[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]







                                                        S. Hrg. 115-271

                    HOW THE INNOVATION ECONOMY LEADS
                               TO GROWTH

=======================================================================

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 25, 2018

                               __________

          Printed for the use of the Joint Economic Committee













[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]















                         U.S. GOVERNMENT PUBLISHING OFFICE 

30-088                         WASHINGTON : 2018 






























                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

HOUSE OF REPRESENTATIVES             SENATE
Erik Paulsen, Minnesota, Chairman    Mike Lee, Utah, Vice Chairman
David Schweikert, Arizona            Tom Cotton, Arkansas
Barbara Comstock, Virginia           Ben Sasse, Nebraska
Darin LaHood, Illinois               Rob Portman, Ohio
Francis Rooney, Florida              Ted Cruz, Texas
Karen Handel, Georgia                Bill Cassidy, M.D., Louisiana
Carolyn B. Maloney, New York         Martin Heinrich, New Mexico, 
John Delaney, Maryland                   Ranking
Alma S. Adams, Ph.D., North          Amy Klobuchar, Minnesota
    Carolina                         Gary C. Peters, Michigan
Donald S. Beyer, Jr., Virginia       Margaret Wood Hassan, New 
                                         Hampshire

                   Colin Brainard, Executive Director
             Kimberly S. Corbin, Democratic Staff Director


























                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Erik Paulsen, Chairman, a U.S. Representative from Minnesota     1
Hon. Martin Heinrich, Ranking Member, a U.S. Senator from New 
  Mexico.........................................................     3

                               Witnesses

Dr. Harold Furchtgott-Roth, Director, Center for the Economics of 
  the Internet; Former FCC Commissioner Hudson Institute, 
  Washington, DC.................................................     6
Dr. Michael R. Strain, Director, Economic Policy Studies; John G. 
  Searle Scholar, American Enterprise Institute, Washington, DC..     7
Mr. Mark P. Mills, Senior Fellow, Manhattan Institute Faculty 
  Fellow, McCormick School of Engineering, Northwestern 
  University, Washington, DC.....................................     9
Dr. Darrell M. West, Vice President and Director of Governance 
  Studies; Founding Director-Center for Technology Innovation, 
  Brookings Institution, Washington, DC..........................    12

                       Submissions for the Record

Prepared statement of Hon. Erik Paulsen, Chairman, a U.S. 
  Representative from Minnesota..................................    30
Prepared statement of Hon. Martin Heinrich, Ranking Member, a 
  U.S. Senator from New Mexico...................................    31
Prepared statement of Dr. Harold Furchtgott-Roth, Director, 
  Center for the Economics of the Internet; Former FCC 
  Commissioner Hudson Institute, Washington, DC..................    33
Prepared statement of Dr. Michael R. Strain, Director, Economic 
  Policy Studies; John G. Searle Scholar, American Enterprise 
  Institute, Washington, DC......................................    46
Prepared statement of Mr. Mark P. Mills, Senior Fellow, Manhattan 
  Institute Faculty Fellow, McCormick School of Engineering, 
  Northwestern University, Washington, DC........................    53
Prepared statement of Dr. Darrell M. West, Vice President and 
  Director of Governance Studies; Founding Director-Center for 
  Technology Innovation, Brookings Institution, Washington, DC...    61
Abstract titled ``Who Becomes an Inventor in America? The 
  Importance of Exposure to Innovation'' submitted by 
  Representative Maloney.........................................    71
Response from Dr. Furchtgott-Roth to Questions for the Record 
  Submitted by Representative Maloney............................    72
Response from Dr. Strain to Questions for the Record Submitted by 
  Representative Maloney.........................................    73
Response from Dr. West to Questions for the Record Submitted by 
  Representative Maloney.........................................    76

 
                    HOW THE INNOVATION ECONOMY LEADS 
                               TO GROWTH

                              ----------                              


                        WEDNESDAY APRIL 25, 2018

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 2:00 p.m., in Room 
216, Hart Senate Office Building, the Honorable Erik Paulsen, 
Chairman, presiding.
    Representatives present: Paulsen, LaHood, Handel, Delaney, 
Adams, and Maloney.
    Senators present: Lee, Heinrich, Klobuchar, and Peters.
    Staff present: Ted Boll, Colin Brainard, Connie Foster, 
J.P. Freire, Colleen Healy, Matt Kaido, Beila Leboeuf, Kim 
Corbin, Ricky Gandhi, Paul Lapointe, Alaina Flannigan.

   OPENING STATEMENT OF HON. ERIK PAULSEN, CHAIRMAN, A U.S. 
                 REPRESENTATIVE FROM MINNESOTA

    Chairman Paulsen. Alright, we will call the Committee 
hearing to order.
    Good afternoon, and welcome to today's hearing on ``How The 
Innovation Economy Leads to Growth.''
    The U.S. economy is not only growing, but it is also doing 
it faster. GDP growth is rising. Job creation is strong. 
Average wage growth is improving, and inflation remains low.
    These long-awaited positive results stem from the decision 
to unleash America's most valuable economic asset: The American 
People. Tax and regulatory relief are allowing American 
families and main-street job creators more breathing room and 
to do more.
    Contrary to those who believed that we are stuck at low 
growth, many economists expect as much as 3 percent GDP growth 
in 2018, and similarly strong growth in 2019. And to achieve 
this, Washington needs to stay out of the way so that 
individuals are free to figure out new ways to solve old 
problems. Such innovation is vital to sustaining our restored 
economic growth.
    America has been a laboratory for invention since its 
inception, and it is that spirit that has led to our strength. 
A report by the McKinsey Global Institute in March of 2017, 
last year, finds that many advanced economies rely on 
productivity gains far more than increases in the labor supply 
to drive economic growth.
    Folks in the private sector know this when they ask 
questions like: How can we serve more customers in one day? How 
can we complete more orders in less time? How can we produce a 
product with fewer passes of a machine?
    Those questions are how innovation becomes the primary 
driver of productivity gains. And we know we are blessed to 
live in the United States for a variety of reasons, but among 
those blessings are our fellow Americans who have generated 
remarkable technologies to lift our standard of living, to 
expand our horizons, to support U.S. leadership in the world, 
and to grow our economy.
    Not all economic systems are equally conducive to such 
path-breaking innovations. Every technological advancement of 
major economic consequence since World War II has come from the 
United States. And that is no accident.
    As we will hear from our witnesses today, strong property 
rights, the rule of law, light regulation, and competition are 
critical conditions for visionary entrepreneurs and risk 
takers, dreamers and investors, and creators to generate the 
technological success that we have seen.
    American inventors, main-street job creators, and the 
resourceful factory workers will continue to deliver amazing 
advances, but that is contingent on Washington allowing that to 
happen.
    A brilliant idea or discovery is only the start. It has to 
be put into concrete form and developed. And from there, it has 
to be commercialized and disseminated throughout the economy 
before it actually boosts economic growth.
    These steps can take a long time, depending on how they are 
taxed and regulated, or how antitrust law is applied. The 
highway to innovation is littered with potholes, traffic jams, 
and overturned vehicles. You can see this up close in my home 
State of Minnesota where an excise tax has threatened the 
innovative medical device industry, and could drive it away to 
other countries.
    While the Federal Government has temporarily suspended this 
tax, innovators still face great uncertainty about their 
future.
    Even more obstacles lurk along the path of international 
trade. Last year, this Committee held a hearing on digital 
trade. And the takeaway is that the United States leads in 
digital products and trade that rely on the internet.
    Yet the freedom of the internet faces challenges abroad, 
and the United States must strive to protect it. To remain 
credible in this mission, the United States must generally 
promote and defend the long-held American principles of 
unencumbered international transactions and trade.
    Every day has the potential for game-changing technological 
breakthroughs. Blockchain is an example of a technology at an 
early stage of development. Its potential for very wide 
application throughout the economy could be stifled by over-
regulation.
    And the United States has the opportunity to continue to be 
the champion of its Age of Invention, but only if we keep the 
engines of innovation running. We must protect the ability of 
our market economy to perform at its full potential at home and 
in global markets across the world.
    I look forward to the testimony from our distinguished 
panel of witnesses today for clarity and for guidance on how 
innovation can drive economic growth and American prosperity.
    Before I introduce our witnesses, though, I would like to 
now recognize our Ranking Member, Senator Heinrich, for his 
opening statement.
    [The prepared statement of Chairman Paulsen appears in the 
Submissions for the Record on page 30.]

