[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 115-271
HOW THE INNOVATION ECONOMY LEADS
TO GROWTH
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
APRIL 25, 2018
__________
Printed for the use of the Joint Economic Committee
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
30-088 WASHINGTON : 2018
JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Erik Paulsen, Minnesota, Chairman Mike Lee, Utah, Vice Chairman
David Schweikert, Arizona Tom Cotton, Arkansas
Barbara Comstock, Virginia Ben Sasse, Nebraska
Darin LaHood, Illinois Rob Portman, Ohio
Francis Rooney, Florida Ted Cruz, Texas
Karen Handel, Georgia Bill Cassidy, M.D., Louisiana
Carolyn B. Maloney, New York Martin Heinrich, New Mexico,
John Delaney, Maryland Ranking
Alma S. Adams, Ph.D., North Amy Klobuchar, Minnesota
Carolina Gary C. Peters, Michigan
Donald S. Beyer, Jr., Virginia Margaret Wood Hassan, New
Hampshire
Colin Brainard, Executive Director
Kimberly S. Corbin, Democratic Staff Director
C O N T E N T S
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Opening Statements of Members
Hon. Erik Paulsen, Chairman, a U.S. Representative from Minnesota 1
Hon. Martin Heinrich, Ranking Member, a U.S. Senator from New
Mexico......................................................... 3
Witnesses
Dr. Harold Furchtgott-Roth, Director, Center for the Economics of
the Internet; Former FCC Commissioner Hudson Institute,
Washington, DC................................................. 6
Dr. Michael R. Strain, Director, Economic Policy Studies; John G.
Searle Scholar, American Enterprise Institute, Washington, DC.. 7
Mr. Mark P. Mills, Senior Fellow, Manhattan Institute Faculty
Fellow, McCormick School of Engineering, Northwestern
University, Washington, DC..................................... 9
Dr. Darrell M. West, Vice President and Director of Governance
Studies; Founding Director-Center for Technology Innovation,
Brookings Institution, Washington, DC.......................... 12
Submissions for the Record
Prepared statement of Hon. Erik Paulsen, Chairman, a U.S.
Representative from Minnesota.................................. 30
Prepared statement of Hon. Martin Heinrich, Ranking Member, a
U.S. Senator from New Mexico................................... 31
Prepared statement of Dr. Harold Furchtgott-Roth, Director,
Center for the Economics of the Internet; Former FCC
Commissioner Hudson Institute, Washington, DC.................. 33
Prepared statement of Dr. Michael R. Strain, Director, Economic
Policy Studies; John G. Searle Scholar, American Enterprise
Institute, Washington, DC...................................... 46
Prepared statement of Mr. Mark P. Mills, Senior Fellow, Manhattan
Institute Faculty Fellow, McCormick School of Engineering,
Northwestern University, Washington, DC........................ 53
Prepared statement of Dr. Darrell M. West, Vice President and
Director of Governance Studies; Founding Director-Center for
Technology Innovation, Brookings Institution, Washington, DC... 61
Abstract titled ``Who Becomes an Inventor in America? The
Importance of Exposure to Innovation'' submitted by
Representative Maloney......................................... 71
Response from Dr. Furchtgott-Roth to Questions for the Record
Submitted by Representative Maloney............................ 72
Response from Dr. Strain to Questions for the Record Submitted by
Representative Maloney......................................... 73
Response from Dr. West to Questions for the Record Submitted by
Representative Maloney......................................... 76
HOW THE INNOVATION ECONOMY LEADS
TO GROWTH
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WEDNESDAY APRIL 25, 2018
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The Committee met, pursuant to call, at 2:00 p.m., in Room
216, Hart Senate Office Building, the Honorable Erik Paulsen,
Chairman, presiding.
Representatives present: Paulsen, LaHood, Handel, Delaney,
Adams, and Maloney.
Senators present: Lee, Heinrich, Klobuchar, and Peters.
Staff present: Ted Boll, Colin Brainard, Connie Foster,
J.P. Freire, Colleen Healy, Matt Kaido, Beila Leboeuf, Kim
Corbin, Ricky Gandhi, Paul Lapointe, Alaina Flannigan.
OPENING STATEMENT OF HON. ERIK PAULSEN, CHAIRMAN, A U.S.
REPRESENTATIVE FROM MINNESOTA
Chairman Paulsen. Alright, we will call the Committee
hearing to order.
Good afternoon, and welcome to today's hearing on ``How The
Innovation Economy Leads to Growth.''
The U.S. economy is not only growing, but it is also doing
it faster. GDP growth is rising. Job creation is strong.
Average wage growth is improving, and inflation remains low.
These long-awaited positive results stem from the decision
to unleash America's most valuable economic asset: The American
People. Tax and regulatory relief are allowing American
families and main-street job creators more breathing room and
to do more.
Contrary to those who believed that we are stuck at low
growth, many economists expect as much as 3 percent GDP growth
in 2018, and similarly strong growth in 2019. And to achieve
this, Washington needs to stay out of the way so that
individuals are free to figure out new ways to solve old
problems. Such innovation is vital to sustaining our restored
economic growth.
America has been a laboratory for invention since its
inception, and it is that spirit that has led to our strength.
A report by the McKinsey Global Institute in March of 2017,
last year, finds that many advanced economies rely on
productivity gains far more than increases in the labor supply
to drive economic growth.
Folks in the private sector know this when they ask
questions like: How can we serve more customers in one day? How
can we complete more orders in less time? How can we produce a
product with fewer passes of a machine?
Those questions are how innovation becomes the primary
driver of productivity gains. And we know we are blessed to
live in the United States for a variety of reasons, but among
those blessings are our fellow Americans who have generated
remarkable technologies to lift our standard of living, to
expand our horizons, to support U.S. leadership in the world,
and to grow our economy.
Not all economic systems are equally conducive to such
path-breaking innovations. Every technological advancement of
major economic consequence since World War II has come from the
United States. And that is no accident.
As we will hear from our witnesses today, strong property
rights, the rule of law, light regulation, and competition are
critical conditions for visionary entrepreneurs and risk
takers, dreamers and investors, and creators to generate the
technological success that we have seen.
American inventors, main-street job creators, and the
resourceful factory workers will continue to deliver amazing
advances, but that is contingent on Washington allowing that to
happen.
A brilliant idea or discovery is only the start. It has to
be put into concrete form and developed. And from there, it has
to be commercialized and disseminated throughout the economy
before it actually boosts economic growth.
These steps can take a long time, depending on how they are
taxed and regulated, or how antitrust law is applied. The
highway to innovation is littered with potholes, traffic jams,
and overturned vehicles. You can see this up close in my home
State of Minnesota where an excise tax has threatened the
innovative medical device industry, and could drive it away to
other countries.
While the Federal Government has temporarily suspended this
tax, innovators still face great uncertainty about their
future.
Even more obstacles lurk along the path of international
trade. Last year, this Committee held a hearing on digital
trade. And the takeaway is that the United States leads in
digital products and trade that rely on the internet.
Yet the freedom of the internet faces challenges abroad,
and the United States must strive to protect it. To remain
credible in this mission, the United States must generally
promote and defend the long-held American principles of
unencumbered international transactions and trade.
Every day has the potential for game-changing technological
breakthroughs. Blockchain is an example of a technology at an
early stage of development. Its potential for very wide
application throughout the economy could be stifled by over-
regulation.
And the United States has the opportunity to continue to be
the champion of its Age of Invention, but only if we keep the
engines of innovation running. We must protect the ability of
our market economy to perform at its full potential at home and
in global markets across the world.
I look forward to the testimony from our distinguished
panel of witnesses today for clarity and for guidance on how
innovation can drive economic growth and American prosperity.
Before I introduce our witnesses, though, I would like to
now recognize our Ranking Member, Senator Heinrich, for his
opening statement.
[The prepared statement of Chairman Paulsen appears in the
Submissions for the Record on page 30.]
OPENING STATEMENT OF HON. MARTIN HEINRICH, RANKING MEMBER, A
U.S. SENATOR FROM NEW MEXICO
Senator Heinrich. Thank you, Chairman Paulsen, for calling
today's hearing on promoting innovation and accelerating
economic growth.
Innovation drives economic growth and boosts wages. We need
more of it, and we need innovation to be more broadly shared
across regions.
Other countries are moving forward aggressively to promote
innovation, to support advanced manufacturing, and to boost the
productivity of their workforces.
To lead in the 21st Century, the United States must remain
at the forefront of game-changing discoveries and create an
ecosystem that supports innovation across the economy.
The Federal Government plays a key role in this, funding
and conducting research and development, investing in human
capital of our people, and in ensuring that we are making the
necessary investments in a STEM workforce.
STEM education and R&D are two innovation anchors. We need
to ensure that students everywhere have access to STEM
pathways, and that starts with making sure that schools have
the resources they need to recruit, train, and retain talented
science and math teachers.
We need to expand middle-skills' pathways into emerging
sectors, and make a college education accessible and affordable
for all Americans, so that every student has the opportunity to
benefit from tomorrow's innovations.
The Federal Government remains the largest funder of basic
research. That research, which adds to our fundamental stock of
knowledge, yet often would not be conducted without public
investment.
This is the research that can help us solve the problems we
do not yet know we even have. Basic research has driven major
leaps forward, including mapping of the human genome, vaccines,
breakthroughs in cancer research, and energy storage
technology, and the creation of the internet, LASER, MRI, and
GPS.
The knowledge gained through this research has significant
spillover economic benefits: increasing productivity, creating
jobs, and accelerating economic growth.
