Government

White House awaits huge innovation report Industry participants in the

study, due to reach President

by April 1, are pleased, but

public interest groups think

it sidesteps basic issues

Wil Lepkowskj C&EN, Washington

The big federal study on innovation is about over. Two weeks of public sessions have just been finished and now the staff of Jordan M. Baruch, assistant Commerce Secretary for science and technology, is boiling down the 150 recommendations and assorted critiques.

Baruch will deliver a slim final report to White House domestic policy chief Stuart Eizenstat around the end of March. Hope is that President Carter, who ordered the study to find out what supposedly is holding back innovation, will have a list of actions that will be po­litically exploitable, Congressionally sal­able, sufficiently novel, and reflecting the real world.

Pre-Baruch pretenders to the tech­nology throne have gone to bat before in quest of establishing policy dominion. They all took swings, managed a couple of base hits, hit mostly foul balls, and really changed no basic rules of the game. Tax codes affecting research and development were altered here and there, antitrust policies remained unchanged, programs

of assistance to ailing industries came and went, and innovation studies proliferated. Attempts to aid sick companies drew fire from the healthy ones.

The net result was a continuing awareness that technological innovation counts for a lot in economic health. But nobody yet has been able to provide a theoretical base for explaining how, much less articulate an equitable ethic for it.

At the same time, public interest causes have risen even faster, and the net of these movements has been a cascade of socially innovative health, safety, and environ­mental regulations that have not only thrown industry into a dither in its scramble to adapt, but have confused the definition of innovation and the purpose of growth.

The result in this Administration has been a systematic but one-dimensional attack on regulation, with which Baruch seems precisely in tune. Said he in a speech not long ago: "The whole body of regulation is primarily an ethic to stop industry from doing things perceived as against the public interest. Regulation is a tool for stopping industry. Regulation is negative in concept. It's like brakes on a car—essential but negative."

But Baruch can choose words of com­passion, too. "We are really engaged here in laying new foundations for our children and those of the people around the world," he said during the recent sessions, borrowing the rallying cry from the President's State of the Union speech. "We are dealing with the benefits of in­dustrial technology in a very human sense," he said.

Most of the ideas that came out of the seven sessions fell more under the rubric of old trusses rather than new founda­tions. But one shouldn't underestimate either Baruch or the process. The agencies are talking about innovation. They have been made to participate. And Baruch is sure to produce a list of things—some new—for the President'to do.

But as for a larger global view—some deeper communication with the President about the shape of the industrial and fi­nancial world and the forces of change around it—Baruch gave no hint during the meetings that he would deal on that level. The last assistant secretary to enjoy such a relationship with a President was J. Herbert Hollomon during the Kennedy Administration.

The meetings were held on seven top­ics—procurement; direct support for R&D; environment, health, and safety regulations; regulation of industry struc­ture and competition; economic and trade policy; patents; and information.

In addition, reports were prepared by public interest and labor panels, but no meetings were devoted exclusively to the interests of these two groups, and this was a cause of some disgruntlement among some public interest members. They felt the sessions were held in a solely indus­trial framework and thus could not have made the kind of objective assessment on innovation that was the purpose of the exercise.

"On the whole I feel pretty good about the exercise," says Monsanto's chairman and president John W. Hanley, who chaired the panel on regulation of indus­try structure and competition. "I've read all the task force reports and there are some terribly good recommendations in them." Hanley says he has "prioritized" the 150 recommendations and reduced them to about 45. One basic change he believes needed is to let companies choose their own technological methods of meeting standards rather than being forced to adopt methods specified by the regulatory agencies. He believes a single change in procedures such as that would reduce industry costs by millions.

"While some of the tax measure rec­ommendations would be tough to ac­complish, most of the recommendations involve a change in attitudes," he says. "They are the kinds of recommendations that could get approval from all segments of society. I wrote to Baruch yesterday to say that he should expose the report to the panels before it goes to the President so that he can get support from the business and professional community."

