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Investing in “Innovation Infrastructure” to Restore U.S. Growth

January 3, 2017

Any stimulus program needs to focus more on “innovation infrastructure,” such as scientific and engineering research, than on traditional concrete and steel.

Recovery from the Great Recession has been painfully slow. Unemployment peaked in October 2009 at 10 percent, and it took until October 2015 to drop to 5 percent, although the labor force participation rate is still below 2000 levels. Productivity growth has been the lowest since the federal government started tracking it in 1947. And annual GDP growth has been averaging less than 2 percent for the past seven quarters. This poor economic performance has befuddled most economists and led to dusting off old theories such as “secular stagnation.”

To address such stagnation, one policy that has gained traction from some economists and President-elect Trump is infrastructure stimulus. When this was first proposed in 2013, the focus was on jobs; since then, employment levels have recovered, but the underlying problems of investment and productivity growth remain. Support for traditional physical infrastructure could help increase employment if it is debt-funded, but we should not expect it to address the underlying structural problems of low investment and productivity stagnation. Nor will it do much to revitalize the manufacturing sector, which suffered unprecedented output and job losses in the 2000s. More broadly, innovation-based growth seems to have stalled except in software. Filling potholes and repairing sewers will do nothing to address these deeper problems.

Instead, restoring an innovation- and investment-led economy depends on spurring growth through investments in America’s “innovation infrastructure,” including scientific and engineering research in the public, academic, and private sectors. This, more than traditional concrete and steel, should be the focus of any stimulus program.

This report reviews the prevailing analysis of “secular stagnation,” including the demand-side perspective of economist Lawrence Summers and the supply-side perspective of economist Robert Gordon. The report assesses the shortcomings of standard monetary and fiscal policy responses, including the limits of traditional infrastructure spending. It then describes the potential benefits associated with increasing investments in “innovation infrastructure,” including:

  • Research funding;
  • Advanced-technology development funding;
  • Research infrastructure;
  • “Smart” infrastructure; and
  • Pre-competitive advanced-manufacturing research institutes.
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