How basic research can repair the broken U.S. business model
Name an industry that can produce 1 million new, high-paying jobs over the next three years. You can't, because there isn't one. And that's the problem.
America needs good jobs, soon. We need 6.7 million just to replace losses from the current recession, then another 10 million to spark demand over the next decade. That's 15 million to 17 million new jobs. In the 1990s, the U.S. economy created a net 22 million jobs (a rate of 2.2 million per year), so we know it can be done. Between 2000 and the end of 2007 (the beginning of the current recession), however, the economy created new jobs at a rate of 900,000 a year, so we know it isn't doing it now. The pipeline is dry because the U.S. business model is broken. Our growth engine has run out of a key source of fuel—critical mass, basic scientific research.
The U.S. scientific innovation infrastructure has historically consisted of a loose public-private partnership that included legendary institutions such as Bell Labs, RCA Labs, Xerox PARC XRX, the research operations of IBM IBM, DARPA, NASA, and others. In each of these organizations, programs with clear commercial potential were supported alongside efforts at "pure" research, with the two streams often feeding one another. With abundant corporate and venture-capital funding for eventual commercialization, these research labs have made enormous contributions to science, technology, and the economy, including the creation of millions of high-paying jobs. Consider a few of the crown jewels from Bell Labs alone:
The first public demonstration of fax transmission (1925)
First long-distance TV transmission (1927)
Invention of the transistor (1947)
Invention of photovoltaic cell (1954)
Creation of the UNIX operating system (1969)
Technology for cellular telephony (1978)
Decline in Lab Funding
In the decades after these initial discoveries, vibrant industries and companies were born. The transistor alone is the building block for the modern computer and consumer-electronics industries. Likewise, DARPA's creation of the Internet (as ARPAnet) in 1969 and Xerox PARC's development of the Ethernet and the graphic user interface (GUI) further developed the transformative computer and Internet industries. The basic research breakthroughs unleashed subsequent cycles of applied innovation that created entirely new sectors of our economy.
But since the 1990s, labs dedicated to pure research—to the pursuit of scientific discovery—have seen funding slowly decline and their mission shift from open-ended problem solving to short-term commercial targets, from pure discovery to applied research. Bell Labs had 30,000 employees as recently as 2001; today (owned by Alcatel-Lucent ALU) it has 1,000. That's symbolic and symptomatic of the broken link in the U.S. business model. With upstream invention and discovery drying up, downstream, industry-creating innovation is being reduced to a trickle.
It's easy to ascribe current job losses in the U.S. to the deep recession or outsourcing. Both are to blame, but neither is at the root of the larger problem, which is lack of new, high-quality job creation. We are in the throes of the fourth recession since 1981. We have been outsourcing jobs for decades, but we have always bounced back with a new industry—a blockbuster industry. Discovery drives innovation, innovation drives productivity, productivity drives economic growth. But this time it's different, and whenever the current recession mercifully ends, the U.S. economy will not respond with the same job-creating vigor we have come to expect.
Job Creation a Huge Challenge
In the past, when the U.S. exported millions of high-paying jobs to low-wage countries, we replaced them with an even greater number of high-paying jobs in industries whose inception could be traced back to science done decades earlier. The PC, Internet, and cellular industries, born in the 1980s and 1990s, more than offset the loss of high-paying jobs in manufacturing industries like consumer electronics, steel, and others as the economy shifted from a manufacturing to a knowledge base. But in recent years, the software and manufacturing jobs lost have been largely replaced by millions of low-wage jobs in fast-food and retail or other service businesses. Finance has been a source of ongoing job growth, but recent events have proven that growth to be unsustainable. We've stopped creating new high-paying jobs.
We should not underestimate the magnitude of the job creation challenge. Outsourcing and extended recessions are not the only job destroyers in our system. There is also the constant pressure of value migration (the flow of value from old business models to new), which continues to be the major force reshaping our economy and will eliminate a large number of jobs in the next decade. (Think of all the old business models you know, from newspapers, to printing, to landline telephony, to the mighty, but now vulnerable, PC).
As a consequence of exporting good jobs that are not fully replaced, the U.S. demand engine is broken. Of the roughly 130 million jobs in the U.S., only 20% (26 million) pay more than $60,000 a year. The other 80% pay an average of $33,000. That ratio is not a good foundation for a strong middle class and a prosperous society. Rather than a demand engine, it's a decay curve. As a nation, we have papered over our declining incomes by accepting the need for two incomes per household and by borrowing heavily, often against paper assets inflated by financial bubbles (dot-com and housing). In recent years, personal debt has grown much faster than personal income. In 1985 the ratio of household debt to household income was 0.7 to 1; in 2000 it was 1 to 1; in 2008, it was 1.7 to 1. We earned less, so we borrowed more. In 2007 we reached our limit.
