How Important is Government to Innovation?

r&dThe US government must soon begin to make tough decisions about how to most effectively balance the budget. The key to resolving this issue is to figure out how to cut spending responsibly without hindering the government’s capacity to promote growth. A significant question that arises from this debate is whether national expenditures on research and development are useful for fostering innovation.

The conventional belief is that innovation is born through competition in the private sector. However, this may overlook the crucial role that government plays in the development of key technologies. The government provides something that the private sector cannot: cost-is-no-object engineering. With their singular aims and large purse, government programs are not restrained by profit-making like the industries in the private sector. It often takes patient, determined, or plain foolish capital, and a lot of it, to turn high-concept ideas into functional prototypes and a body of knowledge capable of driving private innovation and production. Government support for innovation obviously turns up its share of duds, representing a waste of real resources that could have gone toward some other end. Yet, as history has shown, amazing things happen when government investment succeeds. Take the initiative shown during the formative years of the computing era; the government was an enormous source of demand for all the intermediaries of computing power production and computing power itself. America’s military machine brought brilliant people together, demanded they do work requiring extraordinary computational power, and plied them with the funds to develop and build early computers. That work created expertise, component supply, and even private demand that fueled subsequent private investments.

This of course does not diminish the private sector’s vital role in innovation development. In fact, government investment and free-market improvement are almost symbiotic. Forbes lays out two key points that explains the co-dependent nature of the government and the private sector in innovation advancement.

1.)     Reliance on the government to invest in early innovative research because free-market actors cannot do so profitably by themselves;

2.)     Reliance on the free-market to competitively finish the later part of the innovation process because the government cannot realize its return on research investment otherwise

Therefore, it is vital that Congress adopts a budget plan that does not hamper the government’s ability to invest in innovation. US economic success is firmly rooted in technological innovation and this budget debate is a key moment in determining the future of the US economy.

Posted by: Matthew Goldberg

Sources: The Economist, Forbes

Photo Credit: Army scientists energize battery research courtesy of flickr user RDECOM


Sequestration: A Harsh Reality

knife & billIn the second part of our two part series on sequestration, we are disheartened to report that $85 billion in cuts are due to take effect today as Congress failed to reach a deal to avoid sequestration. This development could hurt US growth prospects and dampens domestic and international confidence in Congress.

The sequester is reported to have a variety of deleterious effects on the US economy. Deutsche Bank’s chief U.S. economist, Joseph LaVorgna, stated that the sequester could take 40 basis points off 2013 gross domestic product, “and possibly higher, depending on whether the fiscal multiplier is positive.” This sentiment is reflected by the IMF, which last Thursday reported that the sequester would likely cut US growth rates in 2013 by at least 0.5 percent if the cuts are fully implemented.

According to the Office of Management and Budget, “should sequestration remain in place for an extended period of time, hundreds of thousands of families will lose critical education and wellness services through Head Start and nutrition assistance programs. The Department of Defense will face deep cuts that will reduce readiness of non-deployed units, delay needed investments in equipment and facilities, and cut services for military families. Federal agencies will likely need to furlough hundreds of thousands of employees and reduce essential services such a food inspections, air travel safety, prison security, border patrols, and other mission-critical activities.”

However, the consequences may not be as dire as first predicted and it could take a while before the cuts begin to negatively manifest themselves. For example, most of the pain will only gradually roll over Americans, CNN Money explains. Starting today, agencies will limit their contracts and grant awards, but furloughs won’t take effect until March 26 or later—the IRS, for instance, has said it won’t furlough anyone until after the April 15 tax filing deadline, the Washington Post reports. This means that the US may not immediately feel the effects of sequestration but rather, the sequester cuts are more akin to a slow burn rather than a searing heat.

While there are doubts about the extent to which sequestration will harm the economy and the American people at large, one thing is certain, the debate over the “sequester” has highlighted the scale of divisions in Congress and suggests that hopes of a grand bargain are becoming slimmer and slimmer. Furthermore, with the next mini-cliff scheduled to hit on March 27, it is hard to expect anything other than future Congressional tumult and further economic uncertainty.