 OPENING STATEMENT OF HON. MARTIN HEINRICH, RANKING MEMBER, A 
                  U.S. SENATOR FROM NEW MEXICO

    Senator Heinrich. Thank you, Chairman Paulsen, for calling 
today's hearing on promoting innovation and accelerating 
economic growth.
    Innovation drives economic growth and boosts wages. We need 
more of it, and we need innovation to be more broadly shared 
across regions.
    Other countries are moving forward aggressively to promote 
innovation, to support advanced manufacturing, and to boost the 
productivity of their workforces.
    To lead in the 21st Century, the United States must remain 
at the forefront of game-changing discoveries and create an 
ecosystem that supports innovation across the economy.
    The Federal Government plays a key role in this, funding 
and conducting research and development, investing in human 
capital of our people, and in ensuring that we are making the 
necessary investments in a STEM workforce.
    STEM education and R&D are two innovation anchors. We need 
to ensure that students everywhere have access to STEM 
pathways, and that starts with making sure that schools have 
the resources they need to recruit, train, and retain talented 
science and math teachers.
    We need to expand middle-skills' pathways into emerging 
sectors, and make a college education accessible and affordable 
for all Americans, so that every student has the opportunity to 
benefit from tomorrow's innovations.
    The Federal Government remains the largest funder of basic 
research. That research, which adds to our fundamental stock of 
knowledge, yet often would not be conducted without public 
investment.
    This is the research that can help us solve the problems we 
do not yet know we even have. Basic research has driven major 
leaps forward, including mapping of the human genome, vaccines, 
breakthroughs in cancer research, and energy storage 
technology, and the creation of the internet, LASER, MRI, and 
GPS.
    The knowledge gained through this research has significant 
spillover economic benefits: increasing productivity, creating 
jobs, and accelerating economic growth.
    That is why it is encouraging that the recent Omnibus 
Agreement made significant investments in R&D. Investments in 
basic research increased by almost 10 percent over the previous 
year, its largest annual increase since the Recovery Act in 
2009.
    Promoting innovation also means extending already developed 
technologies like broadband to communities currently without 
access. Today, years after high-speed internet was first made 
available, 19 million rural Americans still lack access.
    The private sector does not have the incentive to extend 
broadband to remote, hard-to-reach communities. The Federal 
Government must step in and fill that gap.
    We also need smart policies that can help emerging 
industries grow. Targeted tax credits, competitive grants, and 
prize competitions are all levers that Congress can pull. The 
multi-year extension of the Wind Production Tax Credit is a 
good example. It is driving investment in wind farms in New 
Mexico and across the country.
    Earlier this year, I toured the future site of the $1.6 
billion Sagamore Wind Project in eastern New Mexico, which will 
be the largest wind production farm in our State's history, and 
create up to 300 construction jobs, and 30 full-time 
operations' jobs.
    Programs like laboratory-directed research and development, 
LDRD, authorizing a portion of Federal labs' funding for 
cutting edge R&D are also quite vital.
    At Los Alamos National Laboratory in New Mexico, LDRD 
researchers generally account for one-quarter of the lab's 
patents and peer-reviewed publications. Efforts to help 
commercialize technology developed at our national labs and 
research universities help to take a good idea and get it into 
production and out into the marketplace.
    In New Mexico, we have seen how commercializing the R&D 
that takes place in our labs can generate significant economic 
opportunities. I will share just one example.
    Descartes Labs is a New Mexico startup that uses artificial 
intelligence technology developed at Los Alamos National 
Laboratory to provide analysis and predictions based on 
satellite images of the earth. Early applications are in 
delivering crop-yield forecasts and analyzing trends in energy, 
construction, and the environment.
    Today the company has its headquarters in Santa Fe and has 
raised close to $40 million in venture money, employs 70 
people, and is a recognized leader in analyzing satellite 
imagery.
    We need to help more research turn into innovative 
startups. Access to capital is key for entrepreneurs. Too many 
promising young companies fall to the valley of death, or get 
absorbed by behemoths where their innovation stalls because 
they cannot find the financing they need.
    This is especially tough for innovators in rural and 
smaller cities. Good ideas and innovations occur everywhere, 
but more than three-quarters of venture capital goes to 
companies in San Francisco, Los Angeles, New York, and Boston.
    Expanding access to capital can help us tap into the next 
generation of innovators creating new startups and new 
opportunities.
    Lastly, immigrants are a key source of innovation and 
entrepreneurship. We cannot jeopardize these enormous 
contributions through short-sighted immigration policies, or by 
kicking out talented young people.
    I am an engineer by training. I could talk about innovation 
and R&D and tech transfer all day long, but I look forward to 
hearing from our witnesses next and hopefully learning some new 
things along the way.
    [The prepared statement of Senator Heinrich appears in the 
Submissions for the Record on page 31.]
    Chairman Paulsen. Thank you, Senator Heinrich.
    I will introduce our four witnesses, and then we will hear 
from each one of them individually.
    First, Dr. Harold Furchtgott-Roth is a Senior Fellow and 
the founder and Director of the Center for the Economics of the 
internet at the Hudson Institute. He is the President of 
Furchtgott-Roth Economic Enterprises, which he founded in 2003. 
He is an Adjunct Professor of Law at Brooklyn Law School. From 
1997 through 2001, Dr. Furchtgott-Roth served as a Commissioner 
of the Federal Communications Commission. Prior to his 
appointment to the FCC, Dr. Furchtgott-Roth served as Chief 
Economist of the U.S. House of Representatives' Committee on 
Commerce, where he was one of the principal staff involved in 
drafting the Telecommunications Act of 1996. Dr. Furchtgott-
Roth holds an S.B. in Economics from the Massachusetts 
Institute of Technology, and a Ph.D. in Economics from Stanford 
University.
    Dr. Michael Strain, who is with us today, is the John G. 
Searle Scholar and Director of Economic Policy Studies at the 
American Enterprise Institute. He oversees the Institute's work 
in economic policy, financial markets, poverty studies, 
technology policy, energy economics, health care policy, and 
related areas. His research has been published in peer-reviewed 
academic and policy journals. And before joining AEI, Dr. 
Strain worked at the U.S. Census Bureau's Center for Economic 
Studies, and the Federal Research Bank of New York's Macro 
Economic Research Group. Dr. Strain holds a Ph.D. in Economics 
from Cornell University. He was a graduate of Marquette 
University and holds an M.A. from New York University.
    Also with us is Mr. Mark Mills, who is a Senior Fellow at 
the Manhattan Institute; CEO of the Digital Power Group; 
faculty Fellow at Northwestern's McCormick School of 
Engineering and Applied Science; and an Advisory Board Member 
of Notre Dame University's Riley Center for Science, 
Technology, and Values. Previously he co-founded and was Chief 
Tech Strategist of Digital Power Capital. Early in his career, 
Mills was an experimental physicist and development engineer at 
Bell Northern Research, Canada's Bell Lab. And he earned 
several patents for his work. Mills is also a published author 
and has contributed to The Wall Street Journal, The New York 
Times, and Forbes.com. He holds a degree in Physics from Queens 
University in Ontario, Canada.
    Also with us is Dr. Darrell West, who is the Vice President 
and Director of Governance Studies, and holds the Douglas 
Dillon Chair at the Brookings Institution since 2013. He is the 
Founding Director of the Center for Technology, Innovation at 
Brookings, and Editor-in-Chief of Tech Tank. Prior to coming to 
Brookings, West was the John Hayson White Professor of 
Political Science and Public Policy, and Director of the Todman 
Center for Public Policy at Brown University. West is the 
author or co-author of 23 books, and has published more than 
three dozen scholarly articles in a wide range of academic 
journals. He holds an M.A. and Ph.D. in Political Science from 
Indiana University, and an A.B. in Political Science from Miami 
University of Ohio.
    So we have a stellar group of witnesses that are here to 
share their thoughts and expertise with us today. And with 
that, we will begin with you, Dr. Furchtgott-Roth. Thank you 
for being here, for your opening statement, and I will 
recognize you for five minutes.

 STATEMENT OF DR. HAROLD FURCHTGOTT-ROTH, DIRECTOR, CENTER FOR 
  ECONOMICS OF THE INTERNET; FORMER FCC COMMISSIONER; HUDSON 
                   INSTITUTE, WASHINGTON, DC

    Dr. Furchtgott-Roth. Thank you, Mr. Chairman, and thank 
you, Members of this Committee. It is an extraordinary honor 
for me to testify before you today about economic growth and 
innovation in America.
    These are very important topics, and I am going to focus on 
the information sector, which is the sector I follow most 
closely.
    I have prepared testimony, which I hope will be entered 
into the record. I am not going to read it all. In fact, I am 
going to provide separate comments.
    My own research shows that a disproportionate share of 
American economic growth in the past generation is attributable 
to the information sector. I have three simple messages to 
share with you today:
    Global economic growth in the past generation has been more 
profound than any in prior history, and innovation in the 
information sector was at the core of that growth.
    The United States played a pivotal role in innovation in 
the information sector. Important factors included increased 
protection of property rights, a lighter regulatory approach, 
and an emphasis on competition.
    And third, despite early receptivity to the internet, 
governments in other countries today are threatening the 
further development of the information sector.
    The five largest corporations in America today by market 
capitalization are all in the information sector. Amazon, 
Apple, Google, Facebook, and Microsoft. They are also among the 
largest corporations in the world.
    These are all innovative companies, and together with 
smaller companies in the information sector all have 
contributed to innovation and economic growth in America. 
Countless private companies and startups compete in this 
sector. Ask a 20-something in America or anywhere around the 
world where they would like to work, and chances are they're 
going to say: In a company in the information sector.
    These new companies have provided the world with new 
technologies, and have captured the imagination of the next 
generation. Why did these companies develop in the past 
generation and not before? And why did they develop in the 
United States and not so much elsewhere?
    Some might point to extraordinary entrepreneurs and 
technologists such as Bill Gates, Jeff Bezos, Steve Jobs, 
Sergei Wren, Larry Paige, and Mark Zuckerberg. Others might 
emphasize critical technologies developed in past generations 
that enabled the further development of the information sector.
    No doubt these and other factors are important, but great 
entrepreneurs are born in every generation, in every country. 
What made the information sector in the United States over the 
past generation different?
    Consider that much of the sector was founded in America. 
The information sector benefited from three conditions that 
changed in America over the past generation.
    In America we established clear property rights in the 
information sector. We had a determined lighter regulatory 
approach. And we also, by statute, mandated more competition.
    Each of these factors was important to the development of 
the information sector in America over the past generation. 
Congress changed laws, and Federal agencies adopted rules that 
enabled more innovation and economic growth in the information 
sector. The rest is history.
    I have also been asked to address why productivity has 
slowed in recent years. I was asked the same question 40 years 
ago when I arrived at Stanford University. It became the topic 
of my dissertation.
    The answer today is, sadly, much the same as it was four 
years ago. We know only part, but not all of the reasons. It is 
much the same across all industrialized countries.
    One of my professors at Stanford, Moses Abramovitz, once 
described total factor productivity as a measure of our 
ignorance. It still is.
    Having said that, let me briefly note a few major reasons 
for recent productivity slowdowns:
    One, increased share of the economy in the service sector. 
Output is measured largely as revenue in the service sector, 
and it is very difficult to measure total factor productivity 
in those sectors.
    Second is increased obsolescence of products indicates 
rapid quality improvements that are not easy to measure. Take a 
look at your Smart Phone. There is no market today for an 
iPhone Version One. It is obsolete. But you can look at a car 
manufactured in 2009 and there is a good market for it, as 
there is for a ton of steel. What we have is rapidly improving 
quality of products that are very, very difficult to measure.
    Nonetheless, there has been a pronounced decline in total 
factor productivity in recent years, even in sectors that 
historically have shown rapid increases in total factor 
productivity, such as manufacturing, agriculture, mining, and 
utilities.
    So as Professor Abramovitz once said, total factor 
productivity remains a measure of our ignorance. There are a 
lot of explanations, but we don't have them all yet.
    Thank you, very much.
    [The prepared statement of Dr. Furchtgott-Roth appears in 
the Submissions for the Record on page 33.]
    Chairman Paulsen. Thank you, Doctor. And our next witness 
we will hear from is Dr. Strain. Thank you for your opening 
statement. You are recognized for five minutes.

