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Can Technology Save the Economy?

The U.S. stimulus bill includes tens of billions to support energy and information technologies. So why are economists and innovation experts so skeptical?

This is the first of two articles by David Rotman on technology and the federal stimulus package. The second, “Chasing the Sun,” appeared in the July/August 2009 issue and examined the impact of spending billions of dollars on renewable energy will have on the future of solar power.

By any measure, $100 billion is a staggering amount of money. That’s how much the federal stimulus bill devotes to the discovery, development, and implementation of various technologies. Some $20 billion will fund the increased use of electronic medical records; another $7.2 billion will support the extension of broadband Internet access to areas currently without such services. Most impressive, roughly $60 billion will be spent on energy, funding everything from energy-efficiency programs to loan guarantees for the construction of large facilities that use new biofuel and solar technologies.

The spending is unprecedented, not only in scale, but also in the breadth of technologies it covers. For initiatives such as broadband deployment and incentives to adopt electronic medical records, the billions of dollars represent entirely new investments. And for energy technologies, the spending levels dwarf existing public and private investments. One big winner: the U.S. Department of Energy, which received $39 billion (in addition to its $25 billion annual budget). The DOE’s Office of Energy Efficiency and Renewable Energy, whose budget in 2008 was $1.7 billion, alone was given $16.8 billion. By comparison, venture capitalists, who often claim clean tech as their favorite growth area, invested just $4.1 billion in that sector in 2008.

The influx of money is particularly dramatic because it comes after years of lackluster federal spending on technology and research, especially in the area of energy. The stimulus bill unabashedly singles out energy projects for huge doses of funding: $11 billion to modernize the electricity transmission system and create a smart grid, and millions to develop such new energy sources as geothermal power ($400 million) and biomass fuels ($800 million). Established renewable-energy sectors, such as wind and solar, also receive tens of billions in tax credits and grants.

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Most audacious, the spending bill does all this with the intention of both stimulating the economy in the immediate future and creating growth in the long term. President Obama and others in his administration have repeatedly connected the stimulus spending with the need to begin creating “green jobs” and building a “clean-energy economy.”

The decision to make large energy investments in hopes of realizing both immediate economic benefits and longer-term environmental dividends represents a “massive shift” in government policy, says Robert Pollin, a professor of economics at the University of Massachusetts, Amherst. Pollin published a report last fall arguing that substantial spending on energy technologies would create two million jobs over the next two years. The idea that spending on energy technologies to address global warming could have an immediate economic benefit, he says, “would have been considered preposterous less than two years ago.” Yet his study now reads like a blueprint for much of the stimulus bill’s energy funding.

But just how realistic are the expectations behind the stimulus package? Can huge jumps in technology funding boost the economy? And will this sudden windfall of funding really be a positive force in encouraging new technologies?

Almost all economists agree that technological progress drives long-term economic growth. Many proponents of the technology provisions in the stimulus bill go further, however, arguing that the funding will alsocreate jobs immediately. Daniel ­Kammen, founding director of the Renewable and Appropriate Energy Laboratory at the University of California, Berkeley, estimates that investments in renewable energy create three to five times as many jobs as the equivalent investments in fossil-fuel energies. “Energy efficiency and solar, in particular, have been shown to be two of the highest job-creating industries that we know,” he says. And he believes there is clear evidence that spending on energy research will improve the performance and reduce the cost of renewable technologies already on the market.

But a number of economists and policy experts who think about these issues regard the stimulus package’s technology funding with ambivalence or even dismay. They worry that the bill conflates the challenges of immediate economic stimulus and long-term technological progress, particularly in the area of energy. Thus, they say, it may not be the most effective way to achieve either goal.

In macroeconomic theory, a stimulus package has a clear, ­simple function: during economic slowdowns, governments increase their own spending to compensate for the fact that consumers and businesses are spending less. “A stimulus is a sudden and dramatic intervention into the economy,” says Robert Stavins, director of the Harvard Environmental Economics Program. And the key to its effectiveness is that it is labor intensive and quick. While some projects to make buildings more energy efficient might qualify as a short-term boon for the economy, Stavins says, other energy-related projects, like rebuilding the electricity grid, will take years and have little immediate effect. “Greening the infrastructure is highly desirable, but it is not going to happen quickly,” he says.