That is why it is encouraging that the recent Omnibus
Agreement made significant investments in R&D. Investments in
basic research increased by almost 10 percent over the previous
year, its largest annual increase since the Recovery Act in
2009.
Promoting innovation also means extending already developed
technologies like broadband to communities currently without
access. Today, years after high-speed internet was first made
available, 19 million rural Americans still lack access.
The private sector does not have the incentive to extend
broadband to remote, hard-to-reach communities. The Federal
Government must step in and fill that gap.
We also need smart policies that can help emerging
industries grow. Targeted tax credits, competitive grants, and
prize competitions are all levers that Congress can pull. The
multi-year extension of the Wind Production Tax Credit is a
good example. It is driving investment in wind farms in New
Mexico and across the country.
Earlier this year, I toured the future site of the $1.6
billion Sagamore Wind Project in eastern New Mexico, which will
be the largest wind production farm in our State's history, and
create up to 300 construction jobs, and 30 full-time
operations' jobs.
Programs like laboratory-directed research and development,
LDRD, authorizing a portion of Federal labs' funding for
cutting edge R&D are also quite vital.
At Los Alamos National Laboratory in New Mexico, LDRD
researchers generally account for one-quarter of the lab's
patents and peer-reviewed publications. Efforts to help
commercialize technology developed at our national labs and
research universities help to take a good idea and get it into
production and out into the marketplace.
In New Mexico, we have seen how commercializing the R&D
that takes place in our labs can generate significant economic
opportunities. I will share just one example.
Descartes Labs is a New Mexico startup that uses artificial
intelligence technology developed at Los Alamos National
Laboratory to provide analysis and predictions based on
satellite images of the earth. Early applications are in
delivering crop-yield forecasts and analyzing trends in energy,
construction, and the environment.
Today the company has its headquarters in Santa Fe and has
raised close to $40 million in venture money, employs 70
people, and is a recognized leader in analyzing satellite
imagery.
We need to help more research turn into innovative
startups. Access to capital is key for entrepreneurs. Too many
promising young companies fall to the valley of death, or get
absorbed by behemoths where their innovation stalls because
they cannot find the financing they need.
This is especially tough for innovators in rural and
smaller cities. Good ideas and innovations occur everywhere,
but more than three-quarters of venture capital goes to
companies in San Francisco, Los Angeles, New York, and Boston.
Expanding access to capital can help us tap into the next
generation of innovators creating new startups and new
opportunities.
Lastly, immigrants are a key source of innovation and
entrepreneurship. We cannot jeopardize these enormous
contributions through short-sighted immigration policies, or by
kicking out talented young people.
I am an engineer by training. I could talk about innovation
and R&D and tech transfer all day long, but I look forward to
hearing from our witnesses next and hopefully learning some new
things along the way.
[The prepared statement of Senator Heinrich appears in the
Submissions for the Record on page 31.]
Chairman Paulsen. Thank you, Senator Heinrich.
I will introduce our four witnesses, and then we will hear
from each one of them individually.
First, Dr. Harold Furchtgott-Roth is a Senior Fellow and
the founder and Director of the Center for the Economics of the
internet at the Hudson Institute. He is the President of
Furchtgott-Roth Economic Enterprises, which he founded in 2003.
He is an Adjunct Professor of Law at Brooklyn Law School. From
1997 through 2001, Dr. Furchtgott-Roth served as a Commissioner
of the Federal Communications Commission. Prior to his
appointment to the FCC, Dr. Furchtgott-Roth served as Chief
Economist of the U.S. House of Representatives' Committee on
Commerce, where he was one of the principal staff involved in
drafting the Telecommunications Act of 1996. Dr. Furchtgott-
Roth holds an S.B. in Economics from the Massachusetts
Institute of Technology, and a Ph.D. in Economics from Stanford
University.
Dr. Michael Strain, who is with us today, is the John G.
Searle Scholar and Director of Economic Policy Studies at the
American Enterprise Institute. He oversees the Institute's work
in economic policy, financial markets, poverty studies,
technology policy, energy economics, health care policy, and
related areas. His research has been published in peer-reviewed
academic and policy journals. And before joining AEI, Dr.
Strain worked at the U.S. Census Bureau's Center for Economic
Studies, and the Federal Research Bank of New York's Macro
Economic Research Group. Dr. Strain holds a Ph.D. in Economics
from Cornell University. He was a graduate of Marquette
University and holds an M.A. from New York University.
Also with us is Mr. Mark Mills, who is a Senior Fellow at
the Manhattan Institute; CEO of the Digital Power Group;
faculty Fellow at Northwestern's McCormick School of
Engineering and Applied Science; and an Advisory Board Member
of Notre Dame University's Riley Center for Science,
Technology, and Values. Previously he co-founded and was Chief
Tech Strategist of Digital Power Capital. Early in his career,
Mills was an experimental physicist and development engineer at
Bell Northern Research, Canada's Bell Lab. And he earned
several patents for his work. Mills is also a published author
and has contributed to The Wall Street Journal, The New York
Times, and Forbes.com. He holds a degree in Physics from Queens
University in Ontario, Canada.
Also with us is Dr. Darrell West, who is the Vice President
and Director of Governance Studies, and holds the Douglas
Dillon Chair at the Brookings Institution since 2013. He is the
Founding Director of the Center for Technology, Innovation at
Brookings, and Editor-in-Chief of Tech Tank. Prior to coming to
Brookings, West was the John Hayson White Professor of
Political Science and Public Policy, and Director of the Todman
Center for Public Policy at Brown University. West is the
author or co-author of 23 books, and has published more than
three dozen scholarly articles in a wide range of academic
journals. He holds an M.A. and Ph.D. in Political Science from
Indiana University, and an A.B. in Political Science from Miami
University of Ohio.
So we have a stellar group of witnesses that are here to
share their thoughts and expertise with us today. And with
that, we will begin with you, Dr. Furchtgott-Roth. Thank you
for being here, for your opening statement, and I will
recognize you for five minutes.
STATEMENT OF DR. HAROLD FURCHTGOTT-ROTH, DIRECTOR, CENTER FOR
ECONOMICS OF THE INTERNET; FORMER FCC COMMISSIONER; HUDSON
INSTITUTE, WASHINGTON, DC
Dr. Furchtgott-Roth. Thank you, Mr. Chairman, and thank
you, Members of this Committee. It is an extraordinary honor
for me to testify before you today about economic growth and
innovation in America.
These are very important topics, and I am going to focus on
the information sector, which is the sector I follow most
closely.
I have prepared testimony, which I hope will be entered
into the record. I am not going to read it all. In fact, I am
going to provide separate comments.
My own research shows that a disproportionate share of
American economic growth in the past generation is attributable
to the information sector. I have three simple messages to
share with you today:
Global economic growth in the past generation has been more
profound than any in prior history, and innovation in the
information sector was at the core of that growth.
The United States played a pivotal role in innovation in
the information sector. Important factors included increased
protection of property rights, a lighter regulatory approach,
and an emphasis on competition.
And third, despite early receptivity to the internet,
governments in other countries today are threatening the
further development of the information sector.
The five largest corporations in America today by market
capitalization are all in the information sector. Amazon,
Apple, Google, Facebook, and Microsoft. They are also among the
largest corporations in the world.
These are all innovative companies, and together with
smaller companies in the information sector all have
contributed to innovation and economic growth in America.
Countless private companies and startups compete in this
sector. Ask a 20-something in America or anywhere around the
world where they would like to work, and chances are they're
going to say: In a company in the information sector.
These new companies have provided the world with new
technologies, and have captured the imagination of the next
generation. Why did these companies develop in the past
generation and not before? And why did they develop in the
United States and not so much elsewhere?
Some might point to extraordinary entrepreneurs and
technologists such as Bill Gates, Jeff Bezos, Steve Jobs,
Sergei Wren, Larry Paige, and Mark Zuckerberg. Others might
emphasize critical technologies developed in past generations
that enabled the further development of the information sector.
No doubt these and other factors are important, but great
entrepreneurs are born in every generation, in every country.
What made the information sector in the United States over the
past generation different?
Consider that much of the sector was founded in America.
The information sector benefited from three conditions that
changed in America over the past generation.
In America we established clear property rights in the
information sector. We had a determined lighter regulatory
approach. And we also, by statute, mandated more competition.
Each of these factors was important to the development of
the information sector in America over the past generation.
Congress changed laws, and Federal agencies adopted rules that
enabled more innovation and economic growth in the information
sector. The rest is history.
I have also been asked to address why productivity has
slowed in recent years. I was asked the same question 40 years
ago when I arrived at Stanford University. It became the topic
of my dissertation.
The answer today is, sadly, much the same as it was four
years ago. We know only part, but not all of the reasons. It is
much the same across all industrialized countries.
One of my professors at Stanford, Moses Abramovitz, once
described total factor productivity as a measure of our
ignorance. It still is.
Having said that, let me briefly note a few major reasons
for recent productivity slowdowns:
One, increased share of the economy in the service sector.
Output is measured largely as revenue in the service sector,
and it is very difficult to measure total factor productivity
in those sectors.
Second is increased obsolescence of products indicates
rapid quality improvements that are not easy to measure. Take a
look at your Smart Phone. There is no market today for an
iPhone Version One. It is obsolete. But you can look at a car
manufactured in 2009 and there is a good market for it, as
there is for a ton of steel. What we have is rapidly improving
quality of products that are very, very difficult to measure.
Nonetheless, there has been a pronounced decline in total
factor productivity in recent years, even in sectors that
historically have shown rapid increases in total factor
productivity, such as manufacturing, agriculture, mining, and
utilities.
