Special Report

How to Save the Global Economy: Think Small

How to Save the Global Economy: Think Small

To solve its big economic problems, the United States needs to think small.

It is a well-worn observation that technological innovation leads to economic growth. But ever since Sputnik, the U.S. government has primarily focused on funding innovation via large universities and research institutions. This funding is not insignificant — $143 billion in fiscal 2011, according to the National Science Foundation. Unfortunately, government grants focused on fostering novel technologies are cumbersome to apply for and incur mountains of paperwork once you get them. Small-scale innovation is nonetheless alive and well — and will likely lead the recovery, whenever it happens.

The most adventurous minds in the private sector have long found ways of harnessing this small-scale energy. Consider the X Prize Foundation, which is conducting technology innovation contests in areas such as education, transportation, energy, environmental sciences, and health care. The contests have already yielded a wide variety of promising technologies that could lead to multibillion-dollar companies. The three winners who split the Automotive X Prize in September 2010, for instance, all used a combination of aerodynamic design and alternative energy sources to build cars that achieved more than 100 miles per gallon — an accomplishment that should perk up the ears of any investor who recalls the success of electric-car company Tesla Motors, currently valued at $3.4 billion. Prizes for most of these contests are relatively small, less than $10 million apiece — evidence enough that small investments can nurture really big ideas.

Thinking small is, in fact, a unique American advantage. In China and Japan, the government directs technology innovation, sinking huge sums into industries that are then rapidly commoditized. Japan, for example, poured resources into dominating production of modules for flash memory, a common technology used for digital storage, and various types of simple semiconductors. Those sectors are now largely commodity products with exceedingly low margins and unpredictable market cycles that make capital investment extremely risky. The same is true in Europe, where government policies often lock out competition and lock in industries. The cycle is playing out in the United States’ solar-energy business, with the recent Solyndra fiasco in which the Energy Department invested more than $500 million in a solar panel startup, only to see the company go bankrupt when the market price of its product fell — highlighting the perils of top-down industrial policy.

It’s true that huge innovations have emerged in the past from big government-funded programs like NASA, the Pentagon’s Defense Advanced Research Projects Agency, and major research universities. But it is in the garages of Palo Alto, not the labs of Stanford, that these technologies reach their full potential as drivers of the U.S. economy — just ask Hewlett-Packard, Apple, and Google. By thinking on this scale, the U.S. government can drive commercial technology development and seed future big winners in the marketplace, rebuilding its economy and re-employing its people.

So far, though, President Barack Obama has mainly thought big. Big loans to electric-car makers and solar panel manufacturers. Big loans to Wall Street banks. He needs to think smaller. Sponsor more innovation contests. Make it easier for small companies to get started and get seed funding; if their technology is really good, they would cross the chasm to real funding in the next round. Rather than awarding $500 million to a single Solyndra, place small bets on 100 companies and let the marketplace of ideas sort it out.

Let’s be clear: The industries that have left American shores aren’t coming back. New jobs, when they arrive, will come from the frontiers of technological innovation: personalized medicine and dirt-cheap DNA tests, robotics and artificial intelligence for super-sophisticated manufacturing, voice-recognition technology, and 3D printing for quick manufacturing of complex objects, to name a few. They also represent the road out of economic stagnation — one small step at a time.