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Impact of the recession on innovation and technology growth

So why are economists and innovation experts so skeptical? For initiatives such as broadband deployment and incentives to adopt electronic medical records, the billions of dollars represent entirely new investments.

  • It is not only a moral imperative to ensure that swathes of the globe are not left behind; such a scenario would also pose a risk to global stability through channels such as global inequality, migration flows, and even geopolitical relations and security;
  • Using a simple illustrative accounting framework, it is shown that an economic stimulus can lead to a short-run boost in output that outweighs the additional interest costs of the associated debt increase;
  • I am particularly beholden, because on one hand, I have an opportunity to pay my tributes to these great scientists, who also represent a unique intellectual bond between these two great nations, as partly reflected by a relationship between these two giants of this century.

And for energy technologies, the spending levels dwarf existing public and private investments. The influx of money is particularly dramatic because it comes after years of lackluster federal spending on technology and research, especially in the area of energy.

Can Technology Save the Economy?

The stimulus bill unabashedly singles out energy projects for huge doses of funding: Established renewable-energy sectors, such as wind and solar, also receive tens of billions in tax credits and grants. Multimedia See an economics expert from MIT talk about technology and the economy. Most audacious, the spending bill does all this with the intention of both stimulating the economy in the immediate future and creating growth in the long term.

Pollin published a report last fall arguing that substantial spending on energy technologies would create two million jobs over the next two years. But just how realistic are the expectations behind the stimulus package? Can huge jumps in technology funding boost the economy?

  • Over the infinite horizon, the return is still 1;
  • While some projects to make buildings more energy efficient might qualify as a short-term boon for the economy, Stavins says, other energy-related projects, like rebuilding the electricity grid, will take years and have little immediate effect.

And will this sudden windfall of funding really be a positive force in encouraging new technologies? Almost all economists agree that technological progress drives long-term economic growth. Many proponents of the technology provisions in the stimulus bill go further, however, arguing that the funding will alsocreate jobs immediately. And he believes there is clear evidence that spending on energy research will improve the performance and reduce the cost of renewable technologies already on the market.

They worry that the bill conflates the challenges of immediate economic stimulus and long-term technological progress, particularly in the area of energy. Thus, they say, it may not be the most effective way to achieve either goal.

Recession, recovery and long-run local economic growth

And the key to its effectiveness is that it is labor intensive and quick. While some projects to make buildings more energy efficient might qualify as a short-term boon for the economy, Stavins says, other energy-related projects, like rebuilding the electricity grid, will take years and have little immediate effect.

Because the bill was written quickly and shaped by political expediency, economists and experts on innovation policy impact of the recession on innovation and technology growth leery of many of its funding choices.

Or what if utilities run high-power transmission lines to remote solar or wind farms, only to find that the electricity they produce is too expensive to compete with other sources? As a historical analogy, experts point to corn-derived ethanol. Once the darling of alternative-energy advocates, the heavily subsidized biofuel is now routinely condemned by both environmentalists and economists.

Despite what would seem to be a huge victory for his cause, he still seems irritated by the bickering over the details of the stimulus package. While the stimulus bill broke down the spending slightly differently and extended it over several years, such forecasts of job creation served to justify the inclusion of heavy technology spending in the legislation.

In other words, solar-energy bottles. And he worries that the heavy technology spending in the bill could eventually deter innovation strategies that would prove more effective. Having prominent failures can undermine the whole case for using resources wisely to encourage innovation. One area of technology spending in the stimulus package that appears to flunk economic analysis is the program to extend broadband Internet to areas not currently served. The problem, says Greenstein, is that these households tend to be in isolated or rural areas where supplying broadband is extremely expensive.

The most optimistic estimate is that it will cost at least a thousand dollars per household to extend broadband coverage; for some isolated houses, the cost will be far greater. His analysis shows that the largest financial gain from expanding broadband access goes to broadband suppliers themselves.

Increasing broadband use can also benefit equipment makers and companies such as Google and Amazon, he says. Of course, advocates of federal spending to extend broadband service argue that it provides more general benefits to society. Remote communities would gain increased educational opportunities, easier access to government services, and eventually, perhaps, improved medical treatment impact of the recession on innovation and technology growth online interaction with physicians.

But, says Greenstein, many of these benefits are several years away, and it is debatable whether expanding conventional broadband services—rather than, say, using wireless technologies—is the most effective way to deliver them.

Innovation in science and technology is estimated to account for as much as 90 percent of new economic growth. The reason is that better technology allows more things to be produced more cheaply and can create entirely new markets; in the terminology of economists, it increases productivity.

For economists, the most dramatic recent example is the information technology boom that began in the mid-1990s. Beginning in 1995, productivity began to grow at a much faster rate than it had in years. While strong productivity growth in the decades after World War II fueled the prosperity of that era, it fell off abruptly in the mid-1970s, contributing to an economic slowdown. The jump first seen in 1995 was initially viewed as an anomaly, but productivity continued to rise over the next several years.