So as Professor Abramovitz once said, total factor
productivity remains a measure of our ignorance. There are a
lot of explanations, but we don't have them all yet.
Thank you, very much.
[The prepared statement of Dr. Furchtgott-Roth appears in
the Submissions for the Record on page 33.]
Chairman Paulsen. Thank you, Doctor. And our next witness
we will hear from is Dr. Strain. Thank you for your opening
statement. You are recognized for five minutes.
STATEMENT OF DR. MICHAEL STRAIN, DIRECTOR, ECONOMIC POLICY
STUDIES; JOHN G. SEARLE SCHOLAR, AMERICAN ENTERPRISE INSTITUTE,
WASHINGTON, DC
Dr. Strain. Well thank you, Mr. Chairman, and Members of
the Committee. It is an honor to be here.
How can Congress foster innovation? What are important ways
to improve the skills of workers, helping to enable individuals
to innovate? Education reforms designed to teach 21st Century
skills is critical.
A stronger emphasis on work-based learning for workers is
critical. And in my view increasing the number of highly
skilled immigrants is also critical. Many of the most
innovative companies in the United States were founded by
immigrants.
Government has a role to play in supporting the basic
research that innovation requires. Two important ways
government supports innovation are through funding basic
research, and through producing economic and social statistics
required by businesses, researchers, and policymakers.
Beyond encouraging innovation through increasing skills and
supporting basic research, there is a wide variety of action
government can take. Avoiding excessively high tax rates,
reducing regulation and other barriers to technological
progress, and maintaining a posture of openness to the rest of
the world through international trade are just some of the ways
public policy can support innovation. Congress can also foster
innovation by helping to create and enforce an appropriate
regulatory environment. Likewise, imprudent regulation can
stifle innovation, slowing economic growth and the rate of
improvement of living standards.
I have been quite concerned about imprudent regulation
recently in the conversation around big tech. It is common to
hear calls from both the political left and right to ``break
up'' major technology firms using the government's antitrust
powers.
In my view, such action would be a major policy mistake.
For the past half-century the Federal Government has followed
the best standard that experts have crafted to identify
anticompetitive behavior: consumer welfare. More specifically,
when asking whether a firm is hurting competition, the
following question should be asked:
Is the company reducing the welfare of consumers by pushing
up prices that consumers face, and/or by reducing the quality
and variety of products and services that consumers enjoy?
This antitrust standard stands in contrast to a different
view which rests on the presumption that large and powerful
companies should be suspect simply because of their size, under
the assumption that with size comes undue economic power and
the lack of competition. I would highlight three reasons why
the latter view is inferior to the consumer welfare standard.
First, it is much more vague and harder to define. This
vagueness invites regulatory mischief at worst. More than that,
though, is the concern that due to its vagueness regulators
might be swayed more by the public debate around a particular
company than by relatively more objective metrics.
Second, the view that is suspicious of size ignores the
good things that come from size. Economies of scale allow
companies to produce goods and services more efficiently and at
a lower cost than relatively smaller firms. These efficiencies
can take many forms, including more specialized management and
production techniques.
Third, focusing on size distracts regulatory attention from
consumers. This argument is equivalent to asserting that
consumer welfare should be the regulatory goal in a normative
sense.
Big tech has significantly increased consumer welfare.
Consider prices. Many products are offered to consumers free of
charge. Amazon does not sell its products at a price of zero,
but it has significantly reduced the prices faced by consumers
for many products to the point that some argue that Amazon may
be lowering the rate of consumer price inflation for the
overall economy.
Now consider product quality and innovation. The services
mentioned above are all remarkably innovative. In addition to
them, for example, Apple first put an entire music library into
the palm of our hands, and then put a computer in all of our
pockets. Major technology companies spend significant sums of
money on research and development for new products in order to
foster innovation.
Alphabet, the parent company of Google, spends 16 percent
of revenue on research and development. Facebook spends 21
percent. Microsoft spends 14 percent. These ratios are far
higher than for other companies. For example, General Motors,
General Electric, Proctor & Gamble, and AT&T each spend less
than 5 percent of revenue on R&D.
In addition, there is more churn in the technology industry
than many may seem to think. It was not long ago that the
dominant web browser was Netscape, not Google; that the
dominant email service was not gmail; and that America Online
was the dominant ISP.
It is imprudent to assume that Google, Facebook, Apple,
Amazon, and other tech giants of today will be dominant in
perpetuity. The public conversation also seems to misrepresent
the actual dominance of these companies in the present day. For
example, despite concern about Amazon's dominance, it is the
case that online sales represent less than 10 percent of total
retail sales. Walmart's revenue is more than twice that of
Amazon's.
In summary, I do not view big tech as a threat to consumer
welfare or innovation, and I am not convinced by arguments that
antitrust action is required to advance these goals. Instead,
big tech is advancing consumer welfare through offering
consumers a wide variety of high-quality products at low and
sometimes zero prices.
It is also advancing consumer welfare and innovation in the
future through high amounts of spending on research and
development which will fuel tomorrow's innovation. And that
innovation will in turn fuel faster economic growth and higher
living standards for American families. Thank you.
[The prepared statement of Dr. Strain appears in the
Submissions for the Record on page 46.]
Chairman Paulsen. Thank you, Dr. Strain. And now we will
welcome Mr. Mills for your opening statement. You are
recognized for five minutes.
STATEMENT OF MR. MARK P. MILLS, SENIOR FELLOW, MANHATTAN
INSTITUTE FACULTY FELLOW, McCORMICK SCHOOL OF ENGINEERING,
NORTHWESTERN UNIVERSITY, WASHINGTON, DC
Mr. Mills. Thank you, Chairman Paulsen, and Members of the
Committee.
As this Committee knows, when it comes to understanding
``How the Innovation Economy Leads to Growth,'' one is
necessarily engaged in forecasting technology. And with all due
respect, the track record on technology forecasting for
Congress, and most pundits and especially economists, again
with all due respect to my economist colleagues, is dismal at
best.
Forecasting can be a dubious science, but it is serious
business. My favorite aphorism in this regard dates back to
1963 when physicist and Nobelist Dennis Gabor wrote, ``The
future cannot be predicted, but it can be invented.''
Despite recent innovations, there is today a popular
forecasting thesis that essentially says we live in a time of a
new normal where foundational innovation has run its course.
The ``New Normalists'' don't propose that there is an end to
the kind of technology disruptions we are witnessing now with
social media and the internet's impact on politics and culture,
instead they claim innovation is now a kind of froth on top of
a paradigm of permanently slower economic growth because
nothing really fundamental is happening in innovation.
The New Normalists misinterpret, though, the record of
recent slow growth we have been living through, in fact an
interregnum between great technological cycles. History offers
a lot of examples of this phenomenon, but permit me to
illustrate just one recent example of energy domains where
technology forecasting offers specific lessons also relevant
for manufacturing and health care.
When the Department of Energy was created 41 years ago,
nearly every forecaster said, to use economic terms,
hydrocarbon technology productivity had stalled out. It would
not be able to affordably supply energy at the scale society
would need in the future.
Policymaking then effectively focused on a kind of
palliative care for hydrocarbons: banning exports, constraining
consumption, creating strategic reserves. And over the decades
a cumulative $500 billion was spent by the Federal Government
in the pursuit of technologies that were forecast to be
essential to replace hydrocarbons.
We now know what happened. Engineers and the private sector
invented a new technology that unlocked America's vast shale
fields that turned out to be astonishingly productive. Shale
tech has added 2,000 percent more energy to the United States
over the past decade alone than have solar and wind combined.
But those on the front lines of the shale revolution, and
the few forecasters who did anticipate what would actually
happen, were at that time generally ignored or either viewed as
engaged in ``old think'' or in the pockets of entrenched
industries.
As some on this Committee know, my written record shows
that I was counted amongst those in the history's minority.
There are a couple of lessons from energy's history that are
relevant:
Noisy public debate and aspirational forecasts can hide the
real underlying trends. And what appears to be innovation
stalling out is often a pause, the interregnum, between eras as
engineers and industries perfect and adopt new technologies.
The question today is what signals are we missing hidden in
the media noise about the demise of manufacturing, the claimed
inevitability of cripplingly higher health care costs?
In my submitted testimony for the record I have addressed
both of those, but in my brief oral remarks I will highlight
health care.
There is a lot of excitement these days about information
systems applied to health care, the rising power of algorithms
and machine learning. In fact, we are likely seeing a new
battle for health care efficiency launched by the announced
collaboration between Amazon, Berkshire Hathaway, and J.P.
Morgan.
And information systems will add valuable efficiency to
administering existing health care services and the management
of records and insurance. But doing better with existing data
and therapeutics isn't enough for a real revolution in health
care productivity.
Information systems inherently depend on acquiring more and
better information. One has to have a physical means to act on
that information, as well. Fortunately we're on the cusp of a
technological revolution in biological data acquisition and
diagnostics and therapeutics. A lot of attention has been
afforded to the promise of genetic engineering, which itself
is, information centric, but the other two domains are equally
critical: diagnostic tools, and information acquisition.
There is now a clear path to commercial bioelectronics that
are body-compatible, implantable, even digestable.
Bioelectronics will ultimately rival in scale the traditional
silicon electronics industry and create a tsunami of heretofore
unavailable health-centric data.
Much of that data will end up being channeled through
radically new kinds of diagnostic tools, many soon in the hands
of consumers not just professionals. There are far-reaching
implications with the prospect of nearly every citizen
possessing a useful diagnostic device.
Apple, for example, is well aware of the fact that features
inherent in or that can be added to an iPhone constitute an
implicit if not explicit classification as a medical device.