  STATEMENT OF DR. MICHAEL STRAIN, DIRECTOR, ECONOMIC POLICY 
STUDIES; JOHN G. SEARLE SCHOLAR, AMERICAN ENTERPRISE INSTITUTE, 
                         WASHINGTON, DC

    Dr. Strain. Well thank you, Mr. Chairman, and Members of 
the Committee. It is an honor to be here.
    How can Congress foster innovation? What are important ways 
to improve the skills of workers, helping to enable individuals 
to innovate? Education reforms designed to teach 21st Century 
skills is critical.
    A stronger emphasis on work-based learning for workers is 
critical. And in my view increasing the number of highly 
skilled immigrants is also critical. Many of the most 
innovative companies in the United States were founded by 
immigrants.
    Government has a role to play in supporting the basic 
research that innovation requires. Two important ways 
government supports innovation are through funding basic 
research, and through producing economic and social statistics 
required by businesses, researchers, and policymakers.
    Beyond encouraging innovation through increasing skills and 
supporting basic research, there is a wide variety of action 
government can take. Avoiding excessively high tax rates, 
reducing regulation and other barriers to technological 
progress, and maintaining a posture of openness to the rest of 
the world through international trade are just some of the ways 
public policy can support innovation. Congress can also foster 
innovation by helping to create and enforce an appropriate 
regulatory environment. Likewise, imprudent regulation can 
stifle innovation, slowing economic growth and the rate of 
improvement of living standards.
    I have been quite concerned about imprudent regulation 
recently in the conversation around big tech. It is common to 
hear calls from both the political left and right to ``break 
up'' major technology firms using the government's antitrust 
powers.
    In my view, such action would be a major policy mistake. 
For the past half-century the Federal Government has followed 
the best standard that experts have crafted to identify 
anticompetitive behavior: consumer welfare. More specifically, 
when asking whether a firm is hurting competition, the 
following question should be asked:
    Is the company reducing the welfare of consumers by pushing 
up prices that consumers face, and/or by reducing the quality 
and variety of products and services that consumers enjoy?
    This antitrust standard stands in contrast to a different 
view which rests on the presumption that large and powerful 
companies should be suspect simply because of their size, under 
the assumption that with size comes undue economic power and 
the lack of competition. I would highlight three reasons why 
the latter view is inferior to the consumer welfare standard.
    First, it is much more vague and harder to define. This 
vagueness invites regulatory mischief at worst. More than that, 
though, is the concern that due to its vagueness regulators 
might be swayed more by the public debate around a particular 
company than by relatively more objective metrics.
    Second, the view that is suspicious of size ignores the 
good things that come from size. Economies of scale allow 
companies to produce goods and services more efficiently and at 
a lower cost than relatively smaller firms. These efficiencies 
can take many forms, including more specialized management and 
production techniques.
    Third, focusing on size distracts regulatory attention from 
consumers. This argument is equivalent to asserting that 
consumer welfare should be the regulatory goal in a normative 
sense.
    Big tech has significantly increased consumer welfare. 
Consider prices. Many products are offered to consumers free of 
charge. Amazon does not sell its products at a price of zero, 
but it has significantly reduced the prices faced by consumers 
for many products to the point that some argue that Amazon may 
be lowering the rate of consumer price inflation for the 
overall economy.
    Now consider product quality and innovation. The services 
mentioned above are all remarkably innovative. In addition to 
them, for example, Apple first put an entire music library into 
the palm of our hands, and then put a computer in all of our 
pockets. Major technology companies spend significant sums of 
money on research and development for new products in order to 
foster innovation.
    Alphabet, the parent company of Google, spends 16 percent 
of revenue on research and development. Facebook spends 21 
percent. Microsoft spends 14 percent. These ratios are far 
higher than for other companies. For example, General Motors, 
General Electric, Proctor & Gamble, and AT&T each spend less 
than 5 percent of revenue on R&D.
    In addition, there is more churn in the technology industry 
than many may seem to think. It was not long ago that the 
dominant web browser was Netscape, not Google; that the 
dominant email service was not gmail; and that America Online 
was the dominant ISP.
    It is imprudent to assume that Google, Facebook, Apple, 
Amazon, and other tech giants of today will be dominant in 
perpetuity. The public conversation also seems to misrepresent 
the actual dominance of these companies in the present day. For 
example, despite concern about Amazon's dominance, it is the 
case that online sales represent less than 10 percent of total 
retail sales. Walmart's revenue is more than twice that of 
Amazon's.
    In summary, I do not view big tech as a threat to consumer 
welfare or innovation, and I am not convinced by arguments that 
antitrust action is required to advance these goals. Instead, 
big tech is advancing consumer welfare through offering 
consumers a wide variety of high-quality products at low and 
sometimes zero prices.
    It is also advancing consumer welfare and innovation in the 
future through high amounts of spending on research and 
development which will fuel tomorrow's innovation. And that 
innovation will in turn fuel faster economic growth and higher 
living standards for American families. Thank you.
    [The prepared statement of Dr. Strain appears in the 
Submissions for the Record on page 46.]
    Chairman Paulsen. Thank you, Dr. Strain. And now we will 
welcome Mr. Mills for your opening statement. You are 
recognized for five minutes.

   STATEMENT OF MR. MARK P. MILLS, SENIOR FELLOW, MANHATTAN 
  INSTITUTE FACULTY FELLOW, McCORMICK SCHOOL OF ENGINEERING, 
            NORTHWESTERN UNIVERSITY, WASHINGTON, DC

    Mr. Mills. Thank you, Chairman Paulsen, and Members of the 
Committee.
    As this Committee knows, when it comes to understanding 
``How the Innovation Economy Leads to Growth,'' one is 
necessarily engaged in forecasting technology. And with all due 
respect, the track record on technology forecasting for 
Congress, and most pundits and especially economists, again 
with all due respect to my economist colleagues, is dismal at 
best.
    Forecasting can be a dubious science, but it is serious 
business. My favorite aphorism in this regard dates back to 
1963 when physicist and Nobelist Dennis Gabor wrote, ``The 
future cannot be predicted, but it can be invented.''
    Despite recent innovations, there is today a popular 
forecasting thesis that essentially says we live in a time of a 
new normal where foundational innovation has run its course. 
The ``New Normalists'' don't propose that there is an end to 
the kind of technology disruptions we are witnessing now with 
social media and the internet's impact on politics and culture, 
instead they claim innovation is now a kind of froth on top of 
a paradigm of permanently slower economic growth because 
nothing really fundamental is happening in innovation.
    The New Normalists misinterpret, though, the record of 
recent slow growth we have been living through, in fact an 
interregnum between great technological cycles. History offers 
a lot of examples of this phenomenon, but permit me to 
illustrate just one recent example of energy domains where 
technology forecasting offers specific lessons also relevant 
for manufacturing and health care.
    When the Department of Energy was created 41 years ago, 
nearly every forecaster said, to use economic terms, 
hydrocarbon technology productivity had stalled out. It would 
not be able to affordably supply energy at the scale society 
would need in the future.
    Policymaking then effectively focused on a kind of 
palliative care for hydrocarbons: banning exports, constraining 
consumption, creating strategic reserves. And over the decades 
a cumulative $500 billion was spent by the Federal Government 
in the pursuit of technologies that were forecast to be 
essential to replace hydrocarbons.
    We now know what happened. Engineers and the private sector 
invented a new technology that unlocked America's vast shale 
fields that turned out to be astonishingly productive. Shale 
tech has added 2,000 percent more energy to the United States 
over the past decade alone than have solar and wind combined.
    But those on the front lines of the shale revolution, and 
the few forecasters who did anticipate what would actually 
happen, were at that time generally ignored or either viewed as 
engaged in ``old think'' or in the pockets of entrenched 
industries.
    As some on this Committee know, my written record shows 
that I was counted amongst those in the history's minority. 
There are a couple of lessons from energy's history that are 
relevant:
    Noisy public debate and aspirational forecasts can hide the 
real underlying trends. And what appears to be innovation 
stalling out is often a pause, the interregnum, between eras as 
engineers and industries perfect and adopt new technologies.
    The question today is what signals are we missing hidden in 
the media noise about the demise of manufacturing, the claimed 
inevitability of cripplingly higher health care costs?
    In my submitted testimony for the record I have addressed 
both of those, but in my brief oral remarks I will highlight 
health care.
    There is a lot of excitement these days about information 
systems applied to health care, the rising power of algorithms 
and machine learning. In fact, we are likely seeing a new 
battle for health care efficiency launched by the announced 
collaboration between Amazon, Berkshire Hathaway, and J.P. 
Morgan.
    And information systems will add valuable efficiency to 
administering existing health care services and the management 
of records and insurance. But doing better with existing data 
and therapeutics isn't enough for a real revolution in health 
care productivity.
    Information systems inherently depend on acquiring more and 
better information. One has to have a physical means to act on 
that information, as well. Fortunately we're on the cusp of a 
technological revolution in biological data acquisition and 
diagnostics and therapeutics. A lot of attention has been 
afforded to the promise of genetic engineering, which itself 
is, information centric, but the other two domains are equally 
critical: diagnostic tools, and information acquisition.
    There is now a clear path to commercial bioelectronics that 
are body-compatible, implantable, even digestable. 
Bioelectronics will ultimately rival in scale the traditional 
silicon electronics industry and create a tsunami of heretofore 
unavailable health-centric data.
    Much of that data will end up being channeled through 
radically new kinds of diagnostic tools, many soon in the hands 
of consumers not just professionals. There are far-reaching 
implications with the prospect of nearly every citizen 
possessing a useful diagnostic device.
    Apple, for example, is well aware of the fact that features 
inherent in or that can be added to an iPhone constitute an 
implicit if not explicit classification as a medical device.
    Last year's X Prize, awarded for a portable diagnostic 
tool, was a dramatic example of the kinds of devices that were 
once just the stuff of science fiction. That prize was awarded 
for inventing the Star Trek Tricorder.
    For those who are not science fiction cognoscenti, the 
space ship's doctor would wave a hand-held tricorder over a 
patient to obtain an immediate diagnosis. The real-world X 
Prize was for a mobile device that was able to diagnose 13 
health conditions and continuously monitor 3 vital health 
signs. All this says nothing about the revolutionary health 
care technologies emerging from a class of practical robots and 
so-called co-bots, the latter working collaboratively with 
people. These will unlock not only more hyper-precise and 
minimally invasive surgery, but also radically more productive 
tools for elder care and rehabilitation.
    For the record, the same trifecta of technologies--
computing, new materials, and new machines--is signaling a 
manufacturing productivity revolution as well.
    History shows that economy-moving revolutions in technology 
have never been predicted by economists. Instead, they've been 
invented and propelled, usually unexpectedly, by innovators. If 
there is a central for policymaking, it's that instead of 
directing innovation, it is critical to ensure that there's an 
environment that doesn't impede innovators. Thank you.
    [The prepared statement of Mr. Mills appears in the 
Submissions for the Record on page 53.]
    Chairman Paulsen. Thank you, Mr. Mills. And now we will 
hear from Dr. West. You are recognized for five minutes, thank 
you.

