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INNOVATION AS A REMEDY FOR THE CRISIS

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In the past few months "crisis" has become one of the most common words in our vocabulary. We start our conversations with friends by asking them how the crisis is affecting their lives. Recently our common language has been enriched with terms such as "subprime mortgages", "mortgage-backed securities", "auction rate securities", "credit default swaps", "securitization" and so on, which are now inherently associated with the news about the stock market collapses and thus have acquired a somewhat derogatory meaning in our eyes. Since the government started to pour big bailout money into the financial sector and biggest industrial corporations in the hope that it alone will recover the economy, the biggest buzzwords in Washington now are "bailout", "stimulus", and "new deal", and every politician argues about how big the bailout package must be in order to save our troubled economy. At the end of 2008, the U.S. government set up Troubled Asset Relief Program (TARP) to help the ailing U.S. banks and financial corporations and has already spent to this end about $295 billion of taxpayers' money as the bailout. However, there have not been any substantial positive changes in the economy since the bailout was paid out. Moreover, the first steps of some "troubled" financial corporations that received the bailout money disturbed the peace in the society and dramatically questioned the government initiative. The recent payouts of huge bonuses to top executives of Merrill Lynch for a total of $3.6 billion raised many doubts. The excuse of John Thain, its former CEO, that the most qualified people should be properly compensated for their work is full of hypocrisy. The rewarded people have done nothing but help Merrill Lynch lose $15 billion in the fourth quarter of 2008! Almost the same story is developing with AIG.

Paul Krugman, Professor of Economics at Princeton University and 2008 Noble Prize winner in Economics, thinks that the reason for the crisis was the fact that many banks and other financial institutions were not subject to the traditional banking regulation. Therefore, more regulation in the economy could be a remedy. However, he does not believe that it is possible to handle the crisis merely by utilizing monetary policies as was once done by the former Federal Reserve Chairman Alan Greenspan. This opinion is supported by the fact that all efforts undertaken only by the Federal Reserve and its chairman Ben Bernanke have not been able to handle the crisis so far. In 2009, the government plans to spend almost a trillion dollars to help the economy get back on track and the so-called stimulus package of $787 billion has recently been signed by President Obama. With this policy, the odds are very high that a second stimulus package will be needed and more and more money should be borrowed by the government using U.S. government bonds. Accordingly, the domestic and abroad worries and concerns about the future of the U.S. economy, for example, the recent concerns of the Chinese Prime Minister Wen Jiabao over the outlook of U.S. government bonds, are dramatically increasing, whether the stimulus packages will revive the economy.

With all current discussions about bailouts, mortgages, insurance companies, stock markets, and stimulus packages, we seem to forget the fundamental mechanisms that pushed our economy forward in the past and made our country the world leader. In view of so much attention dedicated to financial tools, we should ask ourselves: Are they more important than health, transportation, energy, education, water, housing, food, information, communication, and other primary needs? Or should they play the role of facilitators that are built around this core? In other words, what comes first: chicken or egg? Primary needs or financial tools?

To answer this question, let us look at the history of banking. Centuries back banks played a role of a facilitator. When a factory needed money to manufacture clothing, its owner came to local bankers to borrow money. Once the goods were sold, the factory returned the money with an interest. In other words, the customers came to a bank when they needed money. Thus, bankers’ money was used to serve the production and other activities related to meeting our primary needs. It is this product-money relation that generated the bankers’ profits, which was later used to drive the economy forward. Now, in contrast, the product-money relation turned into a "money-money" relation, in which money is used only for generating profits for the bankers, like Madoff’s Ponzi scheme, rather than catalyzing the progress in health, transportation, energy, and other areas that are closely related to our primary needs.

Our history shows that real economic growth was achieved through innovations in the fields related to our primary needs: innovations that solved real problems of people. Among them, Henry Ford’s Model T that completely transformed the ways people traveled. His assembly lines revolutionized the ways products were manufactured. His franchise system put a car dealership in every major American city. Moreover, Ford’s invention spawned many industries, jobs and lead to real economic growth. At the end of a day, Henry Ford was simply solving a real problem of people, transportation. His achievements brought an automobile to almost every American household. There are other bright examples of innovation in the fields related to primary needs: Nikola Tesla’s AC electricity, Thomas Edison’s light bulb, Alexander Bell’s telephone, Bill Hewlett’s scientific calculator, Steve Wozniak’s Apple computer and many others. What do we know about innovations in our country in the past twenty years that solved real problems? The only sectors that have been truly driven by innovation are the information technology, pharmacology, nanotechnology, and very few others. How about innovations in other crucial areas, such as energy? Despite all the discussions about alternative sources of energy, we are still mostly relying on fossil fuels. Advances in such fields as bio-fuel are overshadowed by the fact that the production of ethanol is often achieved at the expense of food crop slashing. Jeffrey Sachs, Columbia University Professor of sustainable development, even used the term "scam" to describe the current bio-fuel solutions. Is not the lack of innovations in the fields related to our primary needs the real cause of the current crisis?

