Many investors have been schooled in the Henry David Thoreau concept that “the government that governs least, governs best.” Not necessarily.
The government can also be a catalyst for growth and innovation. Indeed, the world-class technological capabilities of America are due not only to a dynamic private sector, but also to public sector investment in foundational technologies.
To this point, government-funded research & development (R&D) soared in the aftermath of World War II, rising 20-fold between 1940 and 1964, when federal R&D spending reached a peak of nearly 2% of gross domestic product (GDP). Then, the engine of American innovation was the U.S. government, with public sector agencies like the Defense Advanced Research Projects Agency (DARPA), the Advanced Research Projects Agency (ARPA), the Atomic Energy Commission and, of course, NASA - the National Aeronautics and Space Administration, spawning and creating the technological capabilities that would drive U.S. economic growth for decades.
As Jonathan Gruber and Simon Johnson note in their book, Jump-Starting America, “It is hard to find an area of technology development that has not been affected by the NASA enterprise in some fashion.”
According to the authors, NASA has spawned hundreds of commercial spin-offs including digital camera sensors, precision global positioning systems (GPS), advance water filtration and airplane wing designs among many other goods and services. In addition, integrated circuits, semiconductors, computer hardware and software, satellites, flat-screen panels, drones, the internet: all of these wealth-enhancing products were hatched by federally funded R&D over the decades, creating numerous positive “spillover” effects on real growth.
From the book The Entrepreneurial State, author Mariana Mazzucato notes: “From the development of aviation, nuclear energy, computers, the Internet, biotechnology, and today’s development in green technology, it is, and has been, the State, not the private sector, that has kick-started and developed the engine of growth, because of its willingness to take risks in areas where the private sector has been too risk averse.”
Having said all that, it’s worth noting that the guts of an iPhone are full of major components like GPS, lithium batteries, cellular technologies, liquid crystal display (LCD), Internet connectivity, etc. that didn’t originate with Steve Jobs and Apple but rather from research that was either directly or indirectly funded by Uncle Sam.
As Mazzucato notes in her book: “While the products owe their beautiful design and slick integration to the genius of Jobs and his large team, nearly every state-of-the-art technology found in the iPod, iPhone, and iPad is an often overlooked and ignored achievement of the research efforts and funding support of the government and military.”