This cycle looks only to be getting worse. The effects of the massive scaling back of American science and engineering research in the 1990s and 2000s may just be beginning. Unless reversed, it is likely to have its greatest impact a decade from now, when the missing discoveries of a generation earlier would have been expected to come to commercial fruition. It's time to identify—and fix—the root of the problem.
Rebuild Research Labs
The good news is that restarting the innovation engine is quite doable and doesn't require a massive investment relative to other spending. The return on investment is very high, especially if you consider the return across the companies and entire industries that are built on the foundation of the initial discoveries. The venture-capital and initial public offering components of the business model are still in place; we just have to rebuild the upstream labs that focused on basic research, the headwaters for the whole innovation ecosystem.
Science is funny. It's a crapshoot. It takes hundreds of people with high IQs, PhDs, and an incredible curiosity, work ethic, and persistence. It also takes critical mass, lab support, the right equipment and instrumentation, peer review, etc. It takes open communication among peers, and other subtle but critical cultural factors. It takes a tolerance for risk. A tolerance for failure. A willingness to think and apply innovation laterally (many of the big breakthroughs were originally aimed at other targets). It takes a culture that attracts, encourages, and rewards the best minds.
The innovation path emerging from success is equally unpredictable. In many cases, the economic payoff is a decade away. Sometimes a decade and a half. And the success can lead in unexpected directions. Who in 1975 could have predicted how the PC would evolve, how it created networking, and giants like Cisco (CSCO), which enabled the entire online sector and already two generations of blockbuster businesses (from Amazon AMZN and eBay EBAY to Google GOOG and Facebook). Who in 1980 would have envisioned that the work at Bell Labs on novel cellular communications technology would lead to the global mobile revolution that is reaching into the most rural and remote corners of the world, creating millions of jobs and raising productivity and incomes?
Many of the classic scientific research labs, such as Bell Labs and RCA Labs (now Sarnoff Corp.), were started and funded by companies with virtual monopolies and very strong, predictable cash flows. They were able to embrace the uncertainty and serendipity of pure research in the context of their business. But such companies don't exist today. With the increasing focus on shareholder value that began in the 1990s as global competition heated up, Fortune 500 companies could no longer justify open-ended research that might not directly impact their bottom line. Today, corporate research is almost exclusively engineering R&D, tending more toward applied research with a 3- to 5-year time horizon (or shorter). IBM, Microsoft MSFT, and Hewlett-Packard HPQ, for example, collectively spend $17 billion a year on R&D but only 3% to 5% of that is for basic science.
Basic Science Gives Way to Fast Payoffs
Consider what has been lost. The diminution of Bell Labs—the crown jewel of the innovation ecosystem—is most jarring. Bell Labs was founded in 1925 as a joint venture of AT&T T and Western Electric (AT&T's manufacturing arm) to develop equipment for the Bell System phone companies. Bell Labs scientists have won six Nobel prizes in physics. However, starting in 2001, funding and staffing at Bell Labs was drastically reduced due to budget cuts. In 2008, parent Alcatel-Lucent announced it would be pulling out of its last remaining areas of basic science—material physics and semiconductor research—to focus on projects that promise more immediate payoffs. The legendary Bell Labs, an engine of scientific discovery and industry creation for more than 80 years, is essentially gone. (To see a response from the president of Alcatel-Lucent Bell Labs, click here.)
A similar fate has befallen Sarnoff Corp. Born as RCA Labs in 1942 to support the war effort, it developed technologies such as improved radar antennas, radar-jamming antennas, and acoustical depth charges for maritime warfare. In the 1950s and 1960s, RCA Labs produced breakthroughs in numerous broadcasting and related fields, including color TV, tape recording, transistors, lasers, advanced vacuum tubes, solar cells, and infrared imaging. At its peak in the 1970s, RCA was generating more patents than rival Bell Labs. In 1986, RCA was purchased by General Electric GE, which spun off Sarnoff Lab as Sarnoff Corp., a wholly owned subsidiary of SRI International. Sarnoff is now a shadow of its former self, developing smaller technologies with a commercial focus on a drastically reduced budget.
If the 1950s and 1960s belonged to Bell Labs and RCA, the 1970s and 1980s belonged to Xerox PARC (Palo Alto Research Corp.) and DARPA. PARC was the legendary Silicon Valley spawning ground of the Ethernet, movable real-time computer text, and graphical user interfaces. Companies such as Apple AAPL, Microsoft, and Adobe ADBE have built global businesses that have created hundreds of thousands of high-paying jobs, based in large measure on PARC's breakthroughs. Xerox missed most of these opportunities, but has created a multibillion laser-printing business based on work done at PARC. But PARC's research staff has shrunk drastically as Xerox's performance has forced dramatic budget cuts.