What does a subsidy mean? But Jorgenson says the best way to encourage innovation for that purpose is through carbon pricing—either a direct carbon tax, which he advocates, or the cap-and-trade program that is now being debated in Congress. It will be less risky, he says, to let the carbon pricing scheme determine which of the renewable-energy technologies are viable in the market.

The federal government, he points out, played a critical role in the development of IT by supporting the early, basic research that led to the Web and by funding research programs in computer science and electrical engineering. Becalmed While academic economists might be worried about long-term growth strategies, the entrepreneurs and executives running renewable-energy businesses, including solar, wind, and biofuel companies, say they are struggling just to stay alive.

The credit and banking crisis that took hold last fall ruined any chance of obtaining financing for most large-scale, capital-intensive projects. As a result, construction on many costly solar-power and wind-energy facilities came to a halt, and a number of companies announced layoffs. Those developing truly novel technologies, such as cellulosic biofuels, were left stranded without the prospect of obtaining the hundreds of millions in private financing needed to demonstrate their technologies on a larger scale.

And during that period, a lot of these companies would just disappear completely. Mascoma wants to construct a commercial-scale facility in northern Michigan that could be in operation by 2012, says Jamerson.

The Solar Energy Industries Association estimates that overall, the provisions will create 110,000 jobs over the next two years. The stimulus bill will boost public-sector spending on energy research and development, which has been on the decline for decades.

Beyond helping companies impact of the recession on innovation and technology growth the energy sector survive the recession, the stimulus bill could—supporters hope—jump-start fledging technology sectors such as the smart grid, the effort to modernize the electricity infrastructure so that energy can be distributed more cost-effectively and used more efficiently. And it will begin to spur further investments in improving the electric grid. The danger, of course, is that while the federal dollars could help renewable-energy companies survive the recession, they could also prop up existing technologies that would not be competitive in an open market.

Not only could the federal spending support uneconomical energy sources as has been the case with ethanolbut the resulting backlash could discourage policy makers, investors, and the public from embracing newer, more efficient technologies.

As the stimulus runs its course in two to three years, pressure to reduce the federal budget and cut government spending could make such a backlash even worse. One renewable sector that could be particularly vulnerable in such a scenario is the solar industry.

  1. The unprecedented speed of change, as well as the breadth and the depth of many radical changes unleashed by new digital, robotic and 3D technologies, is having major impacts on what we produce and do, how and where we do it and indeed how we earn a living.
  2. Innovation in science and technology is estimated to account for as much as 90 percent of new economic growth. Such an analysis clearly shows that a temporary increase in federal spending—especially during an economic downturn—leads to an increase in national income in the near term, while spreading out the costs over many years.
  3. Remember that technological innovation is an important component of productivity. The competitive advantage in high-technology business increasingly depends on underlying technical skills of the business rather than on particular products.
  4. Measures such as the price of cloud storage, data processing rates, broadband speed, and 21st-century skill development could be more relevant.
  5. The competitive advantage in high-technology business increasingly depends on underlying technical skills of the business rather than on particular products. While many of the papers use standard economic indicators such as gross value added GVA and employment, others examine more specific forms of resilience as measured by indicators such as firm births or patenting.

Not only are they still too expensive, but researchers need to develop longer-lasting, more efficient solar cells that can handle higher voltages. In such a context, the stimulus bill is just one part of a larger energy agenda that will, arguably, be the most important change in technology policy for a generation. Such laws could help address global warming. But few energy experts believe that renewable technologies will be reliable and cheap enough to replace fossil fuels on a large scale anytime soon.

Electricity produced by existing solar technologies is likely to remain relatively expensive. Overhauling the electricity grid will take years, cost at least a hundred billion dollars, and require new storage technologies in order to be fully effective. Programs like ARPA-E, which emphasizes government and industry research on high-risk programs, are likely to yield significant advances.

There is little, if any, sign that the green economy has even begun to sprout. Congress and the president were, arguably, right to attempt to revitalize energy research and to link technology spending to the long-term objective of transforming the country to a clean-energy economy.

Why the Technology Economy Matters

Most important, it has once again established energy research and the search for cleaner power as a national priority. But including so much technology spending in the stimulus bill also brings dangers. Technology—more specifically, technological progress—can save the economy. A cleaner energy infrastructure will prove invaluable to economic growth in the long term.

However, it will take time to realize the benefits. If the transition to a clean-tech economy is ever truly to begin, government policy makers will have to move past politics and get the economics, policy, and technologies right. The way technologies are chosen, implemented, and funded will matter. That means properly designing a carbon pricing program and supporting institutions like the DOE in the expectation that they will make informed decisions and work closely with private investors and venture capitalists to develop the most viable technologies.

Perhaps most important, it means that the government will need to support and fund energy research even as the stimulus spending peters out and political support for massive technology funding wanes. This will be a long transformation, and it is going to be very expensive.

David Rotman is the editor of Technology Review.