 STATEMENT OF DR. DARRELL M. WEST, VICE PRESIDENT AND DIRECTOR-
 GOVERNANCE STUDIES; FOUNDING DIRECTOR, CENTER FOR TECHNOLOGY 
       INNOVATION, BROOKINGS INSTITUTION, WASHINGTON, DC

    Dr. West. Chairman Paulsen, Ranking Member Heinrich, and 
Members of the Joint Economic Committee, so thank you for the 
opportunity to testify at this hearing.
    So today I want to summarize my thinking on ``The 
Innovation Economy.'' My latest book is entitled ``The Future 
of Work: Robots, AI, and Automation,'' and it looks at the 
impact of new technologies on the workforce, education, and 
public policy.
    I also have a new paper, co-authored with Brookings 
President John Allen, on how artificial intelligence is 
transforming the world.
    Based on this research, it is clear that the Federal 
Government plays a vital role in encouraging innovation. I 
think there are several steps that would increase our economic 
growth and make sure the United States does not fall behind 
other leading nations.
    First I argue we need to increase Federal R&D. Right now 
the U.S. spends about $495 billion on R&D, with 72 percent of 
that money coming from the business sector, and only 11 percent 
coming from the Federal Government.
    If you go back to the 1960s, the Federal Government 
provided 65 percent of R&D, and we saw NASA land a man on the 
Moon. In 1969 we planted the seeds for today's internet through 
a Department of Defense communications tool called ARPANET. So 
we need to remember that historically the Federal Government 
has played a vital role in these advances, and we have done 
very well on innovation.
    I think there is a danger of relying too much on the 
private sector for three-quarters of R&D because of its 
vulnerability to macro economic cycles. When the economy 
weakens, companies often slash their R&D and important 
strategic priorities can be lost through the decisions of 
individual firms.
    Secondly, we need to maintain our international 
competitiveness. The United States now devotes about 2.74 
percent of GDP to research and development. This is less than 
the 4.23 percent devoted by South Korea, 3.29 percent in Japan, 
and 2.93 percent in Germany.
    Now China only devotes about 2 percent, but it has been 
increasing its R&D spending by anywhere from 14 to 20 percent 
every year since 2000. In fact, China accounts for 31 percent 
of the world's R&D increase during this 15-year time period.
    Third, we need to address our critical needs in AI and data 
analytics. The U.S. Government is spending only about $1.1 
billion a year on nonclassified AI. And just to contrast this, 
at it's 19th Party Congress, China announced it was going to 
spend $150 billion on AI and plans to become the global leader 
by 2030.
    As John Allen and I argue in our recent paper, AI is the 
transformative technology of our era, and it is going to 
dictate our leadership in terms of national security, economic 
development, and resource management, including many other 
areas.
    Fourth, we need to promote STEM education. There are too 
few Americans studying science, technology, engineering, and 
math. Only 17 percent of Americans earn a STEM Bachelor's 
Degree, of those who are graduating from college, and 65 
percent of them are male. This is far less than other nations. 
For example, in Korea 38 percent are graduating with STEM 
degrees. China is producing 4.7 million STEM graduates every 
year, compared to about a half a million in the United States. 
So we need to hire more science and math teachers in K-12. We 
need to pay those teachers higher salaries.
    Fifth, we need to invest in our physical and digital 
infrastructure. We still have many Americans who lack access to 
the internet. We are moving to 5G networks. They are going to 
be faster, smarter, and more efficient, but they are going to 
require the deployment of small cell towers. We need to 
streamline the local approvals for those towers.
    Six, we need to improve data access. Data analytics has 
tremendous potential to transform the public and private sector 
decision making. It will give us new insights into health care, 
energy efficiency, and national security.
    The last point I want to make is just the need to improve 
our digital access. It is crucial that everyone shares in the 
benefits of our innovation economy. We currently have 
disparities by income, race, and education. There are major 
gaps for rural Americans, which I can appreciate having grown 
up on a dairy farm in rural Ohio. One-third of rural dwellers 
lack access to high-speed internet. So this limits their 
ability to participate in the innovation economy. So it is 
vital that we close that digital divide.
    Thank you, very much.
    [The prepared statement of Dr. West appears in the 
Submissions for the Record on page 61.]
    Chairman Paulsen. Thank you, Dr. West.
    And now we will have an opportunity to ask questions and 
have an answer period. I would ask Members, and remind them to 
keep your question period to five minutes. I will begin.
    Dr. Furchtgott-Roth, the importance of technological 
progress and driving economic growth is widely agreed upon by 
members on both sides of the aisle. However, there is some 
disagreement about how much growth is actually left to be had, 
and how to encourage the necessary innovation that fuels 
technological progress.
    Do you think there will be much stronger growth moving 
forward? And if so, why?
    Dr. Furchtgott-Roth. Thank you, Mr. Chairman, for that 
question. I don't remember the author of this statement, but 
approximately 120 years ago someone famous said that we had 
reached the end of science, and all discoveries that were 
important had been made, and there really wasn't much point in 
pursuing it any further.
    I think that any suggestion that innovation has reached an 
end, any suggestion that we are at the end, that technology is 
naive and misguided, I think there is an awful lot still going 
on.
    Chairman Paulsen. Okay, and Dr. Strain, maybe you can 
provide some thoughts there. Dr. West had just mentioned how AI 
is sort of the transformational initiative that we'll be 
looking at in the future here. And sometimes we have a little 
bit of disagreement in terms of sort of how much resources that 
the Federal Government should not do in just basic research 
versus really encouraging more government spending, especially 
on R&D and other programs, to help investment in innovation and 
fuel growth. What is the reasonable approach? You know, sort of 
the basic foundations of research versus, you know, a lot more 
government spending in research and development? And how do you 
draw those distinctions and those lines?
    Dr. Strain. Yeah, thank you, Mr. Chairman. I think it's an 
excellent question. I think there's a clear role, in my view, 
for the Federal Government to provide resources to universities 
and to scientists and to centers that fuel innovation. For some 
kind of clear economic reasons, those types of innovative 
activities generate public goods. Those public goods would be 
under-provided if it were left to the private market. And so 
there is a clear economic rationale for Federal funding there.
    I think it is important that those resources be well 
targeted, because it is taxpayer money after all, and making 
sure that laws are written, and that agencies like the National 
Science Foundation are distributing money in such a way that 
the projects are selected carefully to encourage economic 
growth and to fuel innovation I think is very important.
    I also think it is important that Congress ensure that the 
basic economic and social statistics infrastructure remain 
strong. That is important for policy making. It's important for 
private business activity, both of which have downstream 
effects on innovation and on economic growth as well. The 
immediate issue is the 2020 Census. That is far afield from 
this hearing, but it is something that is on my mind when your 
question was asked.
    Chairman Paulsen. So you are sort of referring also to the 
fact that modern technology isn't often fully captured in 
existing measures right now with GDP and different productivity 
measures? Is there a way to--you know, what are your thoughts 
on sort of capturing those statistics or data to make sure 
we're making smart policy decisions?
    Dr. Strain. Well I think it is an extremely difficult 
challenge, for the reason that my colleague mentioned. It is 
hard to kind of compare the price of an iPhone 1 in the year 
2018 to an iPhone 1 in the year 2009.
    The people who work on these issues over at the Bureau of 
Labor Statistics, and throughout the Federal statistical 
system, are very capable people who are doing a good job with 
what they have. And I think making that sort of measurement 
issue a priority for them would be a way to move the ball 
forward there.
    Chairman Paulsen. And, Mr. Mills, just in my final minute, 
but, you know, you mentioned the future can't be predicted but 
it can be invented. Do you have some other thoughts?
    Mr. Mills. Well, I do. In fact, one of the themes that we 
are hearing is this challenge of thinking about what is the 
role of government. And I am extremely enthusiastic about the 
proposition that government should spend more money on basic 
research.
    However, I think we have a definitional problem between 
what are basic research and science order projects. So putting 
a man on the Moon is engineering. It's not basic research. It's 
not science. We do learn science along the way, but it's an 
engineering project.
    I worked as both an engineer and a scientist. I admire both 
domains. Often never the twain shall meet. And I would like 
them not to meet so much in the government domains. Other than 
for Apollo programs and aircraft carriers, I think the 
government should focus on basic science.
    If you look at the history of the sort of disquisitions 
that come from Nobel Laureates, what you will find as the 
common thread on there in their awards is that they had done 
research that was driven by curiosity. In fact, they use those 
words. That these great discoveries that advance humanity 
didn't come from directed research, but they were allowed to do 
research that was driven by curiosity. A tough thing to fund, I 
understand, but I think it is where the government has a 
critical role.
    Chairman Paulsen. Thank you. Alright, Ranking Member 
Heinrich, you are recognized for five minutes.
    Senator Heinrich. Thank you, Chairman.
    I will start with a comment, Mr. Mills, because I think 
that they should actually meet more. You look at a national 
laboratory like Sandia, and one of the keys to their success is 
the cross-pollination that occurs there between basic science 
and engineering. And that actually played a key role in the 
development of the hydraulic fracturing that you referenced in 
your testimony.
    I think it is that cross-pollination that we oftentimes 
fund things in silos and don't have the full benefit of their 
leverage.
    Dr. Strain, I want to jump to you because you talked a lot 
about some of the big information sectors. You talked about 
Amazon in particular. I don't hear a lot about Amazon's low 
prices from my constituents--and that is not a critique of 
Amazon--but I do hear a lot about them on its impact to small 
main street businesses in rural areas.
    And the point of raising that is that the benefits of 
innovation, especially on a gross level, a GDP level, are 
pretty easy to quantify. But they also have very real negative 
impacts to specific populations. And those benefits are not 
flowing equally or homogeneously across our country.
    So how do we make sure, while supporting innovation, that 
innovation's benefits don't just accrue to urban and coastal 
communities?
    Dr. Strain. Well thank you, Senator, for the question. It 
is a very important one, for sure.
    I think it is the case that most people who live even in 