Etcyl Blair, vice president and director Monsanto's Hanley and Commerce's Baruch at public session on Innovation study

14 C&EN Feb. 12, 1979

Sample recommendations from the nine panels

• Procurement (chaired by Thomas O. Paine, president and chief executive officer of Northrop Corp.): Government would recognize that independent re­search and development is an ordinary cost of doing business. Thus it would remove the Defense Department re­quirement that R&D be related to military applications and let the competitive marketplace judge the technical quality and relevance of R&D programs. This in effect would allow companies to use portions of military R&D funds for com­mercially related projects.

• Federal Support for R&D (chaired by Jack Goldman, chief scientist for Xerox Corp.): Federal-industrial matching grants would be established for research in universities. The indus­trial sponsor would choose and oversee the project, and all results would be­come public knowledge.

• Environmental, Health & Safety Regulations (chaired by Donald N. Frey, chairman and president of Bell & How-elf): Where compliance with regulations requires major capital investments and diversion of "funds from productivity improvement investments," government would increase the availability of dis­cretionary funds to meet the cost of

of health and environmental sciences "at Dow Chemical Co. and who served on the environmental panel, had equal praise for the exercise. "The value of the exercise to me," he tells C&EN, "was seeing such a large segment of industry getting together to discuss problems that in the long term will stymie this country. We are dealing with a regulatory bureaucracy that really does not understand innovation. I also thought the public interest input was terrible and nonconstructive. This exer­cise at least served to expose those who are radicals. Their approaches are not workable or even reasonable."

Other observers were less laudatory. "My faulting of the process," says one Office of Management & Budget source, "is that it started out as a look at the sta­tus of U.S. technology but then rapidly went into the assumption that things were bad. When somebody asked Baruch how he knew it was bad, his answer was that it could always be better. Industry says we don't want a lot of extra government help for faltering companies. I don't know what can be done. I don't expect much—maybe some improvement in how the Justice Department administers antitrust, maybe some minor tax code changes. I don't see that much sense of crisis."

"My perception of this [domestic policy review]," says one Congressional staff member close to the study, "is that these broad-brush proposals by industry are terribly vulnerable to criticism. Throughout the session people said you have to be specific almost down to the level of the company about these prob­lems and their solutions. We are clearly

compliance through such mechanisms as direct grants or various kinds of credit allowances.

• Regulation of Industry Structure & Competition (chaired by John W. Han-ley, chairman and president of Mon­santo): Antitrust regulators would en­courage joint or cooperative research even among large competitors. This would be particularly true in high-cost, high-risk, "breakthrough" type projects.

• Economic & Trade Policy (chaired by William M. Agee, chairman and president ofBendix Corp.): Government would allow more favorable stock option incentives to founders and key person­nel of small businesses by increasing the qualified option time to 10 years from the current five. It would postpone the tax on income derived from non­qualified options until the shares have been sold, rather than require benefi­ciaries to pay the tax at the time the option is exercised.

• Patent Policy (chaired by Robert B. Benson, director of Allis-Chalmers Corp.'s patent law department): Strength of patents would be increased against litigation by developing a system for re-examining patents by anyone re-

replowing ground already dug. One of the disadvantages of exercises like this is that there isn't much institutional memory applied. A number of the panel members were not even aware of the recent Ad­ministration study to overhaul antitrust regulation.

"As another example, I was disturbed by Baruch's encounter with [Food & Drug Administration Commissioner] Donald Kennedy. Kennedy showed contempt for the whole process. I remember when Baruch expressed some hope for a con­sensus on how to resolve conflicting po­sitions on risk, benefit, and economic impact, like an arbitration process or a science court. Kennedy simply shot back and told Baruch he obviously didn't un­derstand the process—that there are elaborate mechanisms for doing just that at the Food & Drug Administration. This is my early impression, but the exercise just didn't seem to be educational to anybody."

Public interest panelist Claire Nader was even harsher: "The whole thing is kind of sad because there is this big in­dustrial community that says it can't do the things it ought to do. It wants the U.S. to guarantee its profits.