Many politicians recall FDR’s "new deal" that effectively took the country out of the Great Depression and call for such a deal now. But they forget that what was done in FDR’s time may be completely inappropriate in the present time. We do not need a large number of bridges that lead "nowhere". In FDR's time those bridges were required to provide necessary transportation infrastructure. We do not need an even bigger government. Most definitely we do not need bigger government spending and unnecessary earmarks such as those included in the $410 billion spending bill that was recently approved by the Senate.

Instead, we need to concentrate on the development of a long-term strategy based on innovations that will create new products and services which truly solve specific problems of people. Otherwise, if we concentrate solely on the short-term solutions, as is presently done by the government with its efforts to save the financial and banking sectors, we will need a stimulus package every time the old machine fails. We would like to emphasize again that tools and services such as banks and insurance companies should play the role of facilitators and should not ever come before primary needs.

There should not be any bailout or stimulus packages because they are fundamentally directed towards saving the old malfunctioning machine. We agree with Professor Sachs, who believes that the government should not desperately try to stop the current recession by using bailouts because such actions may lead to the phenomenon known as "instrument instability". These actions may be helpful in a short term but cause an even bigger crisis in a long term. We believe there should be a nationwide investment program specifically directed towards developing products and services that address the primary needs of people with a special emphasis on environmental problems. The government should invest in transformational innovations that, on the one hand, will create new products and markets, and, on the other hand, will trigger development within the entire supply chain and open up opportunities for multiple businesses, which in turn will create new jobs for American people.

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In our view, the U.S. government can gradually solve the crisis by supporting and directing innovations in the following ten sectors of our economy, which are directly related to meeting our primary needs:

Healthcare: We should focus both on new achievements in medical science, such as stem cell research, pharmacology, or genetics, and interdisciplinary innovations, such as computer-assisted diagnosis. A special attention should be directed towards preventative medicine and the use computer systems for the analysis of numerous factors that affect the development of complex diseases, such as diabetes, cancer, and osteoporosis. Public health system should be fully digitized and integrated, and targeted towards a higher personal awareness of diseases and health conditions.

Energy: Support R&D in solar, wind and bio-fuel energy. Provide subsidies to utility companies that buy and deliver energy generated from sunlight and wind. Develop incentives to utilize the energy at its source, for example, by using solar panels in residential areas abundant in sunlight, without depending on the power grid, which is old and unreliable. The renewable energy experience of Denmark proved the feasibility of such governmental initiatives, which led to substantially decreased fossil fuel dependence and carbon footprint.

Water: Many arid areas of the United States now experience water stress, for example, Las Vegas and San Diego. Water treatment technologies that can provide practically complete water recovery should be developed. Research in biological methods of water production should also be supported, as the only water that is truly healthy is the one generated by natural processes. Technologies of efficient water consumption, such as optimized shower guns, should be developed and implemented.

Food: The use of transgenic fats in many types of food has contributed to the nationwide problem of obesity. The use of preservatives, which is partially attributed to the fact that the food travels a long way before it reaches our tables, has also negatively affected our nation’s health. We should support domestic food production in order to improve the quality of food and generate new job opportunities.

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Environment: Carbon-capture technologies and bioremediation of highly polluted areas should be further developed. A new generation of waste-processing technologies that actively incorporate various biological processes should be used to minimize the high environmental impact of large cities, such as New York. Environmentally friendly technologies with low wastes and minimum use of non-renewable energy should be preferred in spite of their high capital costs and long terms of return on investment.

Education: Many graduates of present U.S. schools have a narrow specialization. At the same time, present and future innovations will involve interdisciplinary approaches. The government should support the development of interdisciplinary curriculum programs and make the superior-level education accessible to regular Americans through Internet-based programs. The government should establish national innovation centers and science labs to fuel innovation, as it was done in the 1960s.

Information: Advances in information technology should be actively applied in the governmental sector to reduce red-taping. The whole public system should be fully digitized. Monitoring technologies, such as sensors for monitoring our health conditions, and web-based collaboration systems between scientists, engineers, and students should be further developed. The public sector should become the key player in the development of open-source technologies.

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Yuriy Polyakov is the Chief Technology Officer of USPolyResearch, an interdisciplinary scientific research think tank, and one of the founders of the Global Eco-Innovation Forum. He (more...)
 

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INNOVATION AS A REMEDY FOR THE CRISIS

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thart as soon as you have some Russian guy prophec... by Mark Sashine on Thursday, Apr 16, 2009 at 8:31:31 AM
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