rural communities, even in communities where kind of local mom 
and pop stores are threatened by Amazon still benefit from 
innovation, and still benefit from technology companies, and 
benefit specifically from Amazon. The reason that those mom and 
pop stores are threatened is because Amazon is charging lower 
prices than the mom and pop stores can, and that people in 
those communities are not going to the mom and pop store 
anymore because they are purchasing their goods elsewhere.
    Senator Heinrich. But most of them, my point is, would not 
choose, you know, a quarter or a dollar off their box of soap 
that gets delivered to their house if they have to trade that 
for their neighbor down the street no longer being able to keep 
a retail shop open.
    How do we get the benefits of that innovation into those 
communities so that there's a vested reason for them to want to 
be part of the innovation economy?
    Dr. Strain. It is a classic example of somewhat diffused 
benefits and concentrated costs. So there are some people who 
are really bearing the brunt of this sort of change, and then 
many, many people who are benefiting from it. But the people 
who are bearing the brunt of it, that weighs heavier on them 
and there are a fewer number of them.
    It is a classic example of the kind of creative destruction 
that's the hallmark of a market economy. I think the wrong 
solution is to try and stop innovation, and the wrong solution 
is to try and tax companies----
    Senator Heinrich. So let's get to the right solution. I'm 
running out of time.
    Dr. Strain. The right solution is harder. I think what we 
need is to have kind of a robust set of policies designed to 
create on-ramps to opportunity for people who are negatively 
impacted by technology. And that's why I mentioned in my 
testimony things like work-based learning, and similar 
programs.
    Senator Heinrich. Dr. West, do you have a thought on this?
    Dr. West. The right way to maintain innovation that we all 
value is to keep the startup economy that has been crucial to 
the tech sector and the greatness of America. And here I have 
one major concern.
    We have been compiling data for 40 years on the number of 
startups in America. In the last decade there's been a dramatic 
drop in the number of startups. If you look at the period from 
1970 to the mid-2000s, America averaged between 500,000 and 
600,000 startups. Now we are down to 450,000. So keeping that 
emphasis on competition and helping small businesses start off 
is absolutely crucial.
    Senator Heinrich. Let me ask you about something that 
specifically impacts small businesses. Yesterday I met with 
recently departed FCC Commissioner Mignon Clyburn, and she 
emphasized ensuring that all Americans have access to a free 
and open internet, and how important that is to foster 
innovation in places where it is particularly hard.
    What about the digital divide? You've talked about that. 
And what about a free internet? Does net neutrality promote or 
stifle innovation, Dr. West.
    Dr. West. In terms of the digital divide, as I believe you 
pointed out in your opening statement, there are 19 million 
Americans in rural areas that do not have access to broadband. 
One-third of people who live in rural areas lack access to 
high-speed broadband.
    If you want to apply for a job today, many companies, and 
Brookings has done the same thing, have converted to online 
applications. You have to have access to the digital economy in 
order to get a job.
    In terms of the open internet, it is important to maintain 
the open internet. One of the reasons why our country has done 
so well in innovation over the last couple of decades has been 
that we treat all internet traffic the same. There's been no 
discrimination in the traffic. You can't slow down anyone's 
traffic.
    If you're the small guy operating a small convenience store 
on the corner, your traffic gets treated the same as the large 
company. So it is important to maintain that.
    Chairman Paulsen. Thank you. Now we will listen to the Vice 
Chairman of the Committee. Senator Lee, you are recognized for 
five minutes.
    Vice Chairman Lee. Thank you, Mr. Chairman. Thanks to each 
of you for coming. Your expertise brings a lot to our 
Committee.
    The FAA has banned commercial flight of supersonic aircraft 
in this country. This ban was found in a regulation that was 
promulgated back in 1973, so some 45 years ago. Today, in 2018, 
commercial aircraft travel no faster than they did 50 years 
ago, in part as a result of this.
    And significantly, the Concord, the heavy, clunky 
supersonic commercial aircraft that was in use at the time the 
regulation was promulgated, has been grounded today in part as 
a result of those regulations.
    But when we look at this today, we realize that there are 
some companies that have developed technologies using stronger, 
lighter materials that could achieve a greater degree of fuel 
efficiency, and perhaps most importantly there are some 
companies that have developed technologies that they claim can 
result in commercial grade supersonic travel that is 30 times 
quieter than the Concord was.
    And this seems like an example of the problem we face when 
regulations do not keep pace with current technology. And so, 
Dr. West, I would like to ask you a question about this.
    What do you think some of the benefits to the United States 
might be from supersonic travel? And is this something that you 
think we ought to continue to stick to? Is it time for Congress 
to revisit this idea of banning overland supersonic commercial 
travel?
    Dr. West. I think there has been so much innovation over 
the last 40 years that any regulation from 40 years ago 
deserves another look. Because I remember when the Concord was 
flying, there was concern at the time about sonic booms that 
were annoying people on the ground, and so that was one of the 
reasons that created a complication there.
    But I would not be surprised if manufacturers have figured 
out ways to handle that; that there are noise abatement 
procedures that would make a difference. So we certainly need 
to constantly take a look at regulations.
    We need to move into what I would call smart regulation, 
which basically is well designed and focuses on specific 
problems.
    Vice Chairman Lee. And just because I find this area 
interesting, I would note in response to your observation, it 
is my understanding that the sonic boom is somewhat analogous 
to the wake that travels behind a boat or a ship. And just as 
the size and the shape and the materials used in a boat or a 
ship can affect the type of wake it casts, there are ways of 
diminishing the impact of the sonic boom. And that is yet 
another reason why we ought to revisit this nearly half-
century-old regulation. It is really out of date.
    In the coming years we are going to see the deployment of 
5G technology; 5G wireless networks are going to revolutionize 
all sorts of things. But they require the deployment of a large 
number of small antenna systems, somewhat different from our 
current cell phone networks.
    The dawn of the 5G era brings a whole lot of opportunities 
in the way we will travel, and the offering of things like 
telemedicine, in the travel of autonomous vehicles both on the 
land and in the air in drone use, and a greater connectivity 
generally.
    Dr. Furchtgott-Roth, I would like to ask you. These 
benefits can be impeded by government regulations that could 
stop the deployment of this technology. Is our current 
regulatory framework prepared to handle these challenges, the 
challenges associated with the deployment of a 5G network?
    Dr. Furchtgott-Roth. Senator, that is a very good question. 
A lot of people are very concerned about the deployment of 5G 
technologies, and in fact are concerned about whether 
regulation will get in the way.
    I think at the Federal level, and I would say even at the 
State level, that most people in government are trying to take 
great efforts to be sure that there are not impediments to the 
deployment of the new technologies.
    There are a handful of municipalities around the country 
that want to create new regulations on the siting of towers, or 
in the case of 5G networks it's not going to be towers, it's 
just going to be a tiny little box that can stick on the side 
of a building. And so I think there is some concern that 
municipalities may be impeding the deployment. We will have to 
see.
    Vice Chairman Lee. Thank you. I see my time has expired, 
Mr. Chairman.
    Chairman Paulsen. Thank you. Senator Peters, you are 
recognized for five minutes.
    Senator Peters. Thank you, Mr. Chairman. Thank you to our 
witnesses today. I appreciate the conversation that's been very 
interesting.
    I am concerned about the growth of innovation that we see 
in this economy. There are other sectors outside of IT and 
health care which of course are big drivers for the economy 
right now, but looking at it more broadly coming from Michigan, 
particularly with a lot of older industries there.
    In a recent Economic Innovation Group study I was struck by 
a finding that they cite, another study, that shows that in the 
United States today only generates two nonhealth and non-IT 
patents for every one billion dollars in GDP. And so taking out 
IT, taking out health care, looking at a decline of dynamism 
generally in the rest of the economy, which is a very large 
part of our economy. And in the 1980s it was four. So basically 
it's half. The innovation outside of IT and health care, at 
least as measured by the number of patents, which is just one 
of many measures you could have, has dropped in half.
    Dr. Furchtgott-Roth, any ideas? You've certainly talked in 
your testimony. We have a lot of explanations for what's 
happened to productivity. And you mentioned the iPhone example, 
but that would be out of this. This is innovation within these 
other industries.
    Dr. Furchtgott-Roth. Thank you, Senator. That's a very 
important question. If I had my econometrics hat on, I would 
say there's an inflation issue. If you're comparing patents per 
dollar of activity in the 1980s with today, you're going to 
have a--it's not surprising to see some decline per dollar.
    But I think the real question you're asking is really far 
more profound than that, which is: Outside of some sectors of 
the economy, probably particularly high-tech, health care, the 
United States no longer has the global position that it had a 
generation ago. And I think that is very troubling. It is 
something that I hope this Committee will be able to address, 
to figure out--I focus a lot on the information sector. That is 
an area where the United States has a very strong global 
position.
    There are other industries where we have lost that edge. 
And I am very troubled about actions that are being taken by 
other governments that threaten the information sector, and no 
doubt other sectors of the economy.
    Senator Peters. I appreciate that. We need to work more on 
this, because this is a fundamental question for us to deal 
with. And I think part of what folks have talked about, at 
least in my reading, and it's correlated I think to what Dr. 
West talked about, is the decline of new business formation. 
Because it's a lot of those smaller businesses in particularly 
these other industries where you can get more innovation as a 
result of that.
    Dr. West, you have talked about the decline of that. One 
other statistics that I have been looking at, and would love to 
have your comments, and this doesn't refute but maybe is a 
little counter to what Dr. Strain said, but is that we have 
seen just a concentration in our economy with larger and larger 
firms across the sectors. In fact, I think one of the 
statistics are, if you look at over the last 20 years we have 
more concentration now in more industries than we have had in 
the past. And as you have bigger and bigger firms, it becomes 