"What I think was basically wrong with the exercise was its tremendous imbal­ance. Commerce had these seven subjects it wanted to address and industry people came in with a lot of resources and staff help. There were only 15 of us [public in­terest participants] and we had no staff help at all. Labor put out one little report. We put one out. But unlike the industry reports, our reports were not debated in

questing such a search. Inventors and their attorneys have long been com­plaining that their patents are too easily challenged through the discovery of prior art that was not detected during the original examination.

• Information Policy (chaired by Herbert Brinberg, chairman of Aspen Systems Corp.): Government would be prevented from entering into competi­tion with existing information services without a clear demonstration of public need and would work with the private sector to help fill information gaps.

• Labor (chairedby Markley Roberts, economist for AFL-CIO): Congress would look into the adverse effects of business mergers, interlocking rela­tionships among giant corporations and banks, their domination of key parts of the national economy, their effects on prices and on America's position in the world economy.

• Public Interest (chaired by Jack Conway, senior vice president of United Way): Existing examples of alternative forms of enterprises, such as coopera­tives, mutual societies, and commu­nity-owned arrangements would be as­sessed for their impact on both the rate and direction of innovation.

public hearings. So that left us in the po­sition, as usual, of reacting. We would have loved to have them comment on ours. Then we would have had a better dialogue."

One participant believed that Baruch reduced his stature before public interest groups and the regulatory agencies by failing to direct much focus to the inno­vative aspects of the regulatory process itself.

"What infuriated me," says an aca­demic participant who has conducted studies on regulation, "was that we were supposed to be dealing with the effects of regulation on innovation. Instead, the entire seven hours was spent damning regulation in areas that had nothing to do with innovation. The fact is that there is no empirical evidence demonstrating that regulation retards innovation. The subject is complex and we could have used the day trying to figure out how we could get some answers."

He adds: "We are not at the point of diminishing returns in regulations. The Toxic Substances Control Act was not passed as a dying gasp. There are tre­mendous social consequences as a result of pollution. Just as we think we can relax, along comes a Kepone, or a Love Canal incident at Niagara Falls, or PCB con­tamination of cattle, or sterile workers. And not once did they talk about the people put out of business because of such things as Kepone contamination. Finally, as far as the impact of regulation on in­flation goes, Carter's own Council on Wage & Price Stability said that envi­ronmental and safety regulations in a time

Feb. 12, 1979 C&EN 15

Nader: reaction was even harsher

of double-digit inflation are responsible for less than a 0.75% increase in the con­sumer price index. If you look at the real sources of inflation it's around the ac­tivities of the big operators—real estate, energy, medicine. People are afraid to attack the real sources of power."

One of the highlights of the two-week production was an impressive presenta­tion by George Lockwood, general partner of Monterey Abalone Farms of Monterey, Calif. Abalone is a tiny succulent shellfish and excellent protein source. In their at­tempts to establish a business in abalone, Lockwood and his partners have repeat­edly run into regulatory red tape and in-sensitivities to their innovational ven­ture.

The surprising aspect of Lockwood's presentation, done slickly with charm and wit, is that no one questioned either his data or his anecdotes. Nor had Baruch arranged for any presentation by a small businessman with a contrary tale to tell.

What the sessions seemed to lack, too, was what might be called "a sense of the tide." Sweeping changes are taking place in the geopolitical and geoeconomic bal­ance and no attempts were made by the cream of industrial leadership to spell those out, either in any report or in any of the discussions. Instead, hours were given over to relative trivialities such as the budget needed to run aspects of the Pat­ent & Trademark Office.

"If Baruch had the kind of agenda that went beyond simply improving the cli­mate for technological innovation, he sheltered it pretty well," says Hanley. "But if he wanted us to look into these deeper considerations, he'd scare the hell out of us. We're not used to thinking that way."

