Increasing the productivity of the American workforce is the
key to higher living standards and stronger economic growth in
the future. Investments in research and development (R&D) are
the key to increasing productivity, accounting for half or more
of the growth in output per person, and to the creation of new
products and processes.
Investments in R&D have high rates of return. The social
rates of return, which may be close to 50 percent, exceed the
high private rates of returns, of 20 to 30 percent, by a
considerable amount because of the "spillovers" -- benefits that
accrue as other researchers make use of new findings, often in
applications far beyond what the original researcher imagined.
Because innovators realize only a fraction of the total return to
an innovation, there will be an underinvestment in R&D.
There has been a long record of successful government
support for R&D, from its support of Samuel Morse's original
telegraph line from Washington to Baltimore in 1842 to
demonstrate the feasibility of his new technology, to the support
of agricultural research, beginning with the 1862 Morrill Act
establishing the land-grant colleges, to the development in more
recent years of the Internet, the Global Positioning Satellite
(GPS) system, and support of the basic research leading to the
discovery of DNA. Examples of successful Federal R&D investments
Federal R&D expenditures stimulate additional private R&D
expenditures. An additional dollar of Federal R&D adds more than
a dollar of R&D to the economy, as the private sector expands its
R&D effort. Accordingly, a cut in Federal R&D expenditures is
likely to cause the private sector to cut back as well.
The Congressional budget resolution would cut Federal R&D
expenditures by about 30 percent by the year 2002. The Japanese
government, by contrast, recently announced plans to double its
R&D spending by the year 2000. While non-defense R&D
expenditures in the United States, as a percentage of GDP, are
already smaller than in Japan, as a result of the American
decreases and the Japanese increases, the Japanese government
will actually spend more, in total dollars, than the American
government on non-defense R&D by 1997.
Current debates not only focus on the level of support for
R&D, but also on the composition. Increased living standards and
faster productivity depends on increased support for civilian and
dual-use research (that is, research that has both direct
military and civilian applications), not just support of "star
wars" and other military research. Opponents of government
support for pre-commercial technological development erroneously
characterize government efforts as "picking winners," interfering
with what would otherwise be efficient market allocations, and
try to draw a clear line between basic and generic research
(which all agree government should support) and applied research.
In reality, there is a continuum, with many applied research
projects yielding significant spillovers, so that absent some
government support, there may be marked underinvestment.
Government can aid the development of such potentially high-
payoff pre-commercial R&D with large spillovers, but must involve
the private sector in such efforts. These government investments
can yield high returns.