The concern over the stimulus bill’s technology spending is not just that it offends conventional macroeconomic theory about the best way to boost the economy; it’s that it might harm the very technologies it means to support. Because the bill was written quickly and shaped by political expediency, economists and experts on innovation policy are leery of many of its funding choices. Could extending billions of dollars’ worth of fiber-optic lines to rural communities, for example, become a boondoggle? Or what if utilities run high-power transmission lines to remote solar or wind farms, only to find that the electricity they produce is too expensive to compete with other sources ?

As a historical analogy, experts point to corn-derived ethanol. Once the darling of alternative-energy advocates, the heavily subsidized biofuel is now routinely condemned by both environmentalists and economists. Yet because ethanol’s use in gasoline is now mandated by federal law, and a large industry is now invested in its production, its production is likely to continue even though it offers few environmental benefits over gasoline.

The problem with the stimulus package is that it is “very much a heterogeneous bag of things,” says Daron Acemoglu, an economist at MIT and an expert on the role of technology in economic growth. “It’s very much like pork-barrel politics,” he says. As a result, it’s hard to properly evaluate the different spending programs. And, he suggests, “when you make investments in bad projects under the name of stimulus and in the name of technological investments, you’re doing damage in a number of ways. First of all, you’re not helping; second, you’re confusing matters; and third, you’re poisoning the well for the future.”

Solar Bottles
Less than a week after the passage of the stimulus bill, Robert Atkinson is taking stock of the legislation. Maybe it’s the early hour or the freezing weather that still grips Washington, DC, in late February, but the president of the Information Technology and Innovation Foundation (ITIF), a nonprofit think tank that argues for federal policies to promote technology, doesn’t seem in a celebratory mood. Despite what would seem to be a huge victory for his cause, he still seems irritated by the bickering over the details of the stimulus package.

Much of the bill’s spending plan is strikingly similar to proposals that his own group has presented. In a report published in January, the ITIF estimated that roughly a million jobs would be created by spending $30 billion on broadband, smart-grid technology, and health-care information technology in 2009. While the stimulus bill broke down the spending slightly differently and extended it over several years, such forecasts of job creation served to justify the inclusion of heavy technology spending in the legislation.

Likewise, a study prepared last fall by UMass’s Pollin and his colleagues shows how spending $100 billion over the next two years on energy-related investments could create two million “green” jobs. The report identified six funding areas, including solar, wind, and advanced biofuels, that it argued would create jobs and facilitate transition to a “low-carbon economy.” Although Pollin says he researched and wrote the paper as an academic, the work was published in September by the Center for American Progress, a think tank whose CEO, John Podesta, led Obama’s transition team. And like the ITIF study, Pollin’s report foreshadowed many of the spending provisions in the stimulus legislation. Pollin notes that while the bill’s spending for energy conservation and renewable energy is lower than the total recommended in his report, many of the legislation’s details “are kind of what I proposed.”

The jobs jolt: According to the administration’s economic analysis, the stimulus bill will result in more than three million jobs over the next two years. Last year, the Information Technology and Innovation Foundation predicted that a $30 billion investment in digital infrastructure would mean nearly a million jobs. Its analysis assumed that the money would be paid out over a year (for the smart grid, the estimated spending was $50 billion over five years), but a report from the Congressional Budget Office estimates that much of the technology spending will not reach the economy until 2012 or later.

The theoretical justification for the government’s stimulus package derives from John Maynard Keynes, the 20th-­century British economist. Writing during the height of the Great Depression, Keynes famously suggested that if better job-creation schemes were not available, the British Treasury should fill ­bottles with money and bury them in old coal mines for people to dig up. That idea is central to the ITIF’s policy suggestions, Atkinson says: “Our main message is that innovation could be ­Keynesian in nature. In other words, solar-energy bottles.”