One study, in Congress, is trying to, however. The Joint Economic Committee is currently conducting a long-term study on "Economic Change." The study's purpose is to spell out for Congress what are perceived to be some fundamental changes occurring throughout the eco­nomic and social structure and their rel­

evance to economic policy. Technological innovation is one of the subtopics. Opin­ions come from a wide range of directions and the study is concentrating on some of the issues the Baruch exercise is appar­ently sidestepping.

But Hanley did take a crack at diag­nosing sources of current problems. "Our society seems to be longing for a return to dramatic leadership," he tells C&EN. "We need as a nation to rally behind someone who can help us put down our parochial interests in the interest of a larger merit. We cry out, our circum­stances cry out, for strong leadership and I'm afraid at the moment that Carter hasn't seemed to rally that universal spirit. Reviewing the whole philosophical pattern of life is the hardest work there is. You have to be a tough cookie if you want to bring this up." This other exercise was a visceral reaction.

Some believe Baruch is supremely conscious of the deeper challenges and knows he will get nowhere with a philo­sophical treatise. Still, the deeper prob­lems raised by technology were not made part of the agenda.

Michael Michaelis of Arthur D. Little Inc.'s Washington, D.C., office has seen many innovation studies come and go during his two decades in Washington and, in fact, authored one of the first. Baruch appointed him to the most recent review's advisory committee and he be­lieves the effect of the exercise will be positive. "The federal agencies are sure now to have become sufficiently sensitized to the subject," he says. And he adds that now is the time to establish a strong in­dustrial "focal point" to begin promoting the best ideas.

The main issue is to establish a climate for the marketing of new ideas with high social benefit, he believes, and Lock-wood's tale is at least symbolic of the kind of barriers an environmentally conscious small businessman can run into. Regula­tory paperwork is indeed time-consuming and expensive and does eat up important venture capital. And most of the partici­pants believe that the record of successes in new ventures over the past few years has been poor.

Michaelis says the climate for selling new things within a global environment amidst resource scarcity is especially difficult today. The markets aren't scarce but the "time horizons" for new products are much shorter. Big institutional stockholders of companies are demanding quick profit rather than encouraging the nurturing of dreams by inventors.

Today's dreamer would seem to have to be rich, idealistic, and independent, as well as determined.

Today's visions aren't clear, either, Michaelis says. "Very few people in in­dustry, except those in computers and information, can tell you with any con­viction what business they're in." He says innovation should be thought of as prod­ucts and services for meeting social needs—shelter, nutrition, communica­tion, transportation, education, energy, recreation, procreation, security.

Lockwood: an impressive presentation

Gar Alperovitz, codirector of the Center for Economic Alternatives in Washington, was a member of the public interest committee. He agrees that the innovation focus should be on human needs and basic necessities.

"I don't like the words 'barriers to in­novation,' " he says. "It bespeaks the idea that if you could remove the barriers you would solve the problem. I don't think that's necessarily true." He thinks that increase in productivity comes in job se­curity and worker motivation.

He thinks the government has done little to spur innovation and he is quick to suggest ideas for programs. "We first need a wide range of programs for worker par­ticipation and ownership schemes."

There is no getting around the likeli­hood that the Baruch exercise in the end will be politicized, since it can be expected that Carter's staff will choose only those recommendations that will enhance the President's chances for re-election. But there is a dilemma here. In his frank op­position to the idea that regulation can enhance innovation, Baruch seems to have taken the side of big business, which has pressed an antiregulation fight ever since Carter took office. And he has dis­played abalone farmer Lockwood, whose data many think to be exaggerated.

The dilemma is that Carter may change his mind by the coming summer and perceive that he could lose more votes by opposing health and safety regulations than he could win by taking a stance more in the public interest. One can be sure that a potential challenger to his office, Sen. Edward M. Kennedy, would leap on any softening of Carter's position on envi­ronmental quality and human health.

What can be said is that Baruch is willing to put himself out on a limb. But by stacking his panels with the business community he may have opened the ex­ercise to a nearsightedness that could prove not only harmful politically but wrong in its inability to perceive the true issues around innovation—that is, inno­vation for what end? •

16 C&EN Feb. 12, 1979