Innovation in America: How the Government Helps and Hurts

Formerly a global hotbed of innovation, the United States in recent years and decades has regressed back to the mean as several other countries are catching up. In a previous post, I've examined the role our education system plays in hampering (and helping) innovation. But what role does our government play?

The Government's Role in Innovation

Naturally, any country's government has a major impact on innovation. Even in a market-driven economy like ours, government initiatives can help set the course for creating a culture of innovation, or lack thereof.

Through subsidies aimed at small business owners and new ideas, governments can encourage their citizens to become innovative entrepreneurs. Meanwhile, a nation's Research & Development budget is often directly correlated with how innovative it is.

While government funding plays a crucial role in the innovation process, they can also hamper it through regulations.

Phil McKinney

The Double-Edged Sword of Subsidies

Of course, none of these issues is simple. Subsidies, for one, will often find enemies among those who believe the money is not spent wisely or places an unfair burden on tax payers. For an example, look no further than our higher education system: it has become one of the most expensive in the world, despite massive public investments.

Without subsidies, on the other hand, many small businesses can simply never get off the ground. That's why various city and local governments sponsor a large number of incubators and accelerators across the country, aiming to help innovative ideas make their way into the marketplace.

Considering that many small businesses and entrepreneurs are the source of our country's innovative nature, subsidies to help get them started can be crucial investments with long-term payoffs.

What happens to innovation when the government stops investing became evident during the Great Recession earlier this century:

New business formation was about 600,000 annually but dropped to 400,000 during the Great Recession, according to Robert Litan. It's only recovered to about 420,000.

Used correctly, government subsidies and investments play a crucial role in the innovation process. For evidence, look no further than Apple's iPad and iPhone – innovative products that became the landmark devices of their respective product lines, made possible by government investment. But these investments can become costly, and easily incur the wrath of taxpayers.

Not only that, but subsidies can become so entrenched that they remain in place even as it’s clear they are not contributing to social good or innovation. While the government has programs to support renewable energy development, it spends far more on subsidies and benefits for large oil and gas companies. Similarly, Depression-era farm subsidies are what make unhealthy corn-based products so cheap, while quality vegetables from your local organic farm are too expensive for most people to buy. While small-scale, targeted subsidies can be an excellent way to foster innovation, they’re often no match for those old, entrenched ones that serve only to maintain the status quo.

The Nation's R&D Budget

Naturally, a government's research and development budget is another indicator of its commitment to innovation. The more a nation spends on researching new products, the more likely it will be to develop and support these new products, positioning itself as an innovator in the global economy.

Consider the United States R&D budget, however, and you’ll understand part of our country’s innovation problem. Though still the largest in the world, the budget stagnated during the 1970s and was only increased again in the early 2000s, with almost the entirety of that increase due to higher military spending after September 11, 2001.

Even keeping in mind this increase in military spending, the budget actually dropped significantly due to the Great Recession beginning in 2008, and is now in danger of falling back to pre-2000 levels.

Considering these worrying trends, it should be no surprise that some experts actually predict the U.S. R&D budget to be surpassed by China in less than a decade. To be sure, China has its own governmental innovation problem. But to remain competitive as the world's foremost innovator, the R&D budget has to trend upwards once again.

The Dangers of Governmental Overreach

Finally, government has the potential to seriously hamper innovation through rules and regulations. These regulations often have specific purposes, aiming to create a fair market space and protecting consumers. But for many innovative companies, they can have unintended consequences.

Consider Uber, the car sharing service that is phasing out traditional cab companies. The U.S. tax system is not prepared for such a non-centralized business model, leading to significant challenges for the company.

Uber grew fast enough to work through most of these challenges. But you can easily envision countless smaller businesses not being able to go through with their innovative models and products because an outdated tax code or other regulation did not account for this type of innovation.

Another example is the healthcare industry, where the government encourages and supports various R&D initiatives to develop new drugs and therapies – and then places such a regulatory burden on the drug that getting it to market isn’t even worth it unless the developer knows it will make a large profit. Safety regulations to protect patients are crucial, of course, but the regulatory process is, in the eyes of many in the industry, far too onerous, especially when it comes to new drugs for rare diseases for which new treatments are desperately needed.

Reasons for Hope

Of course, not all is lost. Especially states like Colorado are experiencing a rise in government-sponsored incubators once again, enabling more entrepreneurs to make their innovative ideas a reality.

Meanwhile, the President's proposal for the 2016 Research & Development budget included a significant uptick of 6%, and one that for the first time in over a decade applied to both defense and non-defense spending.

America has an innovation problem, and our government is not innocent. Its enormous size and general slowness to adapt to new needs and realities can seriously hinder its citizens’ innovative efforts. What we can do is push for more R&D spending and vote for political leaders in our own communities and the broader system who are willing to work toward fixing some of the governmental issues that plague American innovation.

How do you feel about our government's role in helping and hampering American innovation? Contact me to share your thoughts.

To get the full series on Americas Innovation Problem along with a FREE two-hour audio course, “Creating Killer Innovations” delivered via email, text the word INNOVATE to 33-444 or if outside the US, visit KillerInnovations.com/innovate