Last year's X Prize, awarded for a portable diagnostic
tool, was a dramatic example of the kinds of devices that were
once just the stuff of science fiction. That prize was awarded
for inventing the Star Trek Tricorder.
For those who are not science fiction cognoscenti, the
space ship's doctor would wave a hand-held tricorder over a
patient to obtain an immediate diagnosis. The real-world X
Prize was for a mobile device that was able to diagnose 13
health conditions and continuously monitor 3 vital health
signs. All this says nothing about the revolutionary health
care technologies emerging from a class of practical robots and
so-called co-bots, the latter working collaboratively with
people. These will unlock not only more hyper-precise and
minimally invasive surgery, but also radically more productive
tools for elder care and rehabilitation.
For the record, the same trifecta of technologies--
computing, new materials, and new machines--is signaling a
manufacturing productivity revolution as well.
History shows that economy-moving revolutions in technology
have never been predicted by economists. Instead, they've been
invented and propelled, usually unexpectedly, by innovators. If
there is a central for policymaking, it's that instead of
directing innovation, it is critical to ensure that there's an
environment that doesn't impede innovators. Thank you.
[The prepared statement of Mr. Mills appears in the
Submissions for the Record on page 53.]
Chairman Paulsen. Thank you, Mr. Mills. And now we will
hear from Dr. West. You are recognized for five minutes, thank
you.
STATEMENT OF DR. DARRELL M. WEST, VICE PRESIDENT AND DIRECTOR-
GOVERNANCE STUDIES; FOUNDING DIRECTOR, CENTER FOR TECHNOLOGY
INNOVATION, BROOKINGS INSTITUTION, WASHINGTON, DC
Dr. West. Chairman Paulsen, Ranking Member Heinrich, and
Members of the Joint Economic Committee, so thank you for the
opportunity to testify at this hearing.
So today I want to summarize my thinking on ``The
Innovation Economy.'' My latest book is entitled ``The Future
of Work: Robots, AI, and Automation,'' and it looks at the
impact of new technologies on the workforce, education, and
public policy.
I also have a new paper, co-authored with Brookings
President John Allen, on how artificial intelligence is
transforming the world.
Based on this research, it is clear that the Federal
Government plays a vital role in encouraging innovation. I
think there are several steps that would increase our economic
growth and make sure the United States does not fall behind
other leading nations.
First I argue we need to increase Federal R&D. Right now
the U.S. spends about $495 billion on R&D, with 72 percent of
that money coming from the business sector, and only 11 percent
coming from the Federal Government.
If you go back to the 1960s, the Federal Government
provided 65 percent of R&D, and we saw NASA land a man on the
Moon. In 1969 we planted the seeds for today's internet through
a Department of Defense communications tool called ARPANET. So
we need to remember that historically the Federal Government
has played a vital role in these advances, and we have done
very well on innovation.
I think there is a danger of relying too much on the
private sector for three-quarters of R&D because of its
vulnerability to macro economic cycles. When the economy
weakens, companies often slash their R&D and important
strategic priorities can be lost through the decisions of
individual firms.
Secondly, we need to maintain our international
competitiveness. The United States now devotes about 2.74
percent of GDP to research and development. This is less than
the 4.23 percent devoted by South Korea, 3.29 percent in Japan,
and 2.93 percent in Germany.
Now China only devotes about 2 percent, but it has been
increasing its R&D spending by anywhere from 14 to 20 percent
every year since 2000. In fact, China accounts for 31 percent
of the world's R&D increase during this 15-year time period.
Third, we need to address our critical needs in AI and data
analytics. The U.S. Government is spending only about $1.1
billion a year on nonclassified AI. And just to contrast this,
at it's 19th Party Congress, China announced it was going to
spend $150 billion on AI and plans to become the global leader
by 2030.
As John Allen and I argue in our recent paper, AI is the
transformative technology of our era, and it is going to
dictate our leadership in terms of national security, economic
development, and resource management, including many other
areas.
Fourth, we need to promote STEM education. There are too
few Americans studying science, technology, engineering, and
math. Only 17 percent of Americans earn a STEM Bachelor's
Degree, of those who are graduating from college, and 65
percent of them are male. This is far less than other nations.
For example, in Korea 38 percent are graduating with STEM
degrees. China is producing 4.7 million STEM graduates every
year, compared to about a half a million in the United States.
So we need to hire more science and math teachers in K-12. We
need to pay those teachers higher salaries.
Fifth, we need to invest in our physical and digital
infrastructure. We still have many Americans who lack access to
the internet. We are moving to 5G networks. They are going to
be faster, smarter, and more efficient, but they are going to
require the deployment of small cell towers. We need to
streamline the local approvals for those towers.
Six, we need to improve data access. Data analytics has
tremendous potential to transform the public and private sector
decision making. It will give us new insights into health care,
energy efficiency, and national security.
The last point I want to make is just the need to improve
our digital access. It is crucial that everyone shares in the
benefits of our innovation economy. We currently have
disparities by income, race, and education. There are major
gaps for rural Americans, which I can appreciate having grown
up on a dairy farm in rural Ohio. One-third of rural dwellers
lack access to high-speed internet. So this limits their
ability to participate in the innovation economy. So it is
vital that we close that digital divide.
Thank you, very much.
[The prepared statement of Dr. West appears in the
Submissions for the Record on page 61.]
Chairman Paulsen. Thank you, Dr. West.
And now we will have an opportunity to ask questions and
have an answer period. I would ask Members, and remind them to
keep your question period to five minutes. I will begin.
Dr. Furchtgott-Roth, the importance of technological
progress and driving economic growth is widely agreed upon by
members on both sides of the aisle. However, there is some
disagreement about how much growth is actually left to be had,
and how to encourage the necessary innovation that fuels
technological progress.
Do you think there will be much stronger growth moving
forward? And if so, why?
Dr. Furchtgott-Roth. Thank you, Mr. Chairman, for that
question. I don't remember the author of this statement, but
approximately 120 years ago someone famous said that we had
reached the end of science, and all discoveries that were
important had been made, and there really wasn't much point in
pursuing it any further.
I think that any suggestion that innovation has reached an
end, any suggestion that we are at the end, that technology is
naive and misguided, I think there is an awful lot still going
on.
Chairman Paulsen. Okay, and Dr. Strain, maybe you can
provide some thoughts there. Dr. West had just mentioned how AI
is sort of the transformational initiative that we'll be
looking at in the future here. And sometimes we have a little
bit of disagreement in terms of sort of how much resources that
the Federal Government should not do in just basic research
versus really encouraging more government spending, especially
on R&D and other programs, to help investment in innovation and
fuel growth. What is the reasonable approach? You know, sort of
the basic foundations of research versus, you know, a lot more
government spending in research and development? And how do you
draw those distinctions and those lines?
Dr. Strain. Yeah, thank you, Mr. Chairman. I think it's an
excellent question. I think there's a clear role, in my view,
for the Federal Government to provide resources to universities
and to scientists and to centers that fuel innovation. For some
kind of clear economic reasons, those types of innovative
activities generate public goods. Those public goods would be
under-provided if it were left to the private market. And so
there is a clear economic rationale for Federal funding there.
I think it is important that those resources be well
targeted, because it is taxpayer money after all, and making
sure that laws are written, and that agencies like the National
Science Foundation are distributing money in such a way that
the projects are selected carefully to encourage economic
growth and to fuel innovation I think is very important.
I also think it is important that Congress ensure that the
basic economic and social statistics infrastructure remain
strong. That is important for policy making. It's important for
private business activity, both of which have downstream
effects on innovation and on economic growth as well. The
immediate issue is the 2020 Census. That is far afield from
this hearing, but it is something that is on my mind when your
question was asked.
Chairman Paulsen. So you are sort of referring also to the
fact that modern technology isn't often fully captured in
existing measures right now with GDP and different productivity
measures? Is there a way to--you know, what are your thoughts
on sort of capturing those statistics or data to make sure
we're making smart policy decisions?
Dr. Strain. Well I think it is an extremely difficult
challenge, for the reason that my colleague mentioned. It is
hard to kind of compare the price of an iPhone 1 in the year
2018 to an iPhone 1 in the year 2009.
The people who work on these issues over at the Bureau of
Labor Statistics, and throughout the Federal statistical
system, are very capable people who are doing a good job with
what they have. And I think making that sort of measurement
issue a priority for them would be a way to move the ball
forward there.
Chairman Paulsen. And, Mr. Mills, just in my final minute,
but, you know, you mentioned the future can't be predicted but
it can be invented. Do you have some other thoughts?
Mr. Mills. Well, I do. In fact, one of the themes that we
are hearing is this challenge of thinking about what is the
role of government. And I am extremely enthusiastic about the
proposition that government should spend more money on basic
research.
However, I think we have a definitional problem between
what are basic research and science order projects. So putting
a man on the Moon is engineering. It's not basic research. It's
not science. We do learn science along the way, but it's an
engineering project.
I worked as both an engineer and a scientist. I admire both
domains. Often never the twain shall meet. And I would like
them not to meet so much in the government domains. Other than
for Apollo programs and aircraft carriers, I think the
government should focus on basic science.
If you look at the history of the sort of disquisitions
that come from Nobel Laureates, what you will find as the
common thread on there in their awards is that they had done
research that was driven by curiosity. In fact, they use those
words. That these great discoveries that advance humanity
didn't come from directed research, but they were allowed to do
research that was driven by curiosity. A tough thing to fund, I
understand, but I think it is where the government has a
critical role.
Chairman Paulsen. Thank you. Alright, Ranking Member
Heinrich, you are recognized for five minutes.
