that the full economic value of a scientific advance is unlikely to accrue to its discoverer, especially if the new knowledge can be replicated or disseminated at low cost.

So, for example, it wouldn't have made sense for a private corporation to take on the project of mapping the human genome, a hugely important scientific undertaking which government paid for over a period of 13 years.

Perhaps the most famous result of direct spending is the invention of the Internet, which was created by DARPA, the Pentagon agency in charge of technological innovation. Less well known, but hugely important, is government support for agricultural science -- which, among other things, produced hybrid seed corn, which dramatically increased corn crop yields.

Government science spending has underwritten any other number of breakthroughs. Funding from National Science Foundation alone helped create sign language, discover anti-freeze, invent bar codes, develop computer-aided design and manufacturing (which revolutionized U.S. industry), create the MRI, invent voice recognition technology, help develop the Internet search engine, accelerate material science in ways that made cars much lighter, and pushed forward the boundaries of cryptography so that information on computers is more secure.

These are all winners picked by government. Have there been losers? Of course, lots of them. But that's the nature of R&D.

Government has even done better picking winners through subsidies or more indirect supports that created the conditions in which new technologies could become financially viable. Early U.S. construction of railroads was spearheaded by the Army in direct response to a directive of President John Quincy Adams, and nearly all early railroad engineers were trained at West Point, which was then the nation's only engineering school. The subsequent large-scale rise of railroads was made possible by government:

Although these companies were mostly private enterprises, state and local governments, and later the Federal government, subsidized all the significant rail lines with public money and credit, using loans, grants, stock purchases, and other means. As with the Army engineering, this public funding was absolutely essential. The biggest private financiers would not invest in constructing such enterprises, and the smaller investors could not sustain projects of such scope and duration without public money and guarantees.

Was there a lot of crony capitalism in all this? You bet. But the result was the most modern transportation system in the world.

Government didn't play a direct role in inventing electricity or cars, but it was instrumental in making both technologies viable. Government created a large early market for electrical lamps and electricity, for lighting public places. And government created the regulatory framework to standardize electrical currents, bulbs, and plugs.

And it's hard to imagine the automobile getting very far if government didn't build the roads and bridges for them to travel on. 

Government's role in jet technology, another winner, was especially important. The government massively subsidized the creation of a U.S. jet industry through the defense sector -- laying the groundwork for U.S. commercial dominance in this area for decades.

And government money played a big role in the rise of the U.S. computer industry, with defense dollars and science grants helping pay for many key breakthroughs. Silicon Valley's earliest origins trace back to U.S. Navy research on radio technology in the Bay Area. Government not only funded all sorts of computer science research, but supported the education of computer scientists and engineers, and paid to equip university research labs.

Given this track record, now is definitely not the time to take the U.S. government out of the role of fostering new technology.