Robert Solow, Nobel laureate and father of neoclassical economic growth theory, says that policymakers’ current economic solutions are nothing more than “drivel” and that spurring innovation – especially energy innovation – must be a central goal of public policy moving forward.

 

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As ITIF and the Breakthrough Institute recently reported in Taking on the Three Deficits, policymakers of all stripes largely ignore the role innovation must play to break America out of its current economic rut and restore budget balance in Washington. The top-line message - only targeted public investments in programs that boost innovation, productivity, and next-generation industries combined with targeted cuts in consumptive spending will put the United States on a long-term path to sound fiscal footing.

But the importance of spurring innovation hasn’t hit home yet. The crashed-and-burned Congressional Super Committee – given significant power and leverage to comprehensively address the flailing economy – never once mentioned innovation in its public deliberations. And actions taken in 2011 to address the budget deficit have targeted the federal discretionary programs, a relatively small contributor to the national budget deficit and home to the most productive, innovation-oriented programs.

Thus, the current deficit reduction approach is akin to taking one (small) step forward and three steps back. This is largely due to a head-shaking misdiagnosis of the size and character of the United States deficit problem. America isn’t just tasked with eliminating a $10+ trillion cumulative budget deficit; it also faces a growing trade deficit in addition to a disturbing shortfall in investments in the fundamentals of innovation like infrastructure, education, and R&D. All total, America’s three deficits - budget, trade, and investment - total a monumental $21 trillion and are set to grow to at least $40 trillion in the next decade. It makes the Super Committee’s task of finding at least $1.5 trillion in budget savings paltry in comparison.

What America really needs is a budget policy reset. First and foremost, policymaker must make innovation central to its economic policy decisions. This means making smart public investments, even with limited government resources in a time of austerity that can address all three of America’s deficits. In Solow’s words, there is “no excuse for boondoggles, for spending for its own sake, [but] there is room for spending on useful things.”

To Solow, one of those “useful things” is clean energy innovation. Spurring innovation in the stagnant U.S. energy industry “has special importance especially over the long run.”  Investments in energy innovation like research, development, and demonstration will “attract capital investment, leading the way to new enterprises, industries and skilled jobs – just what is needed to pick up some of the nation’s underutilized production capacity.”

Solow also notes that supporting energy innovation can also address America’s worsening balance of trade. To do so, we must develop alternatives to imported fossil fuels (which make up almost 50 percent of the annual trade deficit) like electric cars with next-generation batteries that are cheap and can last for 500 miles on one charge or next-generation biofuels developed using advanced genomics or chemistries.

In other words, support for clean energy innovation holds the promise of boosting the economy, creating jobs, reducing the investment and trade deficits. That in turn means targeted investment in energy innovation will also reduce the budget deficit through growth induced higher federal tax revenues. It’s a perfect example of the “three deficits thinking” sorely needed in Washington.

As Fareed Zakaria states in a recent Washington Post piece, shifting to such an investment and innovation strategy requires “a big shift in the United States,” compared to the last two decades of falling investments in “physical and human capital.” Yet, tough times call for tough decisions.  Zakaria ends with a salient message for today’s gridlocked legislators: America has allowed its economic foundation to seriously deteriorate, so “if we want the next generation of growth, we need a similarly serious strategy of investment.” It’s obviously time to shelve the drivel and begin a serious three deficits approach to restoring American fiscal balance and economic prosperity.