Senator Heinrich. Thank you, Chairman.
I will start with a comment, Mr. Mills, because I think
that they should actually meet more. You look at a national
laboratory like Sandia, and one of the keys to their success is
the cross-pollination that occurs there between basic science
and engineering. And that actually played a key role in the
development of the hydraulic fracturing that you referenced in
your testimony.
I think it is that cross-pollination that we oftentimes
fund things in silos and don't have the full benefit of their
leverage.
Dr. Strain, I want to jump to you because you talked a lot
about some of the big information sectors. You talked about
Amazon in particular. I don't hear a lot about Amazon's low
prices from my constituents--and that is not a critique of
Amazon--but I do hear a lot about them on its impact to small
main street businesses in rural areas.
And the point of raising that is that the benefits of
innovation, especially on a gross level, a GDP level, are
pretty easy to quantify. But they also have very real negative
impacts to specific populations. And those benefits are not
flowing equally or homogeneously across our country.
So how do we make sure, while supporting innovation, that
innovation's benefits don't just accrue to urban and coastal
communities?
Dr. Strain. Well thank you, Senator, for the question. It
is a very important one, for sure.
I think it is the case that most people who live even in
rural communities, even in communities where kind of local mom
and pop stores are threatened by Amazon still benefit from
innovation, and still benefit from technology companies, and
benefit specifically from Amazon. The reason that those mom and
pop stores are threatened is because Amazon is charging lower
prices than the mom and pop stores can, and that people in
those communities are not going to the mom and pop store
anymore because they are purchasing their goods elsewhere.
Senator Heinrich. But most of them, my point is, would not
choose, you know, a quarter or a dollar off their box of soap
that gets delivered to their house if they have to trade that
for their neighbor down the street no longer being able to keep
a retail shop open.
How do we get the benefits of that innovation into those
communities so that there's a vested reason for them to want to
be part of the innovation economy?
Dr. Strain. It is a classic example of somewhat diffused
benefits and concentrated costs. So there are some people who
are really bearing the brunt of this sort of change, and then
many, many people who are benefiting from it. But the people
who are bearing the brunt of it, that weighs heavier on them
and there are a fewer number of them.
It is a classic example of the kind of creative destruction
that's the hallmark of a market economy. I think the wrong
solution is to try and stop innovation, and the wrong solution
is to try and tax companies----
Senator Heinrich. So let's get to the right solution. I'm
running out of time.
Dr. Strain. The right solution is harder. I think what we
need is to have kind of a robust set of policies designed to
create on-ramps to opportunity for people who are negatively
impacted by technology. And that's why I mentioned in my
testimony things like work-based learning, and similar
programs.
Senator Heinrich. Dr. West, do you have a thought on this?
Dr. West. The right way to maintain innovation that we all
value is to keep the startup economy that has been crucial to
the tech sector and the greatness of America. And here I have
one major concern.
We have been compiling data for 40 years on the number of
startups in America. In the last decade there's been a dramatic
drop in the number of startups. If you look at the period from
1970 to the mid-2000s, America averaged between 500,000 and
600,000 startups. Now we are down to 450,000. So keeping that
emphasis on competition and helping small businesses start off
is absolutely crucial.
Senator Heinrich. Let me ask you about something that
specifically impacts small businesses. Yesterday I met with
recently departed FCC Commissioner Mignon Clyburn, and she
emphasized ensuring that all Americans have access to a free
and open internet, and how important that is to foster
innovation in places where it is particularly hard.
What about the digital divide? You've talked about that.
And what about a free internet? Does net neutrality promote or
stifle innovation, Dr. West.
Dr. West. In terms of the digital divide, as I believe you
pointed out in your opening statement, there are 19 million
Americans in rural areas that do not have access to broadband.
One-third of people who live in rural areas lack access to
high-speed broadband.
If you want to apply for a job today, many companies, and
Brookings has done the same thing, have converted to online
applications. You have to have access to the digital economy in
order to get a job.
In terms of the open internet, it is important to maintain
the open internet. One of the reasons why our country has done
so well in innovation over the last couple of decades has been
that we treat all internet traffic the same. There's been no
discrimination in the traffic. You can't slow down anyone's
traffic.
If you're the small guy operating a small convenience store
on the corner, your traffic gets treated the same as the large
company. So it is important to maintain that.
Chairman Paulsen. Thank you. Now we will listen to the Vice
Chairman of the Committee. Senator Lee, you are recognized for
five minutes.
Vice Chairman Lee. Thank you, Mr. Chairman. Thanks to each
of you for coming. Your expertise brings a lot to our
Committee.
The FAA has banned commercial flight of supersonic aircraft
in this country. This ban was found in a regulation that was
promulgated back in 1973, so some 45 years ago. Today, in 2018,
commercial aircraft travel no faster than they did 50 years
ago, in part as a result of this.
And significantly, the Concord, the heavy, clunky
supersonic commercial aircraft that was in use at the time the
regulation was promulgated, has been grounded today in part as
a result of those regulations.
But when we look at this today, we realize that there are
some companies that have developed technologies using stronger,
lighter materials that could achieve a greater degree of fuel
efficiency, and perhaps most importantly there are some
companies that have developed technologies that they claim can
result in commercial grade supersonic travel that is 30 times
quieter than the Concord was.
And this seems like an example of the problem we face when
regulations do not keep pace with current technology. And so,
Dr. West, I would like to ask you a question about this.
What do you think some of the benefits to the United States
might be from supersonic travel? And is this something that you
think we ought to continue to stick to? Is it time for Congress
to revisit this idea of banning overland supersonic commercial
travel?
Dr. West. I think there has been so much innovation over
the last 40 years that any regulation from 40 years ago
deserves another look. Because I remember when the Concord was
flying, there was concern at the time about sonic booms that
were annoying people on the ground, and so that was one of the
reasons that created a complication there.
But I would not be surprised if manufacturers have figured
out ways to handle that; that there are noise abatement
procedures that would make a difference. So we certainly need
to constantly take a look at regulations.
We need to move into what I would call smart regulation,
which basically is well designed and focuses on specific
problems.
Vice Chairman Lee. And just because I find this area
interesting, I would note in response to your observation, it
is my understanding that the sonic boom is somewhat analogous
to the wake that travels behind a boat or a ship. And just as
the size and the shape and the materials used in a boat or a
ship can affect the type of wake it casts, there are ways of
diminishing the impact of the sonic boom. And that is yet
another reason why we ought to revisit this nearly half-
century-old regulation. It is really out of date.
In the coming years we are going to see the deployment of
5G technology; 5G wireless networks are going to revolutionize
all sorts of things. But they require the deployment of a large
number of small antenna systems, somewhat different from our
current cell phone networks.
The dawn of the 5G era brings a whole lot of opportunities
in the way we will travel, and the offering of things like
telemedicine, in the travel of autonomous vehicles both on the
land and in the air in drone use, and a greater connectivity
generally.
Dr. Furchtgott-Roth, I would like to ask you. These
benefits can be impeded by government regulations that could
stop the deployment of this technology. Is our current
regulatory framework prepared to handle these challenges, the
challenges associated with the deployment of a 5G network?
Dr. Furchtgott-Roth. Senator, that is a very good question.
A lot of people are very concerned about the deployment of 5G
technologies, and in fact are concerned about whether
regulation will get in the way.
I think at the Federal level, and I would say even at the
State level, that most people in government are trying to take
great efforts to be sure that there are not impediments to the
deployment of the new technologies.
There are a handful of municipalities around the country
that want to create new regulations on the siting of towers, or
in the case of 5G networks it's not going to be towers, it's
just going to be a tiny little box that can stick on the side
of a building. And so I think there is some concern that
municipalities may be impeding the deployment. We will have to
see.
Vice Chairman Lee. Thank you. I see my time has expired,
Mr. Chairman.
Chairman Paulsen. Thank you. Senator Peters, you are
recognized for five minutes.
Senator Peters. Thank you, Mr. Chairman. Thank you to our
witnesses today. I appreciate the conversation that's been very
interesting.
I am concerned about the growth of innovation that we see
in this economy. There are other sectors outside of IT and
health care which of course are big drivers for the economy
right now, but looking at it more broadly coming from Michigan,
particularly with a lot of older industries there.
In a recent Economic Innovation Group study I was struck by
a finding that they cite, another study, that shows that in the
United States today only generates two nonhealth and non-IT
patents for every one billion dollars in GDP. And so taking out
IT, taking out health care, looking at a decline of dynamism
generally in the rest of the economy, which is a very large
part of our economy. And in the 1980s it was four. So basically
it's half. The innovation outside of IT and health care, at
least as measured by the number of patents, which is just one
of many measures you could have, has dropped in half.
Dr. Furchtgott-Roth, any ideas? You've certainly talked in
your testimony. We have a lot of explanations for what's
happened to productivity. And you mentioned the iPhone example,
but that would be out of this. This is innovation within these
other industries.
Dr. Furchtgott-Roth. Thank you, Senator. That's a very
important question. If I had my econometrics hat on, I would
say there's an inflation issue. If you're comparing patents per
dollar of activity in the 1980s with today, you're going to
have a--it's not surprising to see some decline per dollar.
But I think the real question you're asking is really far
more profound than that, which is: Outside of some sectors of
the economy, probably particularly high-tech, health care, the
United States no longer has the global position that it had a
generation ago. And I think that is very troubling. It is
something that I hope this Committee will be able to address,
to figure out--I focus a lot on the information sector. That is
an area where the United States has a very strong global
position.
There are other industries where we have lost that edge.
And I am very troubled about actions that are being taken by
other governments that threaten the information sector, and no
doubt other sectors of the economy.
