advertisement
advertisement

Why Congress Should Craft an Innovation-Based Economic Stimulus Package

As talk of a possible recession grows, so too does consideration of a second economic fiscal stimulus package. Indeed, House Speaker Pelosi has spoken of the need for a stimulus package potentially as high as $300 billion in order to get the economy moving again.

As talk of a possible recession grows, so too does consideration of a second economic fiscal stimulus package. Indeed, House Speaker Pelosi has spoken of the need for a stimulus package potentially as high as $300 billion in order to get the economy moving again.

advertisement
advertisement

There should be no question that Congress needs to pass a stimulus package. But rather than craft a conventional spending-oriented stimulus package focused solely on tax cuts for individuals and spending increases, Congress should craft one of which at least a portion not only gives a quick shot in the arm to the economy but at the same time boosts investment that spurs productivity growth and innovation, especially in information technology, which has been the engine of U.S. economic growth for the past decade.

In the past, the standard approach to heading off recessions through fiscal policy was Keynesian pump-priming—stimulating consumption through a range of temporary government spending increases and/or tax cuts/rebates. Whether such pump priming did anything more than spur consumer spending—such as boost productivity or innovation—was beside the point. The sole focus was to get a lagging economy moving again.

But in an economy which also faces key challenges going forward in the moderate to long term in areas such as the need to increase international competitiveness, raise productivity, and reduce greenhouse gas emissions, any stimulus package should also at least in part help address these challenges. Indeed, in an era of increased international economic competition, we can no longer afford a “consumption-based” stimulus package that leaves the nation with little to show after consumers spend the money and the economy gets back on track. It’s not enough to just consider the amount of short-term “bang for the buck” that any stimulus will create, policy makers need to also consider what kind of long-term “bang for the buck” it creates.

Yet, to date, virtually all discussion of a second stimulus package has been focused on questions of ensuring that the provisions are timely (e.g., take effect over the next year or so), targeted (focused on activities that have relatively high economic multipliers), and temporary (expire when the slowdown is over). While these three considerations are critical, it is equally important to ask whether some measures cannot also be “transformative;” that is, whether they boost investments that in turn will spur growth and innovation long after the initial spending has done its work of creating economic demand and jobs.

As a new ITIF report, Timely, Targeted, Temporary, and Transofrmative: Why Congress Should  Craft an Innovation-Based Economic Stimulus Package, recommends, there are a number of areas that meet these criteria of being timely, targeted, and temporary, but also being transformative in their impact on innovation and productivity.

One is to allow companies to “expense” for tax purposes investments on information technology equipment and software in 2009. As ITIF showed in its report Digital Prosperity: Understanding the Economic Benefits of the Information Technology Revolution, investments in IT produce outsized productivity gains, spurring higher company productivity and higher real wages. Allowing companies to write off all the costs for tax purposes in 2009 would raise the rate of return of new equipment and software, spurring companies to invest more and more rapidly turn over older, less productive equipment and software.

advertisement

Congress should also take steps to spur adoption of health IT. IT promises to revolutionize health care by improving the quality and containing the costs of care. But compared to other nations, the United States lags significantly behind in the adoption of health IT. To get us closer to the needed “tipping point” where health IT is widespread, Congress should provide a one-time tax credit during the first half of 2009 to incentivize health care providers to invest in this technology.

Congress should provide $2 billion to help universities purchase needed state-of-the-art research equipment, such as DNA analysis equipment for cancer research, nanoengineering research facilities for new materials and systems, and supercomputers to create virtual reality environments. To qualify for grants colleges and universities would have to place an order for the equipment within two months of receiving an award (which they must match with at least 10 percent of funding from other sources).

There are a host of other proposals that could spur innovation while also spurring economic activity in the short run. Congress should double the energy efficient home improvement tax credits extended by the Emergency Economic Stabilization Act for investments made in 2009. It should provide a tax credit of 50 percent for companies that reduce their data center power consumption by 15 percent for qualified expenses, including virtualization and consolidation, energy-efficient CPUs, energy-efficient computer power supplies, and server racks with improved airflow. It should provide $1.6 billion to help over 1 million low income households with children at home afford to purchase a computer and get subsidized Internet service for one year.

This kind of “transformative” stimulus package marries some of the best insights of neo-Keynesian economics with prescriptions from an emerging field of economic growth theory – innovation economics – that argues that technology, entrepreneurship, and innovation are central components of driving economic growth. Keynes’ insight that governments can encourage economic rebounds by stimulating aggregate demand through government spending or tax cuts has merit as a short term economic strategy, but it can and must be paired with a strategy to return the United States to long-term economic strength.

advertisement
advertisement