Government Investment in Innovation is Needed to Overcome the “Valley of Death”

by Climate Guest Contributor Posted on July 9, 2011 at 8:49 am Updated: July 9, 2011 at 2:06 pm

According to a recent study, the Human Genome Project cost $3.8 billion, but created over 310,000 jobs and drove economic growth of almost $800 billion. That government boost spurred a wave of private investment, causing a precipitous drop in the cost of genome decoding.

“Government investment in innovation makes sense,” said Francis Collins, director of the National Institutes of Health, at a recent Brookings Institution event on Innovation and America’s Future. “Capital for innovation is very hard to find.”

Collins knows a lot about innovation. He led the Human Genome Project, a government-funded initiative that, according to a recent study, cost the government $3.8 billion, but created over 310,000 jobs and drove economic growth of almost $800 billion. That government boost spurred a wave of private investment, causing a precipitous drop in the cost of genome decoding. (chart above.)

That trend is happening in renewable energy as well:

The same government investment that drove innovation and economic growth in science has been critical for renewables. The government’s current loan guarantee program helps energy companies overcome the “Valley of Death” – the gap in financing that exists between R&D and commercialization.

However, loan guarantees, which have leveraged over $40 billion in private investment, are now on hold due to a lack of funds.

Loan guarantees simply provide a backstop for a company if it defaults on a loan. But the program is under attack from Republicans who claim it somehow violates the free market. A recent piece from the Washington Post describes the debacle over one of the government’s loan guarantees to solar manufacturer Solyndra:

This month, a congressional energy subcommittee chairman accused the administration of picking clean-tech “winners and losers” by pouring government money into a sector best determined by free-market forces.

Republicans and outside critics also have honed in on the political connections of some companies that have received federal help. The most attention has focused on Solyndra, a Silicon Valley solar company that ran into financial trouble after receiving a $535 million federal loan guarantee commitment. Last week, Republicans on the House Energy and Commerce Committee pressed the Office of Management and Budget to account for its role in the selection. Obama visited Solyndra’s factory in May 2010, only weeks after it became public that independent auditors had questioned whether it could remain a “going concern.”

Admittedly, there were a lot of serious concerns about Solyndra’s cost structure and ability to compete. The prudence of investing in the company can rightfully be questioned. But somehow, this one example among the 37 projects backed by the loan guarantee program continues to be highlighted as a “failure.” And as Michael Grunwald points out in Time:

The loan won’t cost the government anything unless Solyndra defaults. And for now the company looks healthier. Shutting down the inefficient older factory and ramping up production in the cutting-edge new factory has driven down costs. Harrison, a former pitcher in the Seattle Mariners organization who spent 24 years at Intel, has also doubled his sales and marketing staff in just the last six months to address the demand problems. Despite all the hubbub about layoffs, Solyndra now employs 166 employees more than it did when Obama visited—and that doesn’t include the 3,000 temporary jobs created during construction.

We should all have such failures.  In any case, when developing an early stage industry, some failures are inevitable —  indeed they are evidence you are considering investments the private sector won’t — but the successes pay off handsomely in jobs, leveraged private investment and technology creation. This is what you expect to see when encouraging a transition deemed important for societal progress – this has played out many times throughout history.

— Raj Salhotra, Center for American Progress Energy Intern