Technology and Economic Growth

Technology and Economic Growth:
Producing Real Results for the American People

The White House
November 8, 1995

Letter from the President
White Paper

November 8, 1995 The Honorable Laura D'Andrea Tyson
The Honorable John Gibbons
The White House
Washington, D.C. 20500

Dear Laura and Jack:

The White Paper we are releasing today makes clear how investments in technology drive econoic growth, generate new knowledge, create new jobs, build new industries, ensure sustained economic and national security, and improve our quality of life. Indeed, over the past 50 years, innovation has been responsible for as much as half of the nation's economic growth.

As you well know, spurring public and private investment in technology has been a key element of my economic strategy. Through deficit reduction, extension of the R&E tax credit, liberalization of export controls, investments in educational technologies, increased support for basic research, continued commitment to mission research and development (R&D), and expansion of industry-led technology partnerships, this Administration has enhanced our nation's economic and security interests.

Our country is now on the move. Our economic strategy is working, and our economy is the strongest in the world. We are seeing continued strong economic growth with very low inflation. The budget deficit has been cut nearly in half since I became President and dropped three years in a row for the first time since the Truman Administration. The American people should be proud of their accomplishment.

Now is the time to finish the job and balance the budget. But we need to do so in a way that reflects our core national values and lays a foundation for strong private sector growth. That is why my balanced-budget plan maintains vital investments in science and technology.

In contrast, under the guise of balancing the budget, Republicans have vowed to cut federal spending on non-defense research and development, including both basic and applied research, by a third over the next seven years (as calculated by the American Association for the Advancement of Science) and to gut or eliminate critical technology programs that are enhancing America's ability to compete and win in the global marketplace.

These actions run counter to the purpose of balancing the budget: ensuring the foundation of economic growth and prosperity. A pro-growth, balanced budget should never sacrifice U.S. leadership in science and technology. It is a foolish choice that does not have to be made but that, if made, would have adverse consequences for years to come.

For more than 200 years, partnerships among the public and private sectors have kept this nation at the forefront of technological and industrial success. The results -- lasers, personal computers, the Internet, microwave ovens, software, modems, jet aircraft, and satellites, just to name a few -- play an important part in our daily lives and our economy.

In the global economy, innovation means jobs, economic growth, and increased living standards. It means opportunity -- and the opportunity for families to prosper. That is why I will fight to promote innovation and why my pln both balances the budget and secures our future. This is the common ground on which American economic progress and quality of life depends.


Unofficial Signature

Technology Creates Jobs

Congressional Republicans are proposeing unprecedented cuts in critical research that the nation needs for future economic growth and job creation, better health, environment, and national security. These cuts would mean lost jobs, lower wages, and a poorer quality of life for all Americans.

Since World War II, America has demonstrated an unwavering, bipartisan commitment to U.S. leadership in technology. This commitment has paid rich dividends to the American people, from the development of computing technologies, like the Internet and personal computers, that are changing the way we work, learn, and play; to satellites that are helping us communicate and stay informed; to the delivery of DNA and innovative technologies, like MRI, that are helping us live longer, healthier lives.

The Republicans budget resolution would, as estimated by the American Association for the Advancement of Science, cut by 30 percent in real dollars the federal investment in non-defense R&D.

Investments in technology create high-paying American jobs. To gut or eliminate these investments is tantamount to unilateral disarmament in the battle for global economic competitivesness. The longstanding R&D partnership between the government, industry, and academia must not be dismantled. America's budget must be balanced in a way that protects and enhances our future. That is why the President and Congressional Democrats will fight to preserve investments in technology and America's technological future.

Technology and Economic Growth:
Producing Real Results for the American People

"Investing in technology is investing in America's future: a growing economy with more high-skill, high-wage jobs for American workers, a cleaner environment where energy efficiency increases profits and reduces pollution; a stronger, more competitive private sector able to maintain U.S. leadership in critical world markets; an education system where every student is challenged, and an inspired scientific and technological research community focused on ensuring not just our national security, but our very quality of life."

President Bill Clinton and Vice President Al Gore
Technology for America's Economic Growth, February 22, 1993

Driving Economic Growth and
Improving Quality of Life

Science and technology are powerful drivers of economic growth and improvements in the quality of life in America. Advances in technology have created millions of good new jobs, better health and longer lives, new opportunities for individuals, and enrichment of our lives in ways we would not have been able to imagine half a century ago. Superior technology is the cornerstone of U.S. national security, just as U.S. economic security depends as never before on our ability to master new technology in areas like information, biotechnology, and advanced materials.

