Analysis: Government-Funded R&D Leads To Long-Term Economic Growth
Texas A&M University research shows that federal science funding drives U.S. productivity and innovation.
From telecommunication satellites to breakthrough medicines, government-funded research and development, or R&D, has tangible results that have improved lives around the world.
Not only does this research further scientific efforts in improving livelihoods, it brings long-term benefits to the economy, according to Dr. Andrew Fieldhouse, visiting assistant professor in the Mays Business School at Texas A&M University. His recent research with Karel Mertens at the Federal Reserve Bank of Dallas shows that government-funded non-defense R&D yields economic returns of 140% to 210%, which is well above estimated returns for private sector R&D of about 55%.
“Our recent empirical economic research has identified a significant causal link between government R&D spending and business-sector productivity growth,” Fieldhouse said. “Productivity growth refers to being able to produce more output without using more input during production. In other words, workers being able to produce more from an hour of labor.”
Economists believe productivity growth largely drives long run increases in economic growth and better living standards. If workers can produce more in an hour of labor, their wages should increase to reflect the increased productivity.
“Economists think of productivity growth as reflecting technological progress and know-how. And we think that productivity growth is what drives all long-run increases in economic growth,” he said.
Fieldhouse said his research looks at five major federal agencies and estimates the economic returns to their R&D investments since World War II. These agencies include the Department of Defense, National Institutes of Health (NIH), National Science Foundation (NSF), National Aeronautics and Space Administration (NASA) and the Department of Energy.
Based on their estimates, Fieldhouse and Mertens calculate that 20% to 25% of all U.S. productivity growth since WWII can be attributed to nondefense government R&D spending.
“That’s a similar contribution to public infrastructure, like highways and bridges, despite the government having spent an order of magnitude more on public infrastructure,” he said. “We just have invested way less in public R&D, but it has a much higher rate of return.”
Government R&D can also start a chain reaction of innovative activity, according to Fieldhouse. More federal funding toward research has historically led to an increase in the employment of scientific researchers, an increase in new technologies or products that become patented and an increase of newly minted STEM Ph.D. students.
“Now you’ve got a more educated, highly skilled STEM workforce in the United States, and you see all these measures of innovative activity increasing, but the productivity effects are pretty gradual. It takes about seven years for there to be a significant and sustained increase in productivity,” he said.
The administration’s preliminary budget request would make unprecedented cuts to organizations like NASA and NIH. NASA’s science budget would be cut by 53% and the overall agency’s budget would drop from $24.8 billion to $18.8 billion, according to the American Association for the Advancement of Science. The Trump administration is also proposing an $18 billion (roughly 40%) cut for NIH and a $5 billion (over 50%) cut for the NSF.
“The research that I’ve been doing suggests to us that productivity will measurably slow if we blow up this engine of innovation,” he said. “This is a case where cutting government R&D is likely to crowd out private sector investment, which is bad for the economy, and cutting government R&D spending is likely to permanently lower the trajectory for productivity growth, which will be completely self-defeating for a fiscal consolidation.”
Fieldhouse said a common argument used against government investments in R&D is that the private sector is doing a more effective job at leading research efforts. However, Fieldhouse’s analysis shows that an increase in government R&D spending induces more private sector R&D spending.
“Government R&D and private R&D are complements. The private sector is running with R&D work funded by the government, and if the government is not funding as much, historically, our research shows that the private sector is just not going to bother investing as much,” he said. “You can’t imagine SpaceX where it is today without decades of NASA R&D preceding it. NIH-funded biomedical research leads to pharmaceutical companies developing better drugs that improve people’s lives.”
While it may take between seven to 15 years to see a significant and sustained increase in productivity, Fieldhouse said R&D investment is often permanent in expanding potential productive capacity in the U.S. economy.
“Even if you’re at a point of somewhat diminishing returns today, you would still expect the returns to be sufficiently high that the government should invest way more in R&D,” he said. “We conclude that Congress historically has under-invested substantially in R&D.”
