Increased Funding of R&D

Greg Mankiw posted a reference to an old paper by Goolsbee which states:

"Conventional wisdom holds that the social rate of return to R&D significantly exceeds the private rate of return and, therefore, R&D should be subsidized. In the U.S., the government has directly funded a large fraction of total R&D spending. This paper shows that there is a serious problem with such government efforts to increase inventive activity. The majority of R&D spending is actually just salary payments for R&D workers. Their labor supply, however, is quite inelastic so when the government funds R&D, a significant fraction of the increased spending goes directly into higher wages. Using CPS data on wages of scientific personnel, this paper shows that government R&D spending raises wages significantly, particularly for scientists related to defense such as physicists and aeronautical engineers. Because of the higher wages, conventional estimates of the effectiveness of R&D policy may be 30 to 50% too high. The results also imply that by altering the wages of scientists and engineers even for firms not receiving federal support, government funding directly crowds out private inventive activity. "

This was written a decade ago. Since then many changes have occurred. Where is the money spent. Hardly in Defense R&D. That is so for two reasons. First a decreasing DOD budget. Second, there are fewer and fewer people who can get clearances. This is a reflection of the fact that fewer and fewer students with US citizenship and backgrounds amenable to security clearances are going into engineering. The good students went into finance, even with engineering degrees.

The students are going into various types of biotech, in the broadest sense. Yet that profession is one which is mired in a Medieval structure of first requiring a PhD, then working as a post-doc, then working the way up through the bench and support work, and hopefully as a principal scientist able to obtain ones own funding. Unlike the old DOD world where engineers could get funding to create something, and in the 1950s and 1960s that was DOD funding, the same is not for biotech, there is a drastic cultural difference. This means that there is a tremendous time lag between the investing of money and the result.

In the 1950s and 1960s the Government spent money educating scientists and engineers and once the graduate degree was obtained the individual could go out and practice, even to the extent of starting their own company, obtaining DOD contracts, such as from ARPA, and then also developing commercial applications. Much of this pump priming in that period led to the foundation of the venture investments in the 1980s and 190s. There is a long time lag even when the archaic institutional structures were not in place.

However, even if the lag were there, it would be strategically useful for the Government to fund the flow of doctoral students, especially those who are US citizens. The problem today is that the funding is for the most part at the doctoral level for non US citizens who then struggle to stay but in the long run get sent back to their country of origin. This is a double loss for the US. First we lose the talent and second we create a competitor elsewhere! Doubly dumb but that was what Congress and the Unions wanted.

There is another concern about government funding. That is what I have called the Apollo Effect. Namely by creating the funding for education and then creating Government projects, the educated students were taken from the work force and sent to work in Government projects. This meant that their productivity in creating new economic value was dramatically reduced. As a member of the Apollo Effect group, almost a generation of creative engineers were sent off to design space missions to the moon while the Japanese were developing a strong technology base to compete with the US in the 1980s. The only thing that saved the problem from continuing was the Nixon financial collapse.

Thus some conclusions:

1. There are significant time lags for R&D investment.

2. The Government is the worst venture investor in the world and further Government projects soak up truly creative and value producing efforts.

3. Students must be motivated to obtain graduate degrees in science and engineering. However, it also must be recognized that there are just a few people who have the competence and drive to perform. Thus there should be a balance of funding growth of US citizen students and at the same time maintaining the superb quality of those students. India and China have created systems with quality. The Indian Institute of Technology is a world class institution where the best of the best go. The US must maintain its selection criteria.

4. The growth areas are engineering, science and especially the biotech areas broadly speaking. The Government should spend with minimal strings attached. The Government should not pick winners, just good horses.