Because these investments have paid such rich dividends to the nation, sustaining U.S. leadership in science and technology is a cornerstone of President Clinton's economic and national security strategy. Put simply, investments in science and technology produce real results for the American people. As much as half the nation's economic growth since World War II can be traced directly to advances in science and technology.

Today, however, America's technological leadership -- and its long history of bipartisan support for science and technology -- is under assault. Congressional Republicans propose to cut federal civilian research and development by one-third over the next seven years -- research cuts unmatched in the history of America. These cuts are not necessary to balance the budget, and will in fact undermine the economic prosperity that a balanced budget is designed to ensure.

The Clinton Administration has vigorously supported a diverse portfolio of investments in science and technology in pursuit of many national objectives -- defense, environmental protection, health, and education among them. This issues paper focuses on one of several areas that would be disproportionately affected by planned Congressional cuts: long-term R&D investments in the development and application of new technologies that are enhancing America's ability to compete and win in the global marketplace.

Investment in Technology Pays Off

Investments in research and development are among the highest-payback investments a Nation can make. A recent report by the Council of Economic Advisers notes, for example, that over the past 50 years technological innovation has been responsible half or more of the nation's growth in productivity.[1]

We see the fruits of this innovation every day. Many of the products and services we have come to depend on for our way of life in America -- lasers, computers, magnetic resonance imaging (MRI), teflon and other advanced materials and composites, communications satellites, jet aircraft, microwave ovens, solar-electric cells, modems, semiconductors, storm windows, human insulin, and others -- are the product of federal science and technology investments made over the past 50 years.

These innovations also mean jobs and economic prosperity for America. It is no accident that our country's most productive and competitive industries are those that benefited from sustained federal investments in R&D:

Computers and Communications: Defense-related R&D to provide for communications in the event of war led to what has become today's Internet, the backbone of a global electronic communication system. Federal investments in computing research have driven the evolution of a $590 billion domestic telecommunications and information technology industry, which supports more than 3.6 million American jobs. In just the past 10 years, American employment in the computer and software industries has almost tripled.

Semiconductors: The U.S. semiconductor industry developed as a direct result of federal R&D investments and procurement activities. During the 1980s, however, U.S. companies lost their lead in semiconductor manufacturing, resulting by some estimates in the loss of $2 billion in earnings and 27,000 American jobs between 1980 and 1986. Today, American semiconductor manufacturers are back on top supplying 46 percent of the world's market for microchips while the Japanese supply 41 percent. Industry experts credit much of this resurgence to Sematech, a joint industry-government research consortium.

Biotechnology: Federally funded discoveries in biology, food science, agriculture, genetics, and drugs upon which the private sector has been able to build and expand a world-class industry today support $7 billion in annual sales and more than 100,000 American jobs.

Aerospace: The federal government traditionally has funded the lion's share of aerospace R&D, and this support has made U.S. aerospace companies the world's most advanced. Aerospace leads all other industry sectors in net exports. In 1994, the U. S. aerospace industry shipped nearly $40 billion worth of commercial aircraft and employed more than 800,000 people.

Environmental Technologies: The federal government provides nearly $2 billion a year in support of R&D related to environmental technologies. Almost unheard of 10 years ago, more than 30,000 environmental technology and services businesses today employ 1 million Americans in high-growth, high-wage jobs. The environmental technology industry has annual sales approaching $134 billion in the United States alone, a number that is expected to grow significantly by the year 2000.

Energy Efficiency: Today, energy efficiency is a $2-billion industry led by entrepreneurial private-sector firms and utilities, but many of the products sold and installed by this industry are the product of partnerships between the federal government and private industry. These partnership efforts produced energy-saving light bulbs and other lighting products, which alone generate $200 million in annual sales and have saved American consumers $400 million in energy costs. New designs and materials for windows have saved consumers another $760 million in energy costs. These savings also decrease U.S. dependence on foreign oil.

These are not isolated examples: U.S. industrial strength in medical devices, agriculture, manufacturing, transportation, and other industries can be traced directly to sustained federal support for R&D. From satellites, to software, to superconductivity, the government has supported -- and must continue to support -- exploratory research, experimentation and innovation that would be impossible for individual companies or even whole industries to afford.

These partnerships in pursuit of innovation enable the private sector to generate newknowledge and adopt novel technologies that ultimately lead to commercial success, increased jobs, and healthier and more productive lives for all Americans.

