Innovation often causes increases in productivity, which can temporarily displace jobs in an economy. This NYT article has some good points on innovation overall…

“If you invest in a technology that makes something more efficient, the fear is that people will be put out of work,” says Kevin Efrusy, the venture capitalist whose firm Accel Partners is the lead funder of several important Silicon Valley start-ups, including Facebook. “But it’s just the opposite. When anything becomes cheaper, we consume a lot more of it. The overall economic effect is, you create and expand entire new industries and employment goes up.”

According to a 1995 study by the Organization for Economic Cooperation and Development, periods of high productivity — often achieved through automation — were correlated with periods of high job growth throughout the last half of the 20th century. “Innovation leads to job growth directly and clearly,” says Robert D. Atkinson, president of the Information Technology and Innovation Foundation.

Link: Unboxed – Innovation Should Mean More Jobs, Not Less –

This is an old misconception. Yes, individual jobs are lost, but at the macro-level jobs are created and optimized in other areas.

Also, government can perhaps set up an innovation framework and not try to pick and choose who the winners should be.

“Innovation is the lifeblood of the American economy,” says Jim Hock, a spokesman for TechNet. “We’re only as good as our next innovation. TechNet believes we shouldn’t be picking and choosing technologies to back with a tax credit. We should be technology-neutral and create an atmosphere of innovation that will let a thousand flowers bloom.”

And, finally it is all about the messy world of innovation…

“America is probably the best culture in the world at failing,” he said. “We’re willing to navigate in a fog and keep moving forward. Our competitive advantage tends to be at the fuzzy front end of things when you’re still finding your way. Once the way has been found, we’re back at a disadvantage. So, yes, investing in innovation is critical.”