Atkinson has little patience with critics who object that investing in long-term technology growth requires a more deliberate strategy; they are “being naïve to the real world,” he maintains. “This is our one chance,” he says of the massive infusion of government funding for new technologies. “It’s almost like free money.” Those who criticized the bill’s provisions for technology spending didn’t understand that innovation could have a big short-term stimulus effect and, at the same time, “have a much better long-term effect than virtually anything else in the package,” he says. “They couldn’t walk and chew gum at the same time.”

Indeed, that deliberate mixing of two goals–immediate job creation and economic growth through the development of IT and energy technologies–is just what rankles many economists. Paul Romer, an economist at the Stanford Institute for Economic Policy Research, is one. “If I sat down and tried to design a stimulus bill most likely to be effective to getting us back to full employment, there is a good chance that this kind of spending on technology would not have been a part of that bill,” says Romer, who has spent his career studying the relationship between technological progress and economic growth. The prospect of spending so much money on technology projects and science programs provoked a “feeding frenzy,” he says. “Everyone was trying to grab as much as they can.”

“If we believe subsidies will speed up technological change, we should do that on its own terms, separate from a stimulus,” says Romer. And he worries that the heavy technology spending in the bill could eventually deter innovation strategies that would prove more effective. “The cost here is not only the dollars,” he says. “[It] may also be the dog that doesn’t bark–the truly important program that we could have put in place if we went about encouraging innovation in a thoughtful way. Having prominent failures can undermine the whole case for using resources wisely to encourage innovation.”

Broadband Boondoggle?
One area of technology spending in the stimulus package that appears to flunk economic analysis is the program to extend broadband Internet to areas not currently served. Broadband has already been built out to the areas where it makes economic sense, says Shane Greenstein, a professor at Northwestern University’s Kellogg School of Management. “If there was money to be made, someone did it,” he says. “It’s 2009, not 2003.”

According to a recent survey by the Internet and American Life Project of the Pew Research Center, a nonpartisan organization based in Washington, DC, less than half the adults in the United States lack broadband service. Most of those people say they don’t want it, either because it is too expensive or because they’re just not interested. Only 4.5 percent of U.S. households (roughly 5.2 million) say they want broadband access but don’t have it. The problem, says Greenstein, is that these households tend to be in isolated or rural areas where supplying broadband is extremely expensive. Whereas it costs approximately $150 to bring the service to an urban household and $250 to bring it to a suburban one, he says, no one really knows how much it will take to bring it to areas not currently served, since the costs for different residences will vary widely. The most optimistic estimate is that it will cost at least a thousand dollars per household to extend broadband coverage; for some isolated houses, the cost will be far greater. Even in the best-case scenario, Greenstein says, the stimulus package won’t extend service to many who want it. “It easily falls short,” he says. “And if it is even more expensive per household [than a thousand dollars], the money goes really fast and doesn’t accomplish much.”

What’s more, says Greenstein, the benefit to local economies will be limited. His analysis shows that the largest financial gain from expanding broadband access goes to broadband suppliers themselves. Increasing broadband use can also benefit equipment makers and companies such as Google and Amazon, he says. The advantage that households would gain in switching from dial-up access to broadband is hard to quantify, but it “can’t be big,” he says. “I’m skeptical there are many local benefits from this.” What is clear, according to Greenstein, is that any benefits add up to far less than the hundreds of billions of dollars that have been cited by Washington advocates of the stimulus spending.

Of course, advocates of federal spending to extend broadband service argue that it provides more general benefits to society. Remote communities would gain increased educational opportunities, easier access to government services, and eventually, perhaps, improved medical treatment through online interaction with physicians. But, says Greenstein, many of these benefits are several years away, and it is debatable whether expanding conventional broadband services–rather than, say, using wireless technologies–is the most effective way to deliver them. What’s more, he adds, the $7 billion expenditure in the stimulus bill seems arbitrary. “How they got that number is a puzzle to me,” he says. “Why not $15 billion? Or $3 billion?”