more difficult for a small firm to start in those industries. 
Dr. Strain mentioned the advantages of size, which there are 
significant ones including economies of scale, et cetera. Do 
you believe--and where's the academic literature--that because 
of an increasing concentration across all industries that we've 
actually seen a decline in dynamism in the economy as a result 
of that, and the competitive advantages that big firms have?
    Dr. West. I do worry about small businesses getting 
squeezed out of this environment. I think the competition is an 
issue, and we need to take a look at it. In 2014 in The Wall 
Street Journal, a Silicon Valley entrepreneur, Peter Thiel, 
wrote a famous column saying competition is for losers, and 
argued that monopolies are great.
    I strongly disagree with that viewpoint. I think small 
businesses actually create a lot of the jobs. When we think 
back to the big tech sector, you know most of those firms 
started in garages or dorm rooms. So it is really vital that we 
maintain an environment where small businesses can thrive.
    Senator Peters. And in my remaining time--I only have 30 
seconds and it's a big question for you--but you mentioned AI 
and the transformative nature of AI. It has also been argued, 
and I agree, that it is transformative, but it is large 
capitalized companies, big companies, that will be able to use 
AI more efficiently and more effectively than smaller 
companies, and could actually further concentration.
    Is that a potential problem?
    Dr. West. It's a potential problem, but the economic payoff 
of AI is just so substantial. Price-Waterhouse Coopers just put 
out a study in which they estimated AI can increase global GDP 
by over $15 trillion.
    Unfortunately, half of that money is going to go to China 
just because they are investing, and they are really putting a 
lot of effort into there. Only about 20 percent of that is 
going to accrue to North America. So that is an area where we 
need to do better.
    Senator Peters. Thank you.
    Chairman Paulsen. Representative Handel, you are recognized 
for five minutes.
    Representative Handel. Thank you very much, and thank you 
to each of the witnesses.
    Mr. Mills, I saw you shaking your head a little bit about 
the comment that AI is going to primarily benefit larger 
companies. Would you like to tell me what you think about that?
    Mr. Mills. Yeah, I don't think that's what's going to 
happen, but we're back in the forecasting game here. AI is in 
early days of deployment. In fact, the AI community is 
struggling with the same kind of reproducibility challenges 
that the medical community and the science community at large 
has in terms of claims.
    But more interesting is that, what I think will happen is 
that AI is going to democratize the nature of computing and 
will actually help small businesses. So we're at an odd phase 
in the computing infrastructure of the world.
    So you have the big guys competing to create these broad 
cloud infrastructures of access to cheap computing. There's 
fierce competition among a half-dozen major players, another 
half-dozen very significant players. There will be some 
winners, but I don't think the consolidation is going to happen 
very quickly.
    And what they are doing is providing astoundingly cheap, 
essentially free, and for small businesses actually free 
supercomputing in the cloud running AI. So I am a partner in a 
boutique venture fund that invests--not on the coasts; we 
invest in the Heartland--in software. And one of our companies 
is an AI company that does AI primarily for the resource 
industries in oil and gas.
    But they get--and they are proud of this AWS compute power 
for free, Amazon offers startup companies. It's a hook. They 
want them to stay in when they become bigger. But that hook is 
chasing a rapidly declining cost of AI. It means that the 
supply chain advantages Amazon had in the early days get 
democratized to the mom and pop shops.
    I am, frankly, worried about regulating big tech, like Dr. 
Strain is, but I am particularly enthusiastic about the 
democratizing effect of what will become sort of an era of 
embodied computing universally.
    Representative Handel. Well it is interesting. I, just 
coincidentally, had a meeting with a young fellow, literally a 
very young fellow, in his early 20s, who is an extraordinary 
innovator and inventor in the AI sector, and he has a very 
small company, and he has been able to monetize it, and he is 
doing extremely well as a 23-year-old.
    So what he said to me--and this goes to my next question 
for you, Dr. Strain--he said that he sees AI and this 
breakthrough as, well, some would be concerned that it is going 
to take jobs away from Americans, he rather sees it as a way to 
help individuals do their jobs better.
    And as we have seen technology advances come forward, we 
always hear the cry that, oh, it is going to be the demise of 
the worker and the workplace. But we really have not seen that 
come forward.
    Do you have some thoughts, Dr. Strain, on that?
    Dr. Strain. I do. It is such an important question. My 
answer will be somewhat similar to my answer to Senator 
Heinrich. This will be a situation where you have concentrated 
costs and diffuse benefits.
    So there will be some people who are impacted quite 
negatively. But the technology will accrue overall to the 
benefit of everybody, and it will accrue to the benefit of the 
average American, if you will.
    There have been many periods of history within the United 
States and in Europe where new technologies have kind of come 
to the fore, and there has been concern that those technologies 
would make human work obsolete. Those concerns have never come 
to pass.
    In my view, we are not looking at a situation where those 
concerns will come to pass at any point in the near future, as 
well. New kinds of work will be created.
    Representative Handel. Great. Thank you.
    And in my remaining time, for Dr. Furchtgott-Roth, you made 
a comment that you, in your opinion the United States has lost 
its edge when it comes to innovation and discovery. Why do you 
think that? And what can we do from a policy--put the money 
investment part aside--but policy framework, can we do to help 
recapture, regain our place in the innovation hierarchy?
    Dr. Furchtgott-Roth. Well as I mention in my comments, I 
think there are three elements. One is clear property rights. 
The second is a lighter regulatory touch. And the third is 
competition.
    I think all three of these are important and necessary for 
innovation. And my comment was in response to Senator Peters 
about certain sectors of the economy where we used to be 
globally dominant and no longer are.
    Representative Handel. Alright, thank you. And I am running 
out of time and I yield back.
    Chairman Paulsen. Representative Adams, you are recognized 
for five minutes.
    Representative Adams. Thank you, Mr. Chairman. And thank 
you for your testimony, gentlemen.
    In 2017 the National Institutes of Health, the primary 
government agency for biomedical and public health research, 
spent $19 billion on research grants. These grants funded 
thousands of laboratories across the country. And since the 
majority of this work is done by academic researchers, these 
grants are an important source of Federal funds for 
universities and their surrounding communities.
    In short, research funding translates into greater economic 
opportunity for the researchers, their schools, and the 
communities hosting them.
    So perhaps you can imagine my concern at finding out that 
of the top 100 organizations that NIH gives research funding 
to, no HBCU, Historically Black College or University, is 
included. Not one was on the list.
    So, Dr. West, what are the implications for HBCUs being 
left out of the bulk of NIH funding?
    Dr. West. Well I would say it is devastating for them, and 
it is devastating for their local economies. Because we know, 
as you suggest, R&D really drives economic development. In 
fact, people have suggested the multiplier effect is 5 to 1, or 
10 to 1. It is a huge economic effect.
    In many local communities, economic development is based on 
Eds and Meds. It is the education sector and the biomedical 
sector and the hospital sector that drives a lot of economic 
growth.
    So if the HBCUs are not getting the grants, it is really 
going to limit what they can do research-wise, but also have a 
devastating impact on their local communities.
    Representative Adams. So what about the--what implications 
do you find of the funding disparity for the students that 
these universities teach?
    Dr. West. It means that they will be denied opportunities, 
especially in the STEM fields, and in biomedical areas, and 
those are going to be the growth areas in the future. So if 
they are coming out of college and they do not have those 
skills, it is going to limit their opportunities.
    We know that by 2044 America is going to become a majority 
minority country, and so it is crucial that we recruit more 
women into the STEM field, but also more minorities so that 
that sector represents the full diversity of America.
    Representative Adams. Thank you. The topic today is ``How 
Innovation Helps the Economy Grow.'' And I am really on HBCUs 
because, not only did I attend one and spent 40 years on the 
campus, I really know the impact that these colleges and 
universities have not only on our economy but also on our 
students.
    So if HBCUs and other minority-serving institutions 
continue to be under-funded in regards to Federal research 
grants, can the economy grow equally?
    Dr. West, that is a question for you.
    Dr. West. Well the short answer is, no. And one of the 
concerns that I have is, if you look at the venture capital 
money today, three-quarters of it is basically concentrated on 
the coasts. So most of America is being left out of the growth 
areas of the economy.
    Something like two-thirds of GDP is now taking place in 
less than one-third of America. Those geographic inequities are 
devastating. It makes most of the country feel left behind, 
while the coasts are running ahead and doing very well.
    It is bad for our country, and it has a devastating effect 
on our politics.
    Representative Adams. So can the African American community 
expect to see the same economic impact from government research 
grants if HBCUs are not receiving proportional Federal funding 
that the PWIs, or the Predominantly White Institutions, 
receive?
    Dr. West. There deserves to be greater representation there 
both from a fairness standpoint, but also from an economic 
development standpoint. Many of those schools are located in 
places that are not doing that well economically, and so this 
is one way in which the Federal Government can play a 
constructive role of helping communities that have been left 
behind by technology innovation and making sure that they are 
able to compete in the years going forward.
    Representative Adams. Well thank you for your responses. 
You know, when you look at across the country we have got 106 
or more of these schools, and it would really I think be 
important not only to them, to the students that attend them, 
but also to our economy for us to take another look there.
    Thank you, and I yield back, Mr. Chairman.
    Chairman Paulsen. Thank you. Representative LaHood, you are 
recognized for five minutes.
    Representative LaHood. Thank you, Mr. Chairman. I want to 
thank the witnesses for being here today, and for your valuable 
testimony.
    I know we have touched a little bit on competition here 
today. And when I think of the tech, or the titan firms that 
are out there, obviously some of them have been under scrutiny 
for what some would deem as somewhat sophisticated or 
calculated, and arguably anticompetitive practices.
    For instance, a number of these tech companies have 
