Transforming the American Economy Through Innovation: Introduction

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How and Why the Recovery Act Invests in Innovation

The American Recovery and Reinvestment Act was designed to help the U.S. pull itself out of the worst economic crisis to face the country in generations.  The Act had three primary purposes: 

  1. To rescue a failing economy,
  2. To put the country on a path to recovery by putting Americans back to work immediately, and
  3. To reinvest in the country’s long-term economic future.

Rescue funds, such as unemployment insurance compensation, food stamps, and additional payments to seniors and veterans have helped those most affected by the downturn and those most in need.  Recovery funds, such as highway or water infrastructure have directly put Americans across the country back to work.  Lastly, Reinvestment funds, such as investments in advanced vehicles, renewable energy, Smart Grid, health information technology, and high-speed rail not only put Americans back to work, but also are laying a foundation on which a stronger and more competitive economic future can be built. 
This report focuses on this third group of programs – the “Reinvestment” part of the Recovery Act – and on those aspects of these programs that harness the innovative power of the American economy.  It also explores the Recovery Act’s transformative impact on diverse sectors of the U.S. economy. 

Innovation in Context

Since its founding, the United States has been a nation built on discovery and innovation.  Through its leadership in these areas, the U.S. has changed the way the world thinks about government, industry, and technology. 

In the 1930s, faced with some of the darkest days America had seen, President Franklin D. Roosevelt signed the $50 billion "New Deal" ($782 billion in today’s dollars), despite much opposition and criticism.  Through an ambitious series of economic programs he invested dollars to transform the work place and rural America, believing that their strength would rescue a devastated nation.  Decades later, President John F. Kennedy chartered the $25 billion Apollo Program ($180 billion in today’s dollars), which was charged with one ultimate goal: to land humankind on the moon.  The results captured the imagination of America and established the U.S. as the global leader in space exploration.

It was in this spirit of taking bold steps forward in the face of daunting adversity that President Obama signed the $787 billion Recovery Act over a year ago on February 17, 2009.  In the Act’s Statement of Purpose, it lists one of its five goals as: “To provide investments needed to increase economic efficiency by spurring technological advances in science and health.” 3  In this light, the Recovery Act is investing over $100 billion in innovative and transformative programs that span industries from Energy to Health Information Technology.  A distribution of Recovery Act spending in innovation and transformation can be seen in the chart below. 

Funding for Innovation and Technology Deployment in the Recovery Act
Note: EERE and Smart Grid figures estimate impact of Title 17 rescission. Source: OMB analysis

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Within three to six years, these funds will lay the seeds for emerging industries and significantly move the needle toward re-shaping the face of the new American economy.  Moreover, they will restore American leadership in industries and sectors where academics and economists from across the ideological spectrum have agreed that America is falling behind.

Why Innovation:  The Need for Change

There is widespread agreement in the economic community that innovation is a primary driver of long-term economic growth and prosperity.  Robert Solow won the Nobel Prize in economics for his analysis demonstrating that advances in human knowledge and technology were the primary drivers for wealth creation in the 20th century.  Years after Solow’s pioneering research, Paul Romer, the chief architect of “New Growth Theory,” made a profound impact on the economic field by showing once again that “economic growth doesn't arise just from adding more labor to more capital, but from new and better ideas expressed as technological progress.” 4  Speaking about the U.S., Romer stated, “We've got a historical precedent for creating institutions which lead to better innovation of the market and strengthen science significantly. We should aim for that kind of improvement again.”5

Innovation also drives job creation. Long-term, high-quality jobs stay in industries where there is a high degree of innovative content and where innovation, manufacturing, and end-user demand are tightly integrated.  Last September, the White House released "A Strategy for American Innovation."  The strategy outlined the President’s vision for innovation to catalyze long-term, sustainable economic growth that would create new jobs and new industries for American workers.  It aims to implement sensible government policies, harness the investments of the private sector, and lay the foundation for innovation, job creation, and American prosperity.  To accomplish this objective, it focuses on three areas:

  1. Investing in the Building Blocks of American Innovation:  Investments in research, development, education, and infrastructure are necessary to set the groundwork for future innovation.
  2. Promoting Competitive Markets that Spur Productive Entrepreneurship:  Competitive markets foster a national environment ripe for entrepreneurship and risk taking that allows American innovators to grow domestically and compete internationally.
  3. Catalyzing Breakthroughs for National Priorities:  Some industries of exceptional national importance, such as developing alternative energy, implementing health information technology, and manufacturing advanced vehicles, will likely not produce outcomes in the best interest of society on their own. In these sectors, the government will seek to assist and leverage the market to produce strong results.

The Recovery Act does all three.  The Act’s investments will accelerate the pace of innovation, helping to establish the U.S. as a global leader in competitive, high-growth industries of the 21st century. It will help make important technologies more affordable in the marketplace and build the nation's infrastructure to enable further sound economic growth and job creation. 

This report explores four areas in which the Recovery Act is helping to create a newer, more efficient economy for decades to come:

1. Modernizing transportation, including advanced vehicle technology and high-speed rail;
2. Jumpstarting the renewable energy sector through wind and solar energy;
3. Building a platform for private sector innovation through investments in:

a. Broadband,
b. Smart Grid, and
c. Health Information Technology; and

4. Investing in groundbreaking medical research. 

3. American Recovery and Reinvestment Act of 2009, Public Law 111-5, (accessed June 3, 2010).
4. Ronald Bailey, “Post-Scarcity Prophet:  Economist Paul Romer on growth, technological change, and an unlimited human future.” Reason Magazine (December 2001),  (accessed June 3, 2010).
5. Ibid.