Why More Spending is Needed on Innovation

Spending on innovation makes up around 2.7 percent of the US gross domestic product (GDP). That money has fueled countless developments and breakthroughs that make the world a better place.
 
The Northwestern Kellogg School of Management’s Benjamin F. Jones argues that isn’t nearly enough. And COVID-19 illustrates that point.
 
During his January 26 virtual Dean’s Seminar Series lecture “A Calculation of the Social Returns to Innovation,” Jones recapped an academic paper he wrote with Lawrence Summers, who served as Secretary of the Treasury under President Bill Clinton, is a former president of Harvard University, and is currently a professor at Harvard. They contend that even under conservative assumptions, it is difficult to find an average return below $5 for every $1 spent on innovation. More moderate estimates suggest $1 brings back $10, and maybe much higher.
 
Developing students to become innovators is imperative.
 
“We need more McCormicks, we need bigger McCormicks. We need more Northwesterns, we need bigger Northwesterns,” said Jones, Gordon and Llura Gund Family Professor of Entrepreneurship, professor of strategy, and faculty director of the Kellogg Innovation and Entrepreneurship Initiative. “We need not just academic support but more going on throughout society in an innovation sense.” 

There was a big shift around the industrial revolution, Jones said. Standards of living started improving rapidly, and health outcomes began to greatly improve – meaning less infant mortality and longer lives.  Innovation – the advance of new ideas and ways of doing things – drove these improvements. Yet we continue to invest rather little in innovation despite the enormous social benefits it brings. 
 
There are many implications.
 
“We should be living longer today. We should be richer today. We should’ve had a solution for the pandemic much faster than we could, because of what we haven’t done in the past,” he said.
 
“Your standard of living is at stake here, and I think as a society there’s just enormous opportunity to do more.”
 
The pandemic brings that point into stark relief. Previous research into RNA and genetics teed up the relatively speedy work to create vaccines to fight COVID-19.
 
And further, Jones said, the pandemic’s economic costs are a microcosm of this point. Globally, the world economy may take a $10 trillion or $15 trillion hit due to the coronavirus. In the US, the pandemic may carry a $3 trillion cost to the federal budget.
 
“Operation Warp Speed is the tiniest, teeniest fraction of that. It’s something like $20 billion. It’s basically nothing,” Jones said. “Just think about: You spend $20 billion and you’re trying to avoid $15 trillion in damages. The world is losing $10 billion a day in GDP, not to mention all the death.
 
“If you could spend another $10 billion, which would be like a 50 percent increase in Operation Warp Speed, and all that did was bring the end of the crisis one day forward, that pays for itself,” he added.
 
That lesson applies to the pandemic, but also much more.
 
“Our level of effort has been so poor compared to the costs we’re bearing as a society, and it’s even worse than the numbers I’m telling you,” Jones said. “We need to be further ahead in our knowledge. We need to understand that is the key. We have to invest in it to solve the problems that face society.
 
“We seem like we do a lot. Or do we?” he added. “Are you impressed with what we did? You should be much less impressed than one might think.”