combined their ability to collect data and build algorithms to 
determine which products or services are trending. And once 
they have achieved those results, these same companies then can 
alter their search engines to favor their own products and 
services over their competitors, and even simply buy out their 
competitors.
    And you add these companies' significant network effects 
where value is added to the company simply because a consumer 
chooses to use only that company's products or services. These 
firms gain significant market power. And I think we have seen 
that in a lot of different instances.
    I guess from a public policy standpoint, when we think 
about what government can or can't do, how do we ensure that 
startups, which are the major drivers of innovation, are still 
able to compete and be able to have a market to innovate as a 
whole. And I think I'll start with Dr. West.
    Dr. West. Thank you. I agree with your emphasis on 
competition. I agree that there is a problem in terms of the 
decline of startups in America.
    My colleague, Bill Galston and Clara Hendrickson wrote a 
paper on this topic, which I would recommend to everyone on the 
Committee. And what they suggest is the need to update our 
merger review guidelines for the digital economy.
    Many of those guidelines date back 20 and 30 years and have 
not really been updated, even though our economy has undergone 
major changes. So we need to kind of look at how we think about 
those types of things.
    Representative LaHood. Dr. Strain.
    Dr. Strain. I certainly think this is an extremely 
important issue, and I agree with Dr. West that looking at some 
of the merger rules is a reasonable course of action.
    I think it is important to recognize that there is more 
complexity here than there may seem. So on the one hand it is 
the case that tech giants are buying smaller tech firms and 
kind of folding them into their conglomerate. And it is 
reasonable to speculate that that may be reducing innovation 
and reducing competition in the economy.
    The flip side might also be the case. It could be that the 
opportunity to be purchased by a major tech firm is actually 
something that is incentivizing people to innovate and to 
create new tech companies. Their goal could be to be purchased.
    And so it is an area that I think merits further study and 
further examination, but it is not immediately clear to me 
that, because Facebook purchased Instagram there is less 
competition and innovation than there otherwise would be.
    Representative LaHood. Along those same lines, as we look 
at the Federal Trade Commission and the role that they play, 
does the FTC have a modernized set of tests and evaluations to 
adequately determine if and when the tech company is stifling 
competition or innovation, or is anticompetitive? Do you feel 
that their standards and evaluations are currently up to par on 
that? Do you want to comment on it, Dr. Strain?
    Dr. Strain. Yes. I feel that the standards are the right 
standards. The standards focus on the consumer and on the 
welfare of the consumer. The standards focus on the prices that 
consumers face, on the quality and variety of products that are 
offered to consumers, and on whether innovation is being 
fostered, and whether competition is being advanced.
    There are other standards, and other countries place 
emphasis on different things, but that standard has been the 
standard in the United States for the past half-century, and it 
still seems to me to be the correct and appropriate standard.
    Representative LaHood. Thanks. Mr. Mills, my ears perked up 
when you mentioned the Heartland. I represent a District in 
central Illinois, Peoria, Illinois, is my home town. And you 
talked about investment in the Heartland when it comes to not 
necessarily the East or the West Coast.
    How do we look at smaller markets? And what is the 
attraction to investing in tech in medium-sized markets or the 
Heartland?
    Mr. Mills. Well the short answer is, to be mildly cynical, 
is that the pricing of the deals is better. So you are not 
competing against large venture funds that add a zero to the 
valuation of a company you want to invest in.
    So you can find just the smart young men and women, and 
older men and women--I would note the Kaufen Index shows that 
the number of startups started by people over 55 is the same as 
the number under 35 as a percentage of startups.
    It is attractive because there is a lot going on. But it is 
not attractive if you do not like traveling. So venture funds 
tend to like to invest in their geographical orbit.
    I would like to point out that one of the big problems, 
having been a practicing venture capitalist and began one, and 
having taken a company through an IPO as the founding chairman 
and CTO, that the biggest problem that we have in getting new 
companies to not be bought by an Amazon, or be bought by a GM, 
or whoever, is that we've damaged the IPO process.
    The finance regulatory system makes it extraordinarily 
difficult and extraordinarily expensive, and this has been well 
analyzed by a lot of academics, but as a practitioner being run 
through that mill I can tell you it is a very difficult, very 
painful process.
    I know what it is designed to do, to protect innocent 
victims buying stock in companies that are charlatans, but I 
think the pendulum has swung too far.
    Representative LaHood. Thank you. Thank you, Mr. Chairman.
    Chairman Paulsen. Thank you. Representative Maloney, you 
are recognized for five minutes.
    Representative Maloney. Mr. Chairman, I would like to thank 
you and the Ranking Member for calling this incredibly 
important hearing, and all of our panelists. I believe this is 
certainly one issue that we can firmly all agree on, that 
innovation and entrepreneurial drive is one of the defining 
characteristics, if not the defining characteristic, of 
America's success. And certainly it has been essential to our 
economic success.
    And I am disturbed by some of your statements that we are 
losing our competitive edge and our really innovative success 
in this area.
    I just have noted economically in my own District and 
around the country that retail stores are closing. They are 
just closing in droves. You have empty stores. And I represent 
Manhattan. It is a business district, but stores, particularly 
retail stores, are all going out of business.
    I read an article last week that 18 major retail companies 
are going out of business. And I resisted buying online, but 
now I do everything online because it is faster and I do not 
have time to go shopping. But there are no more toy stores, 
clothing stores, they are all going under. And that is just one 
example of how a large conglomerate, in this case Amazon, is 
taking over.
    And it just is common sense that when these large 
conglomerates go in and dominate, they are going to stifle the 
creativity in those areas, and the competition in those areas.
    But I want to ask Dr. Furchtgott-Roth, in your testimony 
you state the need for strong intellectual property laws, and I 
agree that our property laws have brought many people to invest 
in our country. They trust our laws. They invest in our 
country. But in the past the high tech industry has benefited 
greatly from the fact that workers often move from one company 
to another, taking their skills with them.
    It has been argued that this cross-cultural or 
hybridization has been a significant factor in promoting 
innovation. If you look at the automobile companies that all 
came up in Detroit. The Silicon Valley with all these high tech 
companies out there. And now we see a trend where some 
companies have tried to enforce nondisclosure agreements that 
restrict the movement of skilled workers, or take a broad 
interpretation of what knowledge is proprietary. They are being 
forced to sign non-compete, won't go to another firm, won't 
share information.
    Yet if you look at the history of the country, it was this 
cross-ideas that people would get in an area and talk to each 
other, go to another firm, do a startup. But now with these 
non-competes and this, that, and the other, I just like to 
think what kind of impact do you think these agreements have? 
And are they damaging innovation?
    I would like to ask you, and I would like to ask Dr. West, 
about the impact of these nondisclosure, non-compete, won't go 
to another firm, you can't go to another firm in the same 
industry, that these industry high tech firms and others are 
forcing their employees to sign.
    I even went to visit a high tech firm. I was just visiting 
it. And I was going in and touring it, and I had to sign a 
nondisclosure, will-not-reveal anything I learn during the trip 
that I had to just look at it.
    So what is this going to have--true story; I couldn't 
believe it--but anyway, to the panelists, if you would start, 
Doctor.
    Dr. Furchtgott-Roth. Yes, thank you. It is a very important 
question.
    I think a lot of the non-compete contracts are very fact-
specific. And I'm sure there are some that are very problematic 
and may have discouraging effects on innovation, and others may 
very well be necessary for companies to be willing to invest in 
employees and be willing to share information with them.
    So I would be very--I am not in a position to make a 
blanket statement about their effectiveness. Maybe some of the 
other panelists have a stronger view.
    Representative Maloney. Dr. West, do you have a----
    Dr. West. Yes, I do have stronger views on that, so thank 
you for the opportunity. I agree with you that many of the 
noncompete clauses are overly broad.
    I grew up in an era where most employees were free agents, 
and you basically sold your talent to the highest bidder, or 
where you wanted to work. I think we have gotten away from 
that, and I think that damages our ability to innovate, it 
damages competition, and it is probably part of this drop in 
startups that we have been seeing over the last 40 years.
    Representative Maloney. I have one minute left, but I am 
going to ask, I guess it was Dr. Strain, you said that all of 
these huge conglomerates were not hindering, if I heard you 
correctly, the competition, and it was really still a small 
part of the profit, or the organizations. But I've got to tell 
you, I don't remember an antitrust suit in my lifetime. And yet 
if you read the history of our country, there was one antitrust 
suit after another trying to break up monopolies.
    I guess we did have one when we reformed the 
telecommunications system in America and said AT&T could no 
longer dominate everything, that there would be competition. 
And I would argue that is what brought us all of the new 
internet and high tech firms, is when we deregulated that we 
had a burst of activity where a young, brilliant kid could 
start their own company.
    But we are fixing it so that it is becoming harder to 
happen. So I just want to throw that out. I am concerned about 
the domination. And I read an article that one major company 
begins every meeting by saying ``Dominate!'' We must dominate 
America's commerce. We must dominate the world in this area.
    And I don't see that dominating brought us the innovation, 
that brought us the success that we have as a country. And if 
we lose that success, I think we lose a fundamental element of 
what America is.
    I am very concerned about it. Thank you for calling this 
hearing, Vice Chair and Chair. I think it is very important.
    Chairman Paulsen. Thank you. And let me just thank all of 
our witnesses for taking the time to appear before the 
Committee today. I want to remind Members, should they wish to 
submit additional questions for the record, the hearing record 
will be open for five business days.
    And with that, our Committee is adjourned.
    [Whereupon, at 3:27 p.m., Wednesday, April 25, 2018, the 
hearing was adjourned.]