Senator Peters. I appreciate that. We need to work more on
this, because this is a fundamental question for us to deal
with. And I think part of what folks have talked about, at
least in my reading, and it's correlated I think to what Dr.
West talked about, is the decline of new business formation.
Because it's a lot of those smaller businesses in particularly
these other industries where you can get more innovation as a
result of that.
Dr. West, you have talked about the decline of that. One
other statistics that I have been looking at, and would love to
have your comments, and this doesn't refute but maybe is a
little counter to what Dr. Strain said, but is that we have
seen just a concentration in our economy with larger and larger
firms across the sectors. In fact, I think one of the
statistics are, if you look at over the last 20 years we have
more concentration now in more industries than we have had in
the past. And as you have bigger and bigger firms, it becomes
more difficult for a small firm to start in those industries.
Dr. Strain mentioned the advantages of size, which there are
significant ones including economies of scale, et cetera. Do
you believe--and where's the academic literature--that because
of an increasing concentration across all industries that we've
actually seen a decline in dynamism in the economy as a result
of that, and the competitive advantages that big firms have?
Dr. West. I do worry about small businesses getting
squeezed out of this environment. I think the competition is an
issue, and we need to take a look at it. In 2014 in The Wall
Street Journal, a Silicon Valley entrepreneur, Peter Thiel,
wrote a famous column saying competition is for losers, and
argued that monopolies are great.
I strongly disagree with that viewpoint. I think small
businesses actually create a lot of the jobs. When we think
back to the big tech sector, you know most of those firms
started in garages or dorm rooms. So it is really vital that we
maintain an environment where small businesses can thrive.
Senator Peters. And in my remaining time--I only have 30
seconds and it's a big question for you--but you mentioned AI
and the transformative nature of AI. It has also been argued,
and I agree, that it is transformative, but it is large
capitalized companies, big companies, that will be able to use
AI more efficiently and more effectively than smaller
companies, and could actually further concentration.
Is that a potential problem?
Dr. West. It's a potential problem, but the economic payoff
of AI is just so substantial. Price-Waterhouse Coopers just put
out a study in which they estimated AI can increase global GDP
by over $15 trillion.
Unfortunately, half of that money is going to go to China
just because they are investing, and they are really putting a
lot of effort into there. Only about 20 percent of that is
going to accrue to North America. So that is an area where we
need to do better.
Senator Peters. Thank you.
Chairman Paulsen. Representative Handel, you are recognized
for five minutes.
Representative Handel. Thank you very much, and thank you
to each of the witnesses.
Mr. Mills, I saw you shaking your head a little bit about
the comment that AI is going to primarily benefit larger
companies. Would you like to tell me what you think about that?
Mr. Mills. Yeah, I don't think that's what's going to
happen, but we're back in the forecasting game here. AI is in
early days of deployment. In fact, the AI community is
struggling with the same kind of reproducibility challenges
that the medical community and the science community at large
has in terms of claims.
But more interesting is that, what I think will happen is
that AI is going to democratize the nature of computing and
will actually help small businesses. So we're at an odd phase
in the computing infrastructure of the world.
So you have the big guys competing to create these broad
cloud infrastructures of access to cheap computing. There's
fierce competition among a half-dozen major players, another
half-dozen very significant players. There will be some
winners, but I don't think the consolidation is going to happen
very quickly.
And what they are doing is providing astoundingly cheap,
essentially free, and for small businesses actually free
supercomputing in the cloud running AI. So I am a partner in a
boutique venture fund that invests--not on the coasts; we
invest in the Heartland--in software. And one of our companies
is an AI company that does AI primarily for the resource
industries in oil and gas.
But they get--and they are proud of this AWS compute power
for free, Amazon offers startup companies. It's a hook. They
want them to stay in when they become bigger. But that hook is
chasing a rapidly declining cost of AI. It means that the
supply chain advantages Amazon had in the early days get
democratized to the mom and pop shops.
I am, frankly, worried about regulating big tech, like Dr.
Strain is, but I am particularly enthusiastic about the
democratizing effect of what will become sort of an era of
embodied computing universally.
Representative Handel. Well it is interesting. I, just
coincidentally, had a meeting with a young fellow, literally a
very young fellow, in his early 20s, who is an extraordinary
innovator and inventor in the AI sector, and he has a very
small company, and he has been able to monetize it, and he is
doing extremely well as a 23-year-old.
So what he said to me--and this goes to my next question
for you, Dr. Strain--he said that he sees AI and this
breakthrough as, well, some would be concerned that it is going
to take jobs away from Americans, he rather sees it as a way to
help individuals do their jobs better.
And as we have seen technology advances come forward, we
always hear the cry that, oh, it is going to be the demise of
the worker and the workplace. But we really have not seen that
come forward.
Do you have some thoughts, Dr. Strain, on that?
Dr. Strain. I do. It is such an important question. My
answer will be somewhat similar to my answer to Senator
Heinrich. This will be a situation where you have concentrated
costs and diffuse benefits.
So there will be some people who are impacted quite
negatively. But the technology will accrue overall to the
benefit of everybody, and it will accrue to the benefit of the
average American, if you will.
There have been many periods of history within the United
States and in Europe where new technologies have kind of come
to the fore, and there has been concern that those technologies
would make human work obsolete. Those concerns have never come
to pass.
In my view, we are not looking at a situation where those
concerns will come to pass at any point in the near future, as
well. New kinds of work will be created.
Representative Handel. Great. Thank you.
And in my remaining time, for Dr. Furchtgott-Roth, you made
a comment that you, in your opinion the United States has lost
its edge when it comes to innovation and discovery. Why do you
think that? And what can we do from a policy--put the money
investment part aside--but policy framework, can we do to help
recapture, regain our place in the innovation hierarchy?
Dr. Furchtgott-Roth. Well as I mention in my comments, I
think there are three elements. One is clear property rights.
The second is a lighter regulatory touch. And the third is
competition.
I think all three of these are important and necessary for
innovation. And my comment was in response to Senator Peters
about certain sectors of the economy where we used to be
globally dominant and no longer are.
Representative Handel. Alright, thank you. And I am running
out of time and I yield back.
Chairman Paulsen. Representative Adams, you are recognized
for five minutes.
Representative Adams. Thank you, Mr. Chairman. And thank
you for your testimony, gentlemen.
In 2017 the National Institutes of Health, the primary
government agency for biomedical and public health research,
spent $19 billion on research grants. These grants funded
thousands of laboratories across the country. And since the
majority of this work is done by academic researchers, these
grants are an important source of Federal funds for
universities and their surrounding communities.
In short, research funding translates into greater economic
opportunity for the researchers, their schools, and the
communities hosting them.
So perhaps you can imagine my concern at finding out that
of the top 100 organizations that NIH gives research funding
to, no HBCU, Historically Black College or University, is
included. Not one was on the list.
So, Dr. West, what are the implications for HBCUs being
left out of the bulk of NIH funding?
Dr. West. Well I would say it is devastating for them, and
it is devastating for their local economies. Because we know,
as you suggest, R&D really drives economic development. In
fact, people have suggested the multiplier effect is 5 to 1, or
10 to 1. It is a huge economic effect.
In many local communities, economic development is based on
Eds and Meds. It is the education sector and the biomedical
sector and the hospital sector that drives a lot of economic
growth.
So if the HBCUs are not getting the grants, it is really
going to limit what they can do research-wise, but also have a
devastating impact on their local communities.
Representative Adams. So what about the--what implications
do you find of the funding disparity for the students that
these universities teach?
Dr. West. It means that they will be denied opportunities,
especially in the STEM fields, and in biomedical areas, and
those are going to be the growth areas in the future. So if
they are coming out of college and they do not have those
skills, it is going to limit their opportunities.
We know that by 2044 America is going to become a majority
minority country, and so it is crucial that we recruit more
women into the STEM field, but also more minorities so that
that sector represents the full diversity of America.
Representative Adams. Thank you. The topic today is ``How
Innovation Helps the Economy Grow.'' And I am really on HBCUs
because, not only did I attend one and spent 40 years on the
campus, I really know the impact that these colleges and
universities have not only on our economy but also on our
students.
So if HBCUs and other minority-serving institutions
continue to be under-funded in regards to Federal research
grants, can the economy grow equally?
Dr. West, that is a question for you.
Dr. West. Well the short answer is, no. And one of the
concerns that I have is, if you look at the venture capital
money today, three-quarters of it is basically concentrated on
the coasts. So most of America is being left out of the growth
areas of the economy.
Something like two-thirds of GDP is now taking place in
less than one-third of America. Those geographic inequities are
devastating. It makes most of the country feel left behind,
while the coasts are running ahead and doing very well.
It is bad for our country, and it has a devastating effect
on our politics.
Representative Adams. So can the African American community
expect to see the same economic impact from government research
grants if HBCUs are not receiving proportional Federal funding
that the PWIs, or the Predominantly White Institutions,
receive?
Dr. West. There deserves to be greater representation there
both from a fairness standpoint, but also from an economic
development standpoint. Many of those schools are located in
places that are not doing that well economically, and so this
is one way in which the Federal Government can play a
constructive role of helping communities that have been left
behind by technology innovation and making sure that they are
able to compete in the years going forward.
Representative Adams. Well thank you for your responses.
You know, when you look at across the country we have got 106
or more of these schools, and it would really I think be
important not only to them, to the students that attend them,
but also to our economy for us to take another look there.
Thank you, and I yield back, Mr. Chairman.
Chairman Paulsen. Thank you. Representative LaHood, you are
recognized for five minutes.