What Green Economy?
Innovation in science and technology is estimated to account for as much as 90 percent of new economic growth. The reason is that better technology allows more things to be produced more cheaply and can create entirely new markets; in the terminology of economists, it increases productivity. For economists, the most dramatic recent example is the information technology boom that began in the mid-1990s.

Beginning in 1995, productivity began to grow at a much faster rate than it had in years. (While strong productivity growth in the decades after World War II fueled the prosperity of that era, it fell off abruptly in the mid-1970s, contributing to an economic slowdown.) The jump first seen in 1995 was initially viewed as an anomaly, but productivity continued to rise over the next several years. As economists scrambled to figure out why, entrepreneurs raced to take advantage of the “new economy.”

Though it took economists several years to figure out exactly what was driving the bump in productivity, Dale Jorgenson, a professor of economics at Harvard and former president of the American Economic Association, says it is now clear that the decreasing cost of computer hardware and software dramatically increased the role of information technology in the economy during the 1990s. Even though IT spending represented only about 3 percent of GDP, it was having “a tremendous impact,” says Jorgenson: “IT probably accounts for almost all the growth in productivity in the boom of the 1990s, and it is still perking right along.”

Could the green economy be the new new economy, with energy technologies replicating the success of information technologies in boosting productivity? Jorgenson is skeptical. In fact, he says, today’s scenario is the “extreme opposite” of the one in which market demand drove the use and implementation of information technology in the 1990s. “A lot of these [energy] technologies that are going to be subsidized are not commercially viable without a subsidy,” he says. “These things have been around for a quite a while, and have never gotten to the stage of being financially viable without sizeable subsidies. What does a subsidy mean? It means it’s not good for the economy. It doesn’t meet the market test, so there has to be some other reason to do it.”

Of course, the other reason for investing in new energy technologies is to address climate change. But Jorgenson says the best way to encourage innovation for that purpose is through carbon pricing–either a direct carbon tax, which he advocates, or the cap-and-trade program that is now being debated in Congress. Such a market-based program would produce “a shift to noncarbon technologies,” says Jorgenson. Meanwhile, if there is going to be a carbon pricing program in the near future, he says, it “doesn’t really make a lot of sense to be funding energy stuff” in the stimulus bill. It will be less risky, he says, to let the carbon pricing scheme determine which of the renewable-energy technologies are viable in the market.

MIT’s Acemoglu agrees. While he is optimistic that energy technologies will be “a great platform for economic growth” and can eventually play the same type of role that hardware and software did in boosting the economy, he too is skeptical of the subsidies in the stimulus bill. “I’m quite confident that alternative energies, new hybrid vehicles, new power sources, a more sophisticated power grid, will be one of the handful of sectors that will spearhead the growth of the economy over the next decade,” says Acemoglu. But, he adds, “a lot of that [growth] will be market generated.”

Instead of providing subsidies to develop new technologies, says Acemoglu, the government should establish a carbon tax and support research. The federal government, he points out, played a critical role in the development of IT by supporting the early, basic research that led to the Web and by funding research programs in computer science and electrical engineering. But it would have been “a kiss of death,” he says, if the government had tried to dictate how to wire computers or define the type of software that should be used.

Likewise, the government should encourage the development of new energy technologies by supporting research, says ­Acemoglu, but “more soberly” than it does in the stimulus bill. He suggests “limited but well-designed funding for the National Science Foundation and other agencies that will create the right type of synergies between private, public, and university research.” That, he says, would create an environment conducive to energy R&D.

Becalmed
While academic economists might be worried about long-term growth strategies, the entrepreneurs and executives running renewable-energy businesses, including solar, wind, and biofuel companies, say they are struggling just to stay alive. The credit and banking crisis that took hold last fall ruined any chance of obtaining financing for most large-scale, capital-intensive projects. As a result, construction on many costly solar-power and wind-energy facilities came to a halt, and a number of companies announced layoffs. Those developing truly novel technologies, such as cellulosic biofuels, were left stranded without the prospect of obtaining the hundreds of millions in private financing needed to demonstrate their technologies on a larger scale.