Posted by: Matthew Goldberg

Sources: Associated Press, Office of Management and Budget, CNBC, Business Insider

Photo Credit: Cutting your Spending courtesy of flickr user Tax Credits

The Consequences of Sequestration

budget signWith Congress once again unable to reach any type of deal, it appears as though the US was able to vault the fiscal cliff only to fall right back into the pit of sequestration. This threat of the budget sequester—in other words, automatic, across-the-board cuts in funding—is soon to become a painful reality that would significantly hamper US economic growth.

The cuts were born of the epic 2011 fight over the debt ceiling. The idea was to create a “trigger” so onerous and indiscriminate that both parties would have an incentive to devise a smarter way to reduce deficits. Instead, the bipartisan committee was unable to reach an agreement and now Congress is faced with the undesirable but increasingly likely prospect of sequestration. This would mean $109 billion in automatic spending cuts, with defense spending being cut by 13 percent. The sequester would also lead to a short term contraction in GDP, since government spending is a component of GDP calculation. This contraction in growth would be compounded by Federal Reserve policy. For example, IMF research suggests that under current conditions, with slack in the economy and the central bank’s policy rate close to zero, the multiplier on government spending may be higher than normal. Moreover, the substantial cuts in spending would force the federal government to decrease pay and lay off government employees, an event that is highly adverse to both US economy and morale.

All this could be avoided if Republicans and Democrats can concede on issues closest to them. For Republicans, that would be tax increases, whereas for Democrats, that would be entitlement spending. Despite both sides wanting to avoid the sequester, it seems that Republicans and Democrats are unwavering in their stubbornness and it is becoming less and less likely that a deal will be struck before the March 1st deadline. It is a testament to the ineptitude of the Congress if they allow the sequester to inflict economic harm that could have been circumvented through logic and compromise. Instead, it remains to be seen whether the sequester will take effect or if another down to the wire political spectacle awaits.

Posted by: Matthew Goldberg

Sources: Economist, CNN Money, Forbes

Photo Credit: budget courtesy of flickr user 401(K) 2013

Fiscal Cliff Temporarily Averted

fiscal cliff
President Obama’s signing of the deal agreed upon by Congress to avert the “fiscal cliff” may have allowed Americans to stop holding their breath over the impending sequestration, but no one is breathing a sigh of relief quite yet.

An agreement was made between the House and the Senate regarding taxes but delayed other tough decisions on spending cuts.  Congress agreed to make the Bush-era tax cuts permanent while raising taxes on the wealthiest Americans. Yet, Americans are likely to see smaller paychecks, since the lowered payroll tax rate expired on January 1.  The bill also extends unemployment insurance and delays cuts on R&D and education but with many more deadlines coming soon, it is unsure what cuts will continue to be spared.

Despite signing off on an agreement, Congress still faces three other cliff-like deadlines over the following months. The debt ceiling still looms overhead and failure to address this could lead to further downgrade of the country’s credit rating and stock market plummets.  The threat of sequestration must be faced again in two months. Furthermore, the current continuing budget resolution is set to expire on March 27th.

Hopefully, with Congress beginning afresh, they can put the past behind them and work together to jumpstart the American economy.

Posted by: Elizabeth White

Sources: CNNMoney, Financial Times

Photo source: flickr user MyEyeSees

From AAA to AA: a Projection for the US following the Fiscal Cliff

AAIf the US goes over the fiscal cliff there will be more financial repercussions than $600 billion in expiring tax cuts and instant spending cuts. According to Fitch, one of the top three credit rating agencies in the world, the cliff will also cost the US its top rating of AAA.

The agency’s biannual report states, “If the negotiations on the fiscal cliff and raising the debt ceiling extend into 2013 and appear likely to be prolonged with adverse implications for the economy and financial stability, the US sovereign rating could be subject to review, potentially leading to a negative rating action.”

Standard and Poors infamously downgraded the US in August of 2011 to AA+ following a similar episode of partisan in-fighting over the debt limit. With a lack of communication on the Hill once again threatening the nation’s credit rating, an important measure for investors of economic health and stability, lies at risk.

The US economy is projected to contract by 5% if Congress does not avert this financial “dooms-day” but if they can, growth will slow to 1.5%. “A multi-year deficit reduction plan to stabilize U.S. debt and public finances [is] likely to see the country keep its AAA rating” and adopt the better of the two bad scenarios for US growth.

