Can America Invent Its Way Back?

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Atkinson, of the think tank ITIF, argues that the R&D tax credit needs to be reworked to encourage collaboration. He suggests giving companies credit on their tax returns for 40% of the money they spend on research partnerships with universities and government laboratories, not just for their increased spending, as the current law allows.

Atkinson also advocates creating a national foundation, similar to the NSF, with the mission of promoting innovation. The idea has some support: In June, Senators Hillary Clinton (D-N.Y.) and Susan Collins (R-Maine) introduced legislation to set up a National Innovation Council.

One of the hottest areas in the field is the use of government aid to cultivate "innovation clusters," or collections of local companies and academic institutions working together to create new products and processes. Ideally, those alliances would build on existing expertise in a region.

Last November, for example, Maine voters passed a $50 million bond issue to help finance groundbreaking local business initiatives. In early August, grants totalling $29 million were announced, including funds to renovate a commercial pulp mill by adding a pilot plant to produce ethanol—without reducing the mill's usual output.

Will innovation economics keep America growing? Proponents are upbeat about the long-term technological possibilities, despite the current pullback. "Like the 1970s, people are going to assume that a short-term slowdown means the trend is slower as well," says Stanford's Romer. "But the arguments for long-run optimism are as strong as they have ever been."

Business Exchange related topics:
US Economy
Business Innovation
Innovation Economics

Mandel is chief economist for BusinessWeek.