Will Hillary's High-Tech Agenda Work?

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Hillary Clinton recently released what she calls her "innovation agenda, 1.0." Although America "is still an innovation superpower," Clinton admits, her proposals will "renew the nation's commitment to research; help create the premier science, engineering, technology, and mathematics workforce; and upgrade our innovation infrastructure." Here are the highlights of what she wants to do, followed by my analysis:

1) Establish a $50 billion "strategic energy fund" to devise ways to make the United States energy independent and reduce the threat of global warming.

2) Increase the basic research budgets 50 percent over 10 years at the National Science Foundation, the Department of Energy's Office of Science, and the Defense Department, with more focus on the physical sciences and engineering, high-risk research, and E-science initiatives that link Internet-based tools, global collaboration, supercomputers, high-speed networks, and software for simulation and visualization.

3) Increase the National Institutes of Health budget by 50 percent over five years and aim to double it over 10 years.

4) Direct the federal agencies to award prizes in order to accomplish specific innovation goals.

5) Triple the number of NSF fellowships to 3,000 a year and increase the size of each award by 33 percent to $40,000 a year.

6) Support initiatives to bring more women and minorities into the math, science, and engineering professions.

7) Provide tax incentives to encourage broadband deployment in underserved areas.

8) Make the 20 percent research and experimentation tax credit permanent.

My take: Of all the major presidential candidates of either party, Clinton has easily proposed the most sweeping and specific agenda for extending America's competitive lead. But are her ideas any good?

I've recently been talking with a lot of experts—including Stanford University economist Paul Romer and Diana Farrell, director of the McKinsey Global Institute—on what government can do, if, anything, to promote innovation. The consensus is that government should help create a fertile environment for innovation and technological advancement without fashioning some sort of clunky industrial policy that seeks to promote certain industries though government intervention.

So "open source" ideas like increasing human capital (through NSF fellowships) and enhancing infrastructure (such as more widespread broadband) may be good moves. So is the idea of offering innovation prizes, since that creates a goal but does not predetermine what the path to the goal is or who the participants are. But the $50 billion energy fund smells like industrial policy—at least it did to Farrell when I ran the idea by her last week. She dismissed the idea as "next-generation industrial policy," though the broadband idea struck her fancy. (To be fair, I outlined all this very generally to Farrell and did not identify these as Clinton ideas.)

But innovation is about more than just technology, Farrell stresses. For instance, retailing and wholesaling were responsible for half of America's productivity surge in the late 1990s. And one company, Wal-Mart, contributed roughly 16 percent of that amount, according to McKinsey. And the way Wal-Mart became so productive was through a business innovation—the big-box store with regional distribution centers—and more quickly applying off-the-shelf technology, like radio-frequency guns to track merchandise, than its competitors did. Wal-Mart's competitors eventually responded and increased their productivity—though by 1999 they were only where Wal-Mart was in 1990.

So the real key, as Farrell puts it, is "creating maximum competitive intensity" to force companies to constantly innovate—whether through new technology or business models or management processes—to keep ahead of rivals. And then when competitors respond, those innovations get spread.

"Europe is innovative, but that innovation doesn't get diffused throughout various sectors," she says. For instance, hypermarkets like Wal-Mart have long been frowned upon in France and restricted via zoning requirements. Likewise, free trade—or as Farrell puts it, "exposure to global best practices"—is critical to fostering innovation of all sorts. Globalization forces U.S. companies to innovate or die—and in the process raises our standard of living.