Technology: Changing the Way We Live
The results of public and private investments in science and technology are deeply embedded in our daily lives and our economy. Here are just a few examples:

Lasers: Discovered not quite 40 years ago and refined through government, industry, and university research, today the laser is one of the most powerful, versatile, and pervasive technologies in our lives. Each day lasers are used by millions of Americans for high quality reproduction of music recorded on compact discs and for fast, efficient checkout in grocery and retail stores. Laser systems carry simultaneously up to 1.5 million transatlantic phone conversations. Lasers are also used for guidance and navigation, to print documents, for precision measurements, for manufacturing, and throughout industry to perform intricate tasks quickly and accurately. Lasers have become a powerful tool for eye surgery; especially for the one percent of americans who are diabetic and for whom laser surgery has decreased blindness by 60 percent.

Computers: Today, more than 70 million personal computers are installed in the United States and between one-fifth and one-third of U.S. households have one. Industries as diverse as entertainment, education, communications, medicine, government, and finance rely on computers to provide the goods and services that enhance our lives. These industries use computers for applications from Automated Teller Machines, to airline reservations, to the design and operation of airplanes and automobiles, to medical diagnostic equipment, just to name a few.

Magnetic Resonance Imaging (MRI): The development of this important medical tool depended on basic research and technological applications. Nuclear physicists and chemists worked out the fundamental technique of using radio beams and magnetic fields to analyze the chemical structure of biological and other materials. The technique initially was too slow for medical use, but modern electronics and superconducting magnets developed with federal support helped craft the scanners in use today. MRI is a remarkable diagnostic tool that allows us to see into the brain, diagnose diseases, and test drugs for control of the immune system without resorting to surgery or other invasive medical procedures.

A Federal Role In Advancing Technology

Private businesses are the principal actors in converting technology to profits andjobs, and support much of the research needed to develop new products, processes and technologies. But government has an indispensable role to play in advancing new technology development -- by ensuring a strong base of fundamental science, by providing a business environment that encourages innovation and investment, and in investing in research that is critical to the economy and social needs of the nation, but that cannot attract adequate private support.

Investments in R&D have high rates of return, but as much as half the return on an individual firm's R&D investment goes to other companies and competitors -- not to the investing company. This "spillover" effect means that private industry cannot and will not commit the level of resources to R&D that is best for society. As a consequence, government support for R&D has been a critical element of federal policy for more than 200 years, and it has kept our nation at the forefront of technological and industrial success.

Joint public and private cooperation in research and development dates back to the birth of the Republic. It led to the invention of the American system of manufacturing -- interchangeable parts and the machine tools to make them -- by the government's Connecticut River and Harper's Ferry armories and civilian inventors like Eli Whitney. Half a century later, in 1863, it was a public-private partnership that guided the federal establishment of land-grant universities to improve the practice of agriculture and engineering, and supported further investments after the turn of the century in agricultural extension services and cooperative research. These government investments have made it possible for American farmers to increase productivity a dozen times over, feeding the United States -- and much of the rest of the world -- well and profitably.

As we move into a new information-age economy, the federal role in advancing technology will be increasingly critical. The accelerating pace of technological advance, shorter product cycles, and rapid worldwide diffusion of technologies mean that many companies are finding it harder to invest in long-term R&D than in the past. Moreover, many in industry are undertaking a critical review of their R&D programs and are scaling back R&D growth (chart 1, below). Since 1992, even premier companies like AT&T, General Electric, IBM, Kodak, Texaco, and Xerox -- world renowned for their investment in long-term R&D -- have dramatically reduced their R&D spending.


Supporters of a reduced federal role in supporting R&D maintain that if the government cuts back on R&D support, the private sector will fill the resulting gap. Recent independent empirical analysis, however, shows that over the past 30 years a decrease in federal funding for R&D has been followed on average by a decrease in industry support for R&D. The author concludes:

". . . there is little in the recent historical record to suggest that industry will pick up the slack if government cuts back on R&D spending. Only a radical change in the beliefs and behaviors of industry would yield that result. In view of the contemporary sharp reductions in R&D funding by many leading American corporations, such an outcome seems unlikely."[2]

That is why American businesses and the government must work together to leverage their resources and ensure adequate investment in the technologies that will fuel and sustain economic growth and job creation. The Administration is committed to these programs.

Key Federal partnership programs in technology include:

Leadership Under Challenge

Since World War II, each President and every Congress has maintained an unwavering, bipartisan commitment to U.S. leadership in science and technology. This commitment has helped to stock the nation's storehouse of innovative ideas, to create economic opportunities for the American people, and to ensure that the United States remains the largest, most vibrant and advanced economy in the world.

Today, the United States is undisputed as the leader in the emerging global marketplace, but our lead is neither comfortable nor certain.