Representative LaHood. Thank you, Mr. Chairman. I want to
thank the witnesses for being here today, and for your valuable
testimony.
I know we have touched a little bit on competition here
today. And when I think of the tech, or the titan firms that
are out there, obviously some of them have been under scrutiny
for what some would deem as somewhat sophisticated or
calculated, and arguably anticompetitive practices.
For instance, a number of these tech companies have
combined their ability to collect data and build algorithms to
determine which products or services are trending. And once
they have achieved those results, these same companies then can
alter their search engines to favor their own products and
services over their competitors, and even simply buy out their
competitors.
And you add these companies' significant network effects
where value is added to the company simply because a consumer
chooses to use only that company's products or services. These
firms gain significant market power. And I think we have seen
that in a lot of different instances.
I guess from a public policy standpoint, when we think
about what government can or can't do, how do we ensure that
startups, which are the major drivers of innovation, are still
able to compete and be able to have a market to innovate as a
whole. And I think I'll start with Dr. West.
Dr. West. Thank you. I agree with your emphasis on
competition. I agree that there is a problem in terms of the
decline of startups in America.
My colleague, Bill Galston and Clara Hendrickson wrote a
paper on this topic, which I would recommend to everyone on the
Committee. And what they suggest is the need to update our
merger review guidelines for the digital economy.
Many of those guidelines date back 20 and 30 years and have
not really been updated, even though our economy has undergone
major changes. So we need to kind of look at how we think about
those types of things.
Representative LaHood. Dr. Strain.
Dr. Strain. I certainly think this is an extremely
important issue, and I agree with Dr. West that looking at some
of the merger rules is a reasonable course of action.
I think it is important to recognize that there is more
complexity here than there may seem. So on the one hand it is
the case that tech giants are buying smaller tech firms and
kind of folding them into their conglomerate. And it is
reasonable to speculate that that may be reducing innovation
and reducing competition in the economy.
The flip side might also be the case. It could be that the
opportunity to be purchased by a major tech firm is actually
something that is incentivizing people to innovate and to
create new tech companies. Their goal could be to be purchased.
And so it is an area that I think merits further study and
further examination, but it is not immediately clear to me
that, because Facebook purchased Instagram there is less
competition and innovation than there otherwise would be.
Representative LaHood. Along those same lines, as we look
at the Federal Trade Commission and the role that they play,
does the FTC have a modernized set of tests and evaluations to
adequately determine if and when the tech company is stifling
competition or innovation, or is anticompetitive? Do you feel
that their standards and evaluations are currently up to par on
that? Do you want to comment on it, Dr. Strain?
Dr. Strain. Yes. I feel that the standards are the right
standards. The standards focus on the consumer and on the
welfare of the consumer. The standards focus on the prices that
consumers face, on the quality and variety of products that are
offered to consumers, and on whether innovation is being
fostered, and whether competition is being advanced.
There are other standards, and other countries place
emphasis on different things, but that standard has been the
standard in the United States for the past half-century, and it
still seems to me to be the correct and appropriate standard.
Representative LaHood. Thanks. Mr. Mills, my ears perked up
when you mentioned the Heartland. I represent a District in
central Illinois, Peoria, Illinois, is my home town. And you
talked about investment in the Heartland when it comes to not
necessarily the East or the West Coast.
How do we look at smaller markets? And what is the
attraction to investing in tech in medium-sized markets or the
Heartland?
Mr. Mills. Well the short answer is, to be mildly cynical,
is that the pricing of the deals is better. So you are not
competing against large venture funds that add a zero to the
valuation of a company you want to invest in.
So you can find just the smart young men and women, and
older men and women--I would note the Kaufen Index shows that
the number of startups started by people over 55 is the same as
the number under 35 as a percentage of startups.
It is attractive because there is a lot going on. But it is
not attractive if you do not like traveling. So venture funds
tend to like to invest in their geographical orbit.
I would like to point out that one of the big problems,
having been a practicing venture capitalist and began one, and
having taken a company through an IPO as the founding chairman
and CTO, that the biggest problem that we have in getting new
companies to not be bought by an Amazon, or be bought by a GM,
or whoever, is that we've damaged the IPO process.
The finance regulatory system makes it extraordinarily
difficult and extraordinarily expensive, and this has been well
analyzed by a lot of academics, but as a practitioner being run
through that mill I can tell you it is a very difficult, very
painful process.
I know what it is designed to do, to protect innocent
victims buying stock in companies that are charlatans, but I
think the pendulum has swung too far.
Representative LaHood. Thank you. Thank you, Mr. Chairman.
Chairman Paulsen. Thank you. Representative Maloney, you
are recognized for five minutes.
Representative Maloney. Mr. Chairman, I would like to thank
you and the Ranking Member for calling this incredibly
important hearing, and all of our panelists. I believe this is
certainly one issue that we can firmly all agree on, that
innovation and entrepreneurial drive is one of the defining
characteristics, if not the defining characteristic, of
America's success. And certainly it has been essential to our
economic success.
And I am disturbed by some of your statements that we are
losing our competitive edge and our really innovative success
in this area.
I just have noted economically in my own District and
around the country that retail stores are closing. They are
just closing in droves. You have empty stores. And I represent
Manhattan. It is a business district, but stores, particularly
retail stores, are all going out of business.
I read an article last week that 18 major retail companies
are going out of business. And I resisted buying online, but
now I do everything online because it is faster and I do not
have time to go shopping. But there are no more toy stores,
clothing stores, they are all going under. And that is just one
example of how a large conglomerate, in this case Amazon, is
taking over.
And it just is common sense that when these large
conglomerates go in and dominate, they are going to stifle the
creativity in those areas, and the competition in those areas.
But I want to ask Dr. Furchtgott-Roth, in your testimony
you state the need for strong intellectual property laws, and I
agree that our property laws have brought many people to invest
in our country. They trust our laws. They invest in our
country. But in the past the high tech industry has benefited
greatly from the fact that workers often move from one company
to another, taking their skills with them.
It has been argued that this cross-cultural or
hybridization has been a significant factor in promoting
innovation. If you look at the automobile companies that all
came up in Detroit. The Silicon Valley with all these high tech
companies out there. And now we see a trend where some
companies have tried to enforce nondisclosure agreements that
restrict the movement of skilled workers, or take a broad
interpretation of what knowledge is proprietary. They are being
forced to sign non-compete, won't go to another firm, won't
share information.
Yet if you look at the history of the country, it was this
cross-ideas that people would get in an area and talk to each
other, go to another firm, do a startup. But now with these
non-competes and this, that, and the other, I just like to
think what kind of impact do you think these agreements have?
And are they damaging innovation?
I would like to ask you, and I would like to ask Dr. West,
about the impact of these nondisclosure, non-compete, won't go
to another firm, you can't go to another firm in the same
industry, that these industry high tech firms and others are
forcing their employees to sign.
I even went to visit a high tech firm. I was just visiting
it. And I was going in and touring it, and I had to sign a
nondisclosure, will-not-reveal anything I learn during the trip
that I had to just look at it.
So what is this going to have--true story; I couldn't
believe it--but anyway, to the panelists, if you would start,
Doctor.
Dr. Furchtgott-Roth. Yes, thank you. It is a very important
question.
I think a lot of the non-compete contracts are very fact-
specific. And I'm sure there are some that are very problematic
and may have discouraging effects on innovation, and others may
very well be necessary for companies to be willing to invest in
employees and be willing to share information with them.
So I would be very--I am not in a position to make a
blanket statement about their effectiveness. Maybe some of the
other panelists have a stronger view.
Representative Maloney. Dr. West, do you have a----
Dr. West. Yes, I do have stronger views on that, so thank
you for the opportunity. I agree with you that many of the
noncompete clauses are overly broad.
I grew up in an era where most employees were free agents,
and you basically sold your talent to the highest bidder, or
where you wanted to work. I think we have gotten away from
that, and I think that damages our ability to innovate, it
damages competition, and it is probably part of this drop in
startups that we have been seeing over the last 40 years.
Representative Maloney. I have one minute left, but I am
going to ask, I guess it was Dr. Strain, you said that all of
these huge conglomerates were not hindering, if I heard you
correctly, the competition, and it was really still a small
part of the profit, or the organizations. But I've got to tell
you, I don't remember an antitrust suit in my lifetime. And yet
if you read the history of our country, there was one antitrust
suit after another trying to break up monopolies.
I guess we did have one when we reformed the
telecommunications system in America and said AT&T could no
longer dominate everything, that there would be competition.
And I would argue that is what brought us all of the new
internet and high tech firms, is when we deregulated that we
had a burst of activity where a young, brilliant kid could
start their own company.
But we are fixing it so that it is becoming harder to
happen. So I just want to throw that out. I am concerned about
the domination. And I read an article that one major company
begins every meeting by saying ``Dominate!'' We must dominate
America's commerce. We must dominate the world in this area.
And I don't see that dominating brought us the innovation,
that brought us the success that we have as a country. And if
we lose that success, I think we lose a fundamental element of
what America is.
I am very concerned about it. Thank you for calling this
hearing, Vice Chair and Chair. I think it is very important.
Chairman Paulsen. Thank you. And let me just thank all of
our witnesses for taking the time to appear before the
Committee today. I want to remind Members, should they wish to
submit additional questions for the record, the hearing record
will be open for five business days.
And with that, our Committee is adjourned.
[Whereupon, at 3:27 p.m., Wednesday, April 25, 2018, the
hearing was adjourned.]
SUBMISSIONS FOR THE RECORD
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Good afternoon, and welcome to today's hearing on ``How the
Innovation Economy Leads to Growth.''
