Cut mortgage subsidies and invest in innovation
A sign sits in the front yard of a home being offered for sale January 25, 2010 in Pleasant Prairie, Wisconsin. (Getty Images)
June 28th, 2011
10:00 AM ET

Cut mortgage subsidies and invest in innovation

Editor's Note: Bruce Katz is a Vice President at the Brookings Institution and Director of its Metropolitan Policy Program.  Follow Bruce on Twitter.

By Bruce Katz – Special to CNN

With economic recovery sluggish, what can the federal government do to spark innovation - the historic catalyst for economic growth and productivity?

There are plenty of ideas out there, including ones that are low cost but controversial.

As the McKinsey Global Institute smartly recommended earlier this month,

“Policymakers can support the emergence of new industries by using the power of the government to set standards and to create pricing mechanisms, and by using government purchases to provide early stage demand for new technologies.”

In today’s global economy, however, setting national rules of the road is not sufficient.   Investments matter.  Governments in mature economies must invest in innovation in appropriate ways and at large enough scale to grow jobs in the near term and retool our economy for the long haul.

The real question is: What to invest in and how to pay for it?

I recommend three tiers of national innovation investments:

First, the U.S. needs an entity charged with bringing strategic purpose and direction to federal innovation policy and flexible resources to make that vision a reality.  Presently, responsibilities for innovation policy and investments are divided up among multiple agencies and entities, let alone Congressional subcommittees.  The result is that the whole is less than the sum of the parts.

Rob Atkinson and Howard Wial have proposed a National Innovation Foundation (NIF) to bring together and ramp up the government’s fragmented efforts to boost commercial innovations in fields such as precision manufacturing, information technology, life sciences, clean energy and the environment.

Modeled on successful efforts in Japan, Korea and Finland, the NIF would bring a series of innovation programs that are now isolated and marginalized in separate cabinet agencies under one roof with a budget of $1 to $2 billion per year.  It would also bring national coherence to the myriad state and local efforts underway across the country.

Second, the U.S. needs to invest at scale and in a sustained way in advanced research and development, particularly in emerging sectors like clean energy.

Earlier this year, the American Energy Innovation Council, led by corporate titans like Bill Gates and Jeff Immelt called for an annual $16 billion investment in clean energy innovation ranging from basic energy science and renewable energy to electricity transmission and efficiency.

To drive market creation, the Council urged that funding flow both through ARPA-E (the military-inspired innovation catalyst at the Department of Energy) as well as via a distributed network of Energy Innovation Hubs and Centers of Excellence.

Finally, the U.S. needs to invest at a more granular scale in the interplay between innovation and manufacturing.  Martin Baily recommends consolidating the federal government’s existing manufacturing-related investments into a $15 billion Manufacturing Innovation Fund, which would support loans through a peer-review selection process to companies in the very early stages of new technology development.

To be effective, these investments need to leverage natural regional clusters, the geographic concentrations of interconnected firms and supporting organizations that drive innovation.

In addition, these investments, along with other financing vehicles like a National Infrastructure Bank and a National Green Bank, must offer ways to unleash private capital for productive and sustainable growth.

The price tag for investing in innovation is not cheap.  But there is a way to pay for it.

Smart tax reform provides a path back to sanity.  One way to free up capital for investment would be to stop fueling the bad habits of a failed growth model and a legacy government.

The federal tax code is replete with expenditures that fuel consumption rather than incentives that catalyze innovative and productive growth.

The worst offender by far is the federal mortgage interest deduction.

This deduction is among the most regressive tax subsidies in the U.S. code. It disproportionately benefits high-income households and it largely fails to fulfill its primary purpose of increasing homeownership rates.

According to recent studies, over 70 percent of all U.S. taxpayers receive no benefit from the mortgage interest deduction, and, for those that do itemize their deductions, the tax savings for families making above $250,000 per year are 10 times greater than for households earning closer to median income.

Incredibly, the deduction is projected to grow from $79 billion in the 2010 fiscal year to $144 billion in 2016, according to the Obama Administration’s FY2012 budget.

Under current law, taxpayers are eligible to deduct the interest on mortgages as large as $1 million for first and second homes and an additional $100,000 on a home-equity loan – with no restrictions on how that money can be spent.

The single act of capping the mortgage interest deduction at current levels would save $166 billion over 5 years. This would be more than enough to invest in innovative growth.

For those concerned about the impact on homeownership rates, we should learn from abroad.

The UK gradually eliminated its mortgage interest relief in the 1990s, with no long-term effects on its homeownership rate. Canada does not have a mortgage interest deduction, and has almost the exact same homeownership rate as the United States.

There are many, particularly in the real estate sector, who will resist any effort to scale back the mortgage interest deduction.  But the stakes post-recession are very high.  To grow and prosper, the United States must invest strategically in innovation.

It is time to cut to invest.

The views expressed in this article are solely those of Bruce Katz.

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Topics: Innovation • United States

soundoff (11 Responses)
  1. laurakeller123

    I've dealt with "123 Refinance" on two refis now, and in each case it was about as painless as anything that involves paperwork by the acre can possibly be. I would heartily recommend his services without reservation for those thinking of refi.

    June 28, 2011 at 1:49 am | Reply
  2. j. von hettlingen

    The mortgage borrowers won't like it!
    The question is, which has more priority – the plight of the mortgage borrowers or the country's competitiveness against others'.

    June 28, 2011 at 5:14 am | Reply
  3. bobalu

    I agree that the deduction benefits homeowners, maybe at the expense of renters, but it would need to be gradually phased out (maybe over 20 years) so we don't unfairly add to the number of foreclosures. I'm a middle class guy and I save about 2 thousand dollars a year due to the mortgage deduction. When I bought my house I calculated what I could afford with the understanding that I'd get the deduction.

    June 28, 2011 at 10:47 am | Reply
  4. muin

    Dream of home ownership is very unique to most americans. Mortgage deuction plays a significant role in that dream. I know many crooks including some banks took advantage of this american psyche and collapsed the whole global economy not just american economy but it's still worth to preserve this dream for future generations.

    June 28, 2011 at 11:34 am | Reply
  5. anil gupta

    it si svery interesting, when i recommended to President Pbama to invest 10 per cent of stimulus funds in innovations in 2009, he did not listen, will he listen now
    Gupta even has a plan for getting the attention of U.S. President Barack Obama. "Given our network's experience in scouting ideas and innovations, both from the formal and informal sectors – working with students, farmers, school children, and more – you could tell Obama that he could get 2,500 ideas by August. Globally."

    By October, Gupta speculates, the opportunities identified would receive investments either to create prototypes, collect more information, or test the innovations out.

    But how much would it cost? Based on his experience, Gupta believes the initiative would require just 10 percent of the stimulus package recently granted to rejuvenate some of the most troubled U.S. companies – namely, $10 billion.

    "With the same amount given to salvage one company and 10,000 jobs, this project would create 1 million jobs and 50,000 small enterprises across the world. We would start a polycentric entrepreneurial global revolution."

    June 29, 2011 at 12:21 am | Reply
  6. Brett

    It is really time for innovation in mortgage in real estate investing! Great article!

    July 29, 2011 at 11:20 am | Reply
  7. Marty

    I wish they had similar initiatives in Australia. Check this out

    November 7, 2011 at 5:38 pm | Reply
  8. countrywide

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    April 11, 2012 at 6:36 am | Reply
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    Dream of home ownership is very unique to most americans.natural weight loss

    May 4, 2012 at 3:01 pm | Reply

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