                       SUBMISSIONS FOR THE RECORD

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    Good afternoon, and welcome to today's hearing on ``How the 
Innovation Economy Leads to Growth.''
    The U.S. economy is not only growing, but it's also doing so 
faster.
    GDP growth is rising, job creation is strong, average wage growth 
is improving, and inflation remains low.
    These long-awaited positive results stem from the decision to 
unleash America's most valuable economic asset: the American people.
    Tax and regulatory relief are allowing American families and main 
street job creators more breathing room and to do more.
    Contrary to those who believed we were stuck at low growth, many 
economists expect as much as 3 percent GDP growth in 2018 and similar 
strong growth in 2019.
    To achieve this, Washington needs to stay out of the way so that 
individuals are free to figure out new ways to solve old problems.
    Such innovation is vital to sustaining our restored economic 
growth.
    America has been a laboratory for invention since its inception, 
and it is that spirit that has led to our strength.
    A report by the McKinsey Global Institute in March 2017 finds that 
many advanced economies rely on productivity gains far more than 
increases in the labor supply to drive economic growth.
    Folks in the private sector know this when they ask questions like: 
How can we serve more customers in one day? How can we complete more 
orders in less time? How can I produce a product with fewer passes of a 
machine?
    Those questions are how innovation becomes the primary driver of 
productivity gains.
    We know we are blessed to live in the United States for a variety 
of reasons, but among those blessings are our fellow Americans who have 
generated remarkable technologies to lift our standard of living, to 
expand our horizons, to support U.S. leadership in the world, and to 
grow our economy.
    Not all economic systems are equally conducive to such path-
breaking innovations.
    Every technological advancement of major economic consequence since 
World War II has come from the United States. That is no accident.
    As we will hear from our witnesses, strong property rights, the 
rule of law, light regulation, and competition are critical conditions 
for visionary entrepreneurs, risk takers, and investors to generate the 
technological success we have seen.
    American inventors, main street job creators, and resourceful 
factory workers will continue to deliver amazing advances-but that's 
contingent on Washington staying out of the way.
    A brilliant idea or discovery is only the start. It has to be put 
into concrete form and developed. From there it has to be 
commercialized and disseminated throughout the economy before it 
actually boosts economic growth.
    These steps can take a long time depending on how they are taxed 
and regulated, or how antitrust law is applied.
    The highway to innovation is littered with potholes, traffic jams, 
and overturned vehicles. You can see this up close in my home state of 
Minnesota where an excise tax threatens the innovative medical device 
industry and could drive it away to other countries.
    While the Federal Government has temporarily suspended that tax, 
innovators still face great uncertainty about their future.
    Even more obstacles lurk along the path of international trade. 
Last year, this Committee held a hearing on digital trade. The takeaway 
is that the United States leads in digital products and trade that rely 
on the internet.
    Yet the freedom of the internet faces challenges abroad, and the 
United States must strive to protect it. To remain credible in this 
mission, the United States must generally promote and defend the long-
held American principles of unencumbered international transactions and 
trade.
    Every day has the potential for game-changing technological 
breakthroughs.
    Blockchain is an example of a technology at an early stage of 
development. Its potential for very wide application throughout the 
economy could be stifled by over-regulation.
    The United States has the opportunity to continue to champion its 
Age of Invention, but only if we keep the engines of innovation 
running. We must protect the ability of our market economy to perform 
at its full potential at home and in global markets.
    I look forward to the testimony from our distinguished panel of 
witnesses today for clarity and guidance on how innovation can drive 
economic growth and American prosperity.
                               __________
   Prepared Statement of Hon. Martin Heinrich, Ranking Member, Joint 
                           Economic Committee
    Thank you for calling today's hearing on promoting innovation and 
accelerating economic growth.
    Innovation drives economic growth and boosts wages. We need more of 
it and we need innovation to be more broadly shared across regions.
    Other countries are moving forward aggressively to promote 
innovation, to support advanced manufacturing, and to boost the 
productivity of their workers.
    To lead in the 21st century economy, the United States must remain 
at the forefront of game-changing discoveries and create an ecosystem 
that supports innovation across the economy.
    The Federal Government plays a key role in this--funding and 
conducting R&D, investing in the human capital of our people, and 
ensuring that we are making the necessary investments in STEM.
    STEM education and R&D are two innovation anchors.
    We need to ensure that students everywhere have access to STEM 
pathways, and that starts with making sure that schools have the 
resources they need to recruit, train, and retain talented science and 
math teachers.
    We need to expand middle-skills pathways into emerging sectors, and 
make a college education accessible and affordable for all Americans, 
so that every student has the opportunity to benefit from tomorrow's 
innovations.
    The Federal Government remains the largest funder of basic 
research--that research which adds to our fundamental stock of 
knowledge, yet often would not be conducted without public investment.
    This is the research that can help us solve the problems we don't 
yet know we have.
    Basic research has driven major leaps forward--including mapping of 
the human genome, vaccines, breakthroughs in cancer research, and 
energy storage technology and the creation of the internet, laser, MRI 
and GPS.
    The knowledge gained through this research has significant 
spillover economic benefits--increasing productivity, creating jobs, 
and accelerating economic growth.
    That's why it's encouraging that the recent Omnibus agreement made 
significant investments in R&D.
    Investments in basic research increased by almost 10 percent over 
the previous year, its largest annual increase since the Recovery Act 
in 2009.
    Promoting innovation also means extending already developed 
technologies, like broadband, to communities currently without access.
    Today, years after high-speed internet was first made available, 19 
million rural Americans still lack access. The private sector doesn't 
have the incentive to extend broadband to remote, hard-to-reach 
communities.
    The Federal Government must step in and fill the gap.
    We also need smart policies that can help emerging industries grow. 
Targeted tax credits, competitive grants, and prize competitions are 
all levers Congress can pull.
    The multi-year extension of the wind production tax credit is a 
good example. It is driving investment in wind farms in New Mexico and 
across the country.
    Earlier this month, I toured the future site of the $1.6 billion 
Sagamore Wind Project in eastern New Mexico, which will be the largest 
wind farm in our state's history and create up to 300 construction jobs 
and 30 full-time operations jobs.
    Programs like Laboratory Directed Research and Development (LDRD) 
authorizing a portion of a lab's Federal funding for cutting-edge R&D 
are also vital.
    At Los Alamos National Laboratory in New Mexico, LDRD researchers 
generally account for one-quarter of the lab's patents and peer-
reviewed publications.
    Efforts to help commercialize technology developed at our national 
labs and research universities help to take a good idea and get it into 
production and out into the marketplace.
    In New Mexico, we've seen how commercializing the R&D that takes 
place in national labs can generate significant economic opportunities.
    I'll share one example.
    Descartes Labs is a New Mexico start up that uses artificial 
intelligence technology developed at Los Alamos National Laboratory to 
provide analysis and predictions based on satellite images of the 
earth.
    Early applications are in delivering crop yield forecasts and 
analyzing trends in energy, construction and the environment.
    Today, the company has its headquarters in Santa Fe, has raised 
close to $40 million in venture money, employs about 70 people, and is 
a recognized leader in analyzing satellite images.
    We need to help more research turn into innovative startups.
    Access to capital is key for entrepreneurs. Too many promising 
young companies fall to the Valley of Death, or get absorbed by 
behemoths where their innovations stall, because they cannot find the 
financing they need.
    This is especially tough for innovators in rural areas and smaller 
cities. Good ideas and innovations occur everywhere. But more than 
three quarters of venture capital goes to companies in San Francisco, 
Los Angeles, New York and Boston.
    Expanding access to capital can help us to tap into the next 
generation of innovators creating new startups and new opportunities.
    Lastly, immigrants are a key source of innovation and 
entrepreneurship. We cannot jeopardize these enormous contributions 
through short-sighted immigration policies or by kicking out talented 
young people.
    I'm an engineer by training. I could talk all day about innovation, 
R&D and tech transfer.
    But, now I look forward to hearing from our witnesses.
  
  
  
  
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Response from Dr. Furchtgott-Roth to Questions for the Record Submitted 
                       by Representative Maloney
    1) Last year Alexander Bell, Raj Chetty, Xavier Jaravel, Neviana 
Petkova and John Van Reenen released a National Bureau of Economic 
Research working paper titled, ``Who Becomes an Inventor in America? 
The Importance of Exposure to Innovation.''
    This is not a theoretical paper. The authors create a dataset of 
1.2 million inventors--defined as individuals who hold patents--and 
compare it to datasets of children with various characteristics.
    The authors find that:
        `` . . . children's characteristics at birth--their 
        socioeconomic class, race and gender--are highly predictive of 
        their propensity to become inventors. Children born to parents 
        in the top 1 percent of the income distribution are 10 times as 
        likely to become inventors as those born to families with 
        below-median income. Whites are more than three times as likely 
        to become inventors as blacks. And 82 percent of 40-year-old 
        inventors today are men. This gender gap in innovation is 
        shrinking gradually over time, but at the current rate of 
        convergence, it will take another 118 years to reach gender 
        parity.
    In the second part of their analysis, the authors find that 
``exposure to innovation during childhood through one's family or 
neighborhood has a significant causal effect on a child's propensity to 
become an inventor.''
    In the third part of the working paper, the authors look at the 
impact of financial incentives on inventors' propensity to innovate. 
They state that their findings ``imply that small changes in financial 
incentives will not affect innovation significantly.''
    What are the policy implications of the empirical findings in this 
paper?
    Thank you for noting this important paper that focuses on the 
individuals who file patents. The paper finds that individuals who are 
exposed to innovation at an early age are more likely to patent in the 
future. This result may have some effect on teaching methods, 
particularly for mathematically gifted students.
    I should note that patents are but one measure of innovation and 
but one form of intellectual property. Many individuals and businesses 
that are widely considered as innovative hold few if any patents.
    Indeed, of the five largest corporations in America that I 
discussed in my prepared testimony--Amazon, Apple, Facebook, Google, 
and Microsoft--only Apple is heavily patent-oriented. The other 
companies hold substantial portfolios of patents, but their business 
models do not rely on them exclusively. Nor is having a patent-oriented 
business plan a guarantee of success. Businesses such as Kodak and 
Xerox had substantial patent portfolios, but nonetheless entered 
bankruptcy.
    Still, I believe that the NBER paper has important results that may 
be relevant to education programs, particularly for mathematically 
gifted students.



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