The Defense Advanced Research Projects Agency (DARPA), originally launched in 1958 as a response to the Soviet launch of Sputnik, is responsible for the Internet and numerous technologies with applications beyond the military. Threatened by Soviet technological advances, the Eisenhower Administration formed DARPA to ensure that American expertise in science and engineering would lead the world. The result: breakthroughs in time-sharing computers, computer graphics, microprocessors, very large-scale integration (VSLI) design, RISC processing, parallel computing, local area networks, and the Internet. DARPA progeny include Amazon, eBay, Yahoo YHOO, Google, Facebook, YouTube (GOOG), and hundreds of other companies that might never have come to life without DARPA's open-ended research that led to the Internet.
How to Reignite Innovation
In a post-September 11 world, DARPA's mission has shifted from science to tactical projects with short-term military applications, but it's not clear that shifting to a short-term applied approach will be as effective for the military as open-ended research. As military historian John Chambers has noted, none of the most important weapons transforming warfare in the 20th century—the airplane, tank, radar, jet engine, helicopter, electronic computer, not even the atomic bomb—owed its initial development to a doctrinal requirement or request of the military. Indeed, without DARPA's breakthroughs in information technology, military tools such as unmanned systems (drones) and global positioning systems would never have been possible.
For any institution—whether an individual company or government agency—cutting back on investment in basic science research may make great sense in the short term. Economic realities and shifting agendas force trade-offs. For a time, you can free-ride off the investments of others. But when everybody makes the same decision society suffers the "tragedy of the commons"—wherein multiple actors operating in their self interest do harm to the overall public good. We've reached that point. We're just beginning to see the consequences. We need to reverse the cycle, and we need to do it quickly.
As we consider reigniting the innovation engine, there are precedents that we can examine to show how the process of innovation can be speeded up. Given the current crisis and the urgency of generating high-paying jobs on a large scale, reducing the time lag between research and commercialization will be critical.
While the timeline for translating research efforts to tangible outcomes is typically 15 years or longer, that cycle can be accelerated. We've done it twice: First, the Manhattan Project, which responded to intelligence reports of Nazi research and created the atomic bomb in six years; and second, the Apollo Program, which landed a man on the moon eight years after President John F. Kennedy responded to Russian cosmonaut Yuri Gagarin's successful space flight. These examples provide a useful template we can to consider in responding to today's crisis.
Strong Leadership is Key
Spurred in part by a letter from Albert Einstein, President Franklin D. Roosevelt authorized a military program to explore the development of an atomic weapon as early as 1939. But despite a handful of scientific breakthroughs, including the discovery of plutonium at the University of California, Berkeley in 1941, the project languished for three years under lackluster leadership. In 1942, with the war in Europe going badly, theoretical physicist J. Robert Oppenheimer convened a meeting of leading atomic scientists at Berkeley, where the experts debated the conceptual options—fission vs. fusion, uranium vs. plutonium, and various ways to organize the fissile material—and reached a broad consensus about the design for the bomb.
Shortly thereafter, President Roosevelt named a new leader for the project, General Leslie Groves of the U.S. Army Corp of Engineers, who had just overseen the rapid construction of the Pentagon. Groves ordered the purchase of 1,250 tons of high-quality Belgian Congo uranium ore to be stored on Staten Island, N.Y., purchased 52,000 acres of land in Tennessee to be the future site of Oak Ridge National Laboratories, and named Oppenheimer the project's director. Based on the Corps' tradition of naming projects after the headquarters' city, Groves named the effort the Manhattan Project.
With as many as 130,000 employees (including thousands of brilliant engineers and physicists), the project conducted research at more than 30 sites in three countries (including Canada and Britain) and spent close to $2 billion (equivalent to $24 billion today). By mid-1945, six years after Roosevelt first laid down a marker and less than three years after Groves took over, two atomic bombs were constructed and used at Hiroshima and Nagasaki to force Japan's surrender and the end of the war.
No comparable scientific project of similar scale and urgency was pursued in the U.S. until the Apollo Program of the 1960s. When President Kennedy vowed in 1961 to land an astronaut on the moon and return him to earth "within the decade," only one American (Alan Shepard) had traveled into space. The difficulties were daunting, but the number and variety of technical innovations developed for the moon mission were remarkable. To power the instruments and computer on board the spacecraft, the world's first fuel cells were invented. To fabricate the structural components of the spacecraft with sufficient precision, computer-controlled machining was conc