“It is really ugly out there for a lot of these technologies,” says David Victor, director of the Program on Energy and Sustainable Development at Stanford University. One of the biggest potential benefits of the stimulus bill is that it might well “protect the [renewable-energy] sector in a period when it would otherwise be absolutely pummeled by market forces,” he says. “If the sector were to blow up, it would take a while for people to put Humpty Dumpty back together. And during that period, a lot of these companies would just disappear completely.”

The cellulosic-biofuels sector, in particular, is at a crossroads, says Bruce Jamerson, chairman and CEO of Mascoma, a Boston-based startup specializing in advanced biofuels. Though often touted as a source of alternative transportation fuel that doesn’t have the environmental drawbacks associated with corn-based ethanol, cellulosic biofuels are not yet produced commercially in the United States, because they are too expensive. Mascoma wants to construct a commercial-scale facility in northern Michigan that could be in operation by 2012, says Jamerson. But building the plant will cost from $300 million to $325 million. Without the grants and loan guarantees in the stimulus package, he says, “it would be very difficult to get a deal done with large equity investors and lenders on a commercial plant.”

A slew of provisions in the stimulus legislation will indeed benefit these fledgling clean-energy businesses. Howard Berke, executive chairman and cofounder of Konarka, a manufacturer of organic photovoltaics based in Lowell, MA, says that 17 provisions will “in one form or another” benefit the solar industry; they include a refundable tax credit that will effectively cover 30 percent of the cost of solar projects, a $6 billion loan guarantee program for renewable projects, and investment credits for manufacturing facilities built in the United States. The Solar Energy Industries Association estimates that overall, the provisions will create 110,000 jobs over the next two years.

Energy R&D slowdown: The stimulus bill will boost public-sector spending on energy research and development, which has been on the decline for decades.

Beyond helping companies in the energy sector survive the recession, the stimulus bill could–supporters hope–jump-start fledging technology sectors such as the smart grid, the effort to modernize the electricity infrastructure so that energy can be distributed more cost-effectively and used more efficiently. Federal spending on an improved power grid could, in turn, increase industry’s spending on electric vehicles and renewable power, advocates argue. And it will begin to spur further investments in improving the electric grid. The $4.5 billion that the legislation devotes to smart-grid technology is barely enough for one utility to build up its transmission system, says Martin Fleming, IBM’s vice president of corporate strategy. However, he says, by “providing incentives for the progress to begin,” the bill could give smart-grid technology the market momentum it needs to survive when the incentives go away.

Indeed, what happens when the stimulus spending ends will largely determine the bill’s real impact on technology. The danger, of course, is that while the federal dollars could help renewable-energy companies survive the recession, they could also prop up existing technologies that would not be competitive in an open market. Not only could the federal spending support uneconomical energy sources (as has been the case with ethanol), but the resulting backlash could discourage policy makers, investors, and the public from embracing newer, more efficient technologies. As the stimulus runs its course in two to three years, pressure to reduce the federal budget and cut government spending could make such a backlash even worse.

One renewable sector that could be particularly vulnerable in such a scenario is the solar industry. Photovoltaics “still have a way to go on the learning curve,” says Henry Lee, director of the Environment and Natural Resources Program at Harvard’s Belfer Center for Science and International Affairs. Not only are they still too expensive, but researchers need to develop longer-lasting, more efficient solar cells that can handle higher voltages. Though Lee is encouraged by the stimulus bill’s emphasis on solar and wind energy, he fears that by funding the construction of extensive solar capacity using existing photovoltaic technology, it could distract attention from the effort to improve renewables. “What you want to stimulate is learning to build better wind turbines and solar collectors,” says Lee. Instead, he says, much of the funding is focused on “how many windmills and solar panels you can erect.”

Great Expectations
By the end of this year, Congress is likely to debate–and perhaps pass–ambitious legislation that will, like the stimulus package, help redefine the economics of energy technology for decades to come. While the specifics are still being considered, the legislation is likely to introduce a cap-and-trade program to set pricing for carbon-­based energy sources, establish nationwide standards for renewable electricity, and provide provisions to modernize long-distance electricity transmission systems. In such a context, the stimulus bill is just one part of a larger energy agenda that will, arguably, be the most important change in technology policy for a generation.