The U.S. economy is not only growing, but it's also doing so
faster.
GDP growth is rising, job creation is strong, average wage growth
is improving, and inflation remains low.
These long-awaited positive results stem from the decision to
unleash America's most valuable economic asset: the American people.
Tax and regulatory relief are allowing American families and main
street job creators more breathing room and to do more.
Contrary to those who believed we were stuck at low growth, many
economists expect as much as 3 percent GDP growth in 2018 and similar
strong growth in 2019.
To achieve this, Washington needs to stay out of the way so that
individuals are free to figure out new ways to solve old problems.
Such innovation is vital to sustaining our restored economic
growth.
America has been a laboratory for invention since its inception,
and it is that spirit that has led to our strength.
A report by the McKinsey Global Institute in March 2017 finds that
many advanced economies rely on productivity gains far more than
increases in the labor supply to drive economic growth.
Folks in the private sector know this when they ask questions like:
How can we serve more customers in one day? How can we complete more
orders in less time? How can I produce a product with fewer passes of a
machine?
Those questions are how innovation becomes the primary driver of
productivity gains.
We know we are blessed to live in the United States for a variety
of reasons, but among those blessings are our fellow Americans who have
generated remarkable technologies to lift our standard of living, to
expand our horizons, to support U.S. leadership in the world, and to
grow our economy.
Not all economic systems are equally conducive to such path-
breaking innovations.
Every technological advancement of major economic consequence since
World War II has come from the United States. That is no accident.
As we will hear from our witnesses, strong property rights, the
rule of law, light regulation, and competition are critical conditions
for visionary entrepreneurs, risk takers, and investors to generate the
technological success we have seen.
American inventors, main street job creators, and resourceful
factory workers will continue to deliver amazing advances-but that's
contingent on Washington staying out of the way.
A brilliant idea or discovery is only the start. It has to be put
into concrete form and developed. From there it has to be
commercialized and disseminated throughout the economy before it
actually boosts economic growth.
These steps can take a long time depending on how they are taxed
and regulated, or how antitrust law is applied.
The highway to innovation is littered with potholes, traffic jams,
and overturned vehicles. You can see this up close in my home state of
Minnesota where an excise tax threatens the innovative medical device
industry and could drive it away to other countries.
While the Federal Government has temporarily suspended that tax,
innovators still face great uncertainty about their future.
Even more obstacles lurk along the path of international trade.
Last year, this Committee held a hearing on digital trade. The takeaway
is that the United States leads in digital products and trade that rely
on the internet.
Yet the freedom of the internet faces challenges abroad, and the
United States must strive to protect it. To remain credible in this
mission, the United States must generally promote and defend the long-
held American principles of unencumbered international transactions and
trade.
Every day has the potential for game-changing technological
breakthroughs.
Blockchain is an example of a technology at an early stage of
development. Its potential for very wide application throughout the
economy could be stifled by over-regulation.
The United States has the opportunity to continue to champion its
Age of Invention, but only if we keep the engines of innovation
running. We must protect the ability of our market economy to perform
at its full potential at home and in global markets.
I look forward to the testimony from our distinguished panel of
witnesses today for clarity and guidance on how innovation can drive
economic growth and American prosperity.
__________
Prepared Statement of Hon. Martin Heinrich, Ranking Member, Joint
Economic Committee
Thank you for calling today's hearing on promoting innovation and
accelerating economic growth.
Innovation drives economic growth and boosts wages. We need more of
it and we need innovation to be more broadly shared across regions.
Other countries are moving forward aggressively to promote
innovation, to support advanced manufacturing, and to boost the
productivity of their workers.
To lead in the 21st century economy, the United States must remain
at the forefront of game-changing discoveries and create an ecosystem
that supports innovation across the economy.
The Federal Government plays a key role in this--funding and
conducting R&D, investing in the human capital of our people, and
ensuring that we are making the necessary investments in STEM.
STEM education and R&D are two innovation anchors.
We need to ensure that students everywhere have access to STEM
pathways, and that starts with making sure that schools have the
resources they need to recruit, train, and retain talented science and
math teachers.
We need to expand middle-skills pathways into emerging sectors, and
make a college education accessible and affordable for all Americans,
so that every student has the opportunity to benefit from tomorrow's
innovations.
The Federal Government remains the largest funder of basic
research--that research which adds to our fundamental stock of
knowledge, yet often would not be conducted without public investment.
This is the research that can help us solve the problems we don't
yet know we have.
Basic research has driven major leaps forward--including mapping of
the human genome, vaccines, breakthroughs in cancer research, and
energy storage technology and the creation of the internet, laser, MRI
and GPS.
The knowledge gained through this research has significant
spillover economic benefits--increasing productivity, creating jobs,
and accelerating economic growth.
That's why it's encouraging that the recent Omnibus agreement made
significant investments in R&D.
Investments in basic research increased by almost 10 percent over
the previous year, its largest annual increase since the Recovery Act
in 2009.
Promoting innovation also means extending already developed
technologies, like broadband, to communities currently without access.
Today, years after high-speed internet was first made available, 19
million rural Americans still lack access. The private sector doesn't
have the incentive to extend broadband to remote, hard-to-reach
communities.
The Federal Government must step in and fill the gap.
We also need smart policies that can help emerging industries grow.
Targeted tax credits, competitive grants, and prize competitions are
all levers Congress can pull.
The multi-year extension of the wind production tax credit is a
good example. It is driving investment in wind farms in New Mexico and
across the country.
Earlier this month, I toured the future site of the $1.6 billion
Sagamore Wind Project in eastern New Mexico, which will be the largest
wind farm in our state's history and create up to 300 construction jobs
and 30 full-time operations jobs.
Programs like Laboratory Directed Research and Development (LDRD)
authorizing a portion of a lab's Federal funding for cutting-edge R&D
are also vital.
At Los Alamos National Laboratory in New Mexico, LDRD researchers
generally account for one-quarter of the lab's patents and peer-
reviewed publications.
Efforts to help commercialize technology developed at our national
labs and research universities help to take a good idea and get it into
production and out into the marketplace.
In New Mexico, we've seen how commercializing the R&D that takes
place in national labs can generate significant economic opportunities.
I'll share one example.
Descartes Labs is a New Mexico start up that uses artificial
intelligence technology developed at Los Alamos National Laboratory to
provide analysis and predictions based on satellite images of the
earth.
Early applications are in delivering crop yield forecasts and
analyzing trends in energy, construction and the environment.
Today, the company has its headquarters in Santa Fe, has raised
close to $40 million in venture money, employs about 70 people, and is
a recognized leader in analyzing satellite images.
We need to help more research turn into innovative startups.
Access to capital is key for entrepreneurs. Too many promising
young companies fall to the Valley of Death, or get absorbed by
behemoths where their innovations stall, because they cannot find the
financing they need.
This is especially tough for innovators in rural areas and smaller
cities. Good ideas and innovations occur everywhere. But more than
three quarters of venture capital goes to companies in San Francisco,
Los Angeles, New York and Boston.
Expanding access to capital can help us to tap into the next
generation of innovators creating new startups and new opportunities.
Lastly, immigrants are a key source of innovation and
entrepreneurship. We cannot jeopardize these enormous contributions
through short-sighted immigration policies or by kicking out talented
young people.
I'm an engineer by training. I could talk all day about innovation,
R&D and tech transfer.
But, now I look forward to hearing from our witnesses.
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Response from Dr. Furchtgott-Roth to Questions for the Record Submitted
by Representative Maloney
1) Last year Alexander Bell, Raj Chetty, Xavier Jaravel, Neviana
Petkova and John Van Reenen released a National Bureau of Economic
Research working paper titled, ``Who Becomes an Inventor in America?
The Importance of Exposure to Innovation.''
This is not a theoretical paper. The authors create a dataset of
1.2 million inventors--defined as individuals who hold patents--and
compare it to datasets of children with various characteristics.
The authors find that:
`` . . . children's characteristics at birth--their
socioeconomic class, race and gender--are highly predictive of
their propensity to become inventors. Children born to parents
in the top 1 percent of the income distribution are 10 times as
likely to become inventors as those born to families with
below-median income. Whites are more than three times as likely
to become inventors as blacks. And 82 percent of 40-year-old
inventors today are men. This gender gap in innovation is
shrinking gradually over time, but at the current rate of
convergence, it will take another 118 years to reach gender
parity.
In the second part of their analysis, the authors find that
``exposure to innovation during childhood through one's family or
neighborhood has a significant causal effect on a child's propensity to
become an inventor.''
In the third part of the working paper, the authors look at the
impact of financial incentives on inventors' propensity to innovate.
They state that their findings ``imply that small changes in financial
incentives will not affect innovation significantly.''
What are the policy implications of the empirical findings in this
paper?
Thank you for noting this important paper that focuses on the
individuals who file patents. The paper finds that individuals who are
exposed to innovation at an early age are more likely to patent in the
future. This result may have some effect on teaching methods,
particularly for mathematically gifted students.
I should note that patents are but one measure of innovation and
but one form of intellectual property. Many individuals and businesses
that are widely considered as innovative hold few if any patents.
Indeed, of the five largest corporations in America that I
discussed in my prepared testimony--Amazon, Apple, Facebook, Google,
and Microsoft--only Apple is heavily patent-oriented. The other
companies hold substantial portfolios of patents, but their business
models do not rely on them exclusively. Nor is having a patent-oriented
business plan a guarantee of success. Businesses such as Kodak and
Xerox had substantial patent portfolios, but nonetheless entered
bankruptcy.
Still, I believe that the NBER paper has important results that may
be relevant to education programs, particularly for mathematically
gifted students.
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