Congress should keep this in mind during the final days of negotiations as an added incentive to come to agreement. America’s future path hangs in the balance: will the decline be reversed and the AAA rating rightfully remain, or will the fiscal cliff and the subsequent AA+ downgrade occur? In less than 11 days the answer will be clear.

Posted by: Sophia Higgins

Sources: Reuters, the Hill

Photo Credit: From AAA to AA @ photostream courtesy of Flickr user fdecomite

Wall Street Improves as Congress Meets on the Fiscal Cliff

On Monday, November 19th the DOW Jones Industrial average rose by 207 points and the S&P gained 2%, marking the second day of improved performance for Wall Street after a 5.3% drop of the S&P index after Election Day. The likely result of this improvement is lawmakers coming together to discuss the fiscal cliff, an imminent financial threat to investors and consumers alike.

In the words of Jeff Morris of Standard Life Investments, “”Constructive comments over the weekend are key for the market to feel like, in this postelection environment with all the intense partisan politics, the two parties will be able to get together to avoid the fiscal cliff that would put the economy back in contraction.”

The cliff, set to be reached on January 1st, 2013 will result in staggering tax increases coupled with extreme spending cuts if Congress and the executive do not find a resolution. The pressure of this situation and the post-election daze coupled with controversial European debt negotiations has negatively impacted the domestic financial outlook.

Nevertheless, several companies have claimed gains since Friday, including the top two achievers Lowe’s and Tyson Foods with a 6.2% rise and 7.8% respectively. Intel, however, saw a loss of .04% due to the retirement announcement of current CEO Paul Otellini who will step down in May. Hopefully in the coming weeks before the New Year, Congress can sit down and find a bipartisan solution to the impending crisis not only for the sake of Wall Street stocks, but for all Americans.

Posted by: Sophia Higgins

Sources: Reuters, Wall Street Journal, New York Times

Photo credit: Rep. Charlie Bass, R-NH @ photostream courtesy of Flickr user Talk Radio News Service

U.S. Debt Now Over 100% of GDP – Corporate Leaders Weigh In

With the U.S. government continuing its deficit spending this year, estimated at $1.1 trillion by the Congressional Budget Office, the U.S. debt inches closer to the $16.4 trillion debt ceiling agreed on by Congress in July 2011. According to recent data released by the Treasury Department, the government surprisingly ran a surplus of $75 billion in September. Despite September’s anomaly, the federal debt ceiling is projected to be reached by January 2013.

Last Monday corporate leaders of some of the biggest companies in the U.S., members of a campaign called “Fix the Debt”, urged Congress to come up with plans to alleviate the nation’s growing debt problem. The solution: Increase taxes for the wealthy and cut federal benefit programs such as Medicare and Social Security. The proposed measures go directly against what either party desires. Democrats look to maintain spending on social programs while Republicans want to keep the tax rates for wealthy Americans at current levels.

Austerity seems to be the only way to dig the American economy out of this hole. Robert Greifeld, chief executive of stock exchange operator Nasdaq OMX Group Inc, told a Bloomberg Television roundtable that everyone is going to have to take part in the recovery, noting that, “there has to be shared pain.” Scott Davis, CEO of United Parcel Service Inc., agreed with the sentiment expressed by Mr. Greifeld.

At some point, the growing debt problem facing America has to be dealt with. Historically, the debt as a percentage of GDP rose to an all-time high at the end of World War II when it stood at 126%. After slowly decreasing to a low of 33% in 1981, the debt has been steadily increasing for the last three decades. The consequences of America’s debt problem have repercussions for the entire global economy, slowing down world commerce. At home, racking up more debt puts more pressure on future generations of Americans to solve the problem.

There is a growing concern about the debt among CEOs. Steven Rattner, head of Willett Advisors LLC said that “for the first time, there is tremendous support in the business community even if it isn’t exactly what everyone in the business community would want to see”. With more CEOs emphasizing the need for a solution, the prospects of turning the tide become brighter. How the debt problem will be dealt with remains uncertain – many factors, such as the outcome of the election and the raising of the debt ceiling play a big role. What is certain as of right now is that the US debt problem is bigger than it has been for more than sixty years.

Posted by: Samuel Benka

Sources: The New York Times, The Wall Street Journal, Reuters

Photo Credit:Fix the Debt News Conference Courtesy of Flickr user Talk Radio News Service