Here's How To Deepen the Recession

President Barack Obama, accompanied by business leaders, makes remarks about innovation and jobs, Thursday, July 2, 2009, in the Rose Garden of the White House in Washington. (AP Photo/Gerald Herbert)
AP Photo/Gerald Herbert
Gary Shapiro is the president and CEO of the Consumer Electronics Association, which represents more than 2,000 U.S. high-tech companies and produces the International CES, the world's largest event for consumer technology.

The U.S. government's series of recent corporate bailouts threaten to undermine one of the most important elements of a successful market economy: failure.

In the technology industry, failure has been a powerful force for advancement. Technologies are displaced as newer, better ones emerge to meet the changing needs of consumers and our society. The VCR gave way to DVD players, which in turn have been challenged by Blu-ray devices and Internet streaming. The beneficiaries of these failures are consumers and by extension, the economy itself.

Economist Joseph Schumpeter described this process of disruptive innovation as "creative destruction." For the technology industry, creative destruction forces even the most established players to adapt to the changing demands of the market or risk fading away. The American economy and consumers have historically benefited from this perennial cycle of improvement. Innovations get better, faster and less expensive for consumers. Meanwhile, more jobs are created to make room for new opportunities and evolving consumer demand.

The innovation cycle is much like life itself - the best lessons come not from success but from failure. In Washington, our lawmakers seem to have forgotten that important rule. As Congress has rushed to bail out failed banks, life insurers and car companies, it has embraced a market system where failure is not an option.

The government is now said to be considering whether to open up funds from the $700 billion bank bailout to small businesses. Of the 2,000 technology companies represented by my organization, 80 percent are small businesses. Many are hurting in today's tough economic climate, and some will undoubtedly go out of business. It is incredibly tempting to enact policies that protect organizations large and small from filing for bankruptcy and laying off employees.

Government intervention sounds comforting when you're on the down and out, but it is not a sustainable national strategy. If we continue on this course of bailing out failed companies - some which have failed to innovate and adapt to market changes for years - we will only serve to deepen the recession.

By staying its current course, the government will create a business environment where healthy companies are forced to compete with government-subsidized competitors. Good ideas and innovations will be slower to come to market. Prices will remain higher. And America could very well lose its competitive edge to other countries.

Instead, we need to allow the market to function properly and give entrepreneurs room to rise to the top. For entrepreneurs to usher in the next great company that will create jobs and economic opportunity, we need to let failed companies - fail.

Congress has an important role to play in the U.S. economic recovery, but first our lawmakers need to have more faith in the innovation economy and free market system. Indeed, policy action is needed to strengthen the economy, create jobs and ensure long-term economic growth. We should eliminate trade barriers for U.S. businesses exporting their products overseas. We should reform H1B visa policies to allow more of the best and brightest immigrants educated at American schools to remain here as American employees. We should reward investment in new technologies and particularly encourage growth in alternative energies and broadband.

Fear of failure will destroy future economic success. For the technology industry, as Schumpeter taught us, failure is part of the innovation cycle. For the U.S. government, allowing - and even hoping for - some failure should be part of the plan.

This makes way for new technologies, new business models, and new companies. Indeed, although not immediately intuitive, failure should be part of what drives our economic recovery. Without it, we are stagnant, and if we are stagnant, we are already falling behind.

By Gary Shapiro