A recent report by the Office of Science and Technology Policy[3] points out that, while we lead the world in 25 of 27 technologies critical to economic and national security, our lead in virtually every one is stagnant or slipping. By contrast, the growth curve in these same technologies is rising sharply in many other countries.

Meanwhile, foreign competitors are increasing federal support for R&D. As a percentage of Gross Domestic Product, Japan and Germany consistently out invest the United States in non-defense research and development (chart 4 below). The Japanese government recently announced plans to double its R&D spending by the year 2000. Recent analysis by the Council of Economic Advisers suggests that the effect of the Congress' plan to cut research funding and the Japanese plan would be that by 1997, Japan will overtake the United States in government support of non-defense R&D -- in total dollars, not just as a share of Gross Domestic Product (chart 2, below).


Japan is not alone. Traditional economic powers such as Germany, and emerging economies such as China, India, Taiwan, Singapore, and South Korea are aggressively promoting investment in R&D and deployment of technology (chart 3, below). Earlier this year, China announced that it will increase publicly supported R&D by nearly 1 percent of GDP by the year 2000.

The Congressional response to these aggressive moves by other countries has been to propose cutting U.S. investments in non-defense R&D by a third over the next seven years and gutting or eliminating technology programs that enhance America's ability to compete and win in the global marketplace. Rather than support a historically successful technology policy with clear benefits to the American people, the 104th Congress has targeted R&D for immediate elimination or crippling cuts, as seen in the table below:

Table 1:
R&D Appropriations Action in Illustrative Technology Programs

FY 1995
FY 1996
Department of Commerce
Advanced Technology Program 341491025tbd
Manufacturing Ext. Partnership741478176tbd
National Info. Infrastructure Grants421004019 tbd
Department of Energy
Cooperative R&D Agreements27429125254tbd
Partnership for New Gen. Vehicle168251123178tbd
Environmental Protection Agency
Enviro. Technology Initiative721270 22tbd
Department of Education
Technology Learning Challenge107025 15tbd
Department of Defense
Technology Reinvestment Project2085000238195

These proposed Congressional cuts could not come at a worse time for America. They jeopardize our economic and national security, and threaten to undo the work of generations that has kept America strong and prosperous.


Source: National Science Foundation/SRS


Source: National Science Foundation/SRS

Building Partnerships for the Future

"I've given the Congress a balanced budget that cuts all kinds of spending; it eliminates hundreds of programs. But it increases our investment in education, in technology, in research."
--President Bill Clinton
October 23, 1995

The investments this country has made in education, science, and technology have benefitted all Americans, regardless of political stripe, and continue to bear a rich harvest of goods and services that keep our economy growing. Continuing these investments is part of the President's overall strategy for bringing this country into the 21st century, a strategy that includes a strong education for America's children; a cleaner environment where energy efficiency increases profits and reduces pollution; a robust, more competitive private sector freed from unnecessary regulatory burdens; and an inspired scientific and technological research community.

This strategy is working -- in 1995, the economy is growing, inflation is low, employment is high. New business starts are at an all-time high. More than 7 million new jobs have been added to the U.S. economy since this Administration came into office -- many of them in the high-skill, high-technology industries.

Continued gains will require balancing the budget. And we've made great strides: for the first time since the Truman Presidency, we've cut the federal deficit for three years in a row. The annual deficit is about half what it was in 1992.

But cutting investments in R&D is not the way to balance the budget; such cuts not only run counter to our national history, they undermine the true purpose of balancing the budget in the first place -- namely, ensuring the foundation of economic growth and prosperity.

The Clinton Administration has initiated or expanded industry-led partnerships in order to spur private-sector investment in innovations with broad economic impact that are necessary to our nation's future. Together these partnerships are a small fraction of our overall federal R&D spending. But they provide a crucial link between the $70 billion federally funded technology base and industry's own investments in technology.

With careful choice and firm management, these modest investments will yield new medicines, new forms of transportation, better educations, a strong national defense, and other benefits. It is partnerships like these that enable the private sector to pursue novel ideas or adopt novel technologies that ultimately lead to commercial success, more jobs and a better quality of life for all Americans.

[1] Supporting Research and Development to Promote Economic Growth: The Federal Government's Role," The Council of Economic Advisers, October 1995.

[2] "Private Funds Are Unlikely to Replace Cuts in Public Funds for R&D in the U.S.," Christopher Hill, Professor of Public Policy and Technology at George Mason University, June 19, 1995.

[3] National Critical Technologies Report, Office of Science and Technology Policy, March, 1995.

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