Such laws could help address global warming. But few energy experts believe that renewable technologies will be reliable and cheap enough to replace fossil fuels on a large scale anytime soon. Electricity produced by existing solar technologies is likely to remain relatively expensive. Advanced biofuels are also too expensive, and they’re years away from significantly cutting into gasoline consumption. Overhauling the electricity grid will take years, cost at least a hundred billion dollars, and require new storage technologies in order to be fully effective. In testimony before Congress this March, Secretary of Energy Steven Chu stressed the importance of finding “transformational technologies” in all these areas. He noted, among other things, the need for “photovoltaic solar power that is five times cheaper than today’s technology.”

No doubt, then, new funding for research will be critical to the search for low-carbon technologies. Somewhat overshadowed in the stimulus bill is the $1.6 billion increase for basic science at the DOE. Even more encouraging, the legislation included $400 million to start up and fund the Advanced Research Projects Agency-Energy (ARPA-E), an office designed to mimic the success of the original ARPA program that pioneered such breakthroughs in information technology as the precursor to the Internet. Programs like ARPA-E, which emphasizes government and industry research on high-risk programs, are likely to yield significant advances. It’s also encouraging that in his recent 10-year budget plan, President Obama proposed almost $75 billion for a permanent R&D tax credit to stimulate private funding of research.

The money is welcome to many in the research community, especially after years of declining federal and private support (see “Energy R&D Slowdown”). But the new emphasis on energy R&D is also a stark reminder that, almost 30 years after such funding peaked in the late 1970s, there are still no good or easy answers when it comes to replacing fossil fuels. Recent statistics from the DOE’s Energy Information Administration reflect the lack of progress: coal-fired power plants still supply the overwhelming bulk of the nation’s electricity, while solar, wind, and geothermal together provide about 2 percent (and most of that comes from wind power). There is little, if any, sign that the green economy has even begun to sprout.

Congress and the president were, arguably, right to attempt to revitalize energy research and to link technology spending to the long-term objective of transforming the country to a clean-energy economy. Including R&D and other technology programs in the stimulus bill makes evident to the public what every economist knows: long-term economic growth depends on innovation and technological progress. Most important, it has once again established energy research and the search for cleaner power as a national priority.

But including so much technology spending in the stimulus bill also brings dangers. Technology–more specifically, technological progress–can save the economy. A cleaner energy infrastructure will prove invaluable to economic growth in the long term. However, it will take time to realize the benefits. By confusing immediate help for the economy with technology’s role in creating growth, the stimulus bill runs the risk of raising unrealistic expectations that could backfire in the face of inevitably slow progress.

If the transition to a clean-tech economy is ever truly to begin, government policy makers will have to move past politics and get the economics, policy, and technologies right. The way technologies are chosen, implemented, and funded will matter. That means properly designing a carbon pricing program and supporting institutions like the DOE in the expectation that they will make informed decisions and work closely with private investors and venture capitalists to develop the most viable technologies. Perhaps most important, it means that the government will need to support and fund energy research even as the stimulus spending peters out and political support for massive technology funding wanes.

Richard Lester, director of MIT’s Industrial Performance Center and a professor of nuclear science and engineering, seems clearly ambivalent about the merits of the technology funding in the stimulus bill. “Would it be better not to spend the money on R&D? Probably not,” he says, choosing his words carefully. “I just don’t think we should have high expectations.” The difficulty, he says, will be to select the right research projects, given the sudden flood of money. “It would be prudent to expect that a lot of the money will not be well spent,” he says.

Adds Lester: “I don’t think there is an understanding of the scale of the task that lies ahead. This will be a long transformation, and it is going to be very expensive.” The reinvention of the nation’s energy sources, he says, “is inherently a project on the time scale of several decades.”

Read part II, “Chasing the Sun”, which looks at how the stimulus money is being spent on solar power around the country.

David Rotman is the editor of Technology Review.

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