The Value of R&D

As scientists, members of the American Chemical Society understand innately the value of R&D and the importance of government funding of R&D. It’s not always obvious that nonscientists—a category that encompasses most politicians—share that understanding. Thus I was heartened to learn that the person who is perhaps America’s most influential economist, Federal Reserve Chairman Ben S. Bernanke, had given a major speech on “Promoting Research and Development: The Government’s Role” in mid-May. Bernanke gave the keynote address at a two-day conference on “New Building Blocks for Jobs and Economic Growth” sponsored by the Conference Board. Bernanke noted that “the effective commercial application of new ideas involves much more than just pure research. Many other factors are relevant, including the extent of market competition, the intellectual property regime, and the availability of financing for innovative enterprises. That said, the tendency of the market to supply too little of certain types of R&D provides a rationale for government intervention; and no matter how good the policy environment, ultimately, big new ideas are often rooted in well-executed R&D.” Bernanke went on to observe that, “The primary economic rationale for a government role in R&D is that, absent such intervention, the private market would not adequately supply certain types of research. The argument, which applies particularly strongly to basic or fundamental research, is that the full economic value of a scientific advance is unlikely to accrue to the discoverer, especially if the new knowledge can be replicated or disseminated at low cost. … If many people are able to exploit, or otherwise benefit from, research done by others, then the total or social return to research may be higher on average than the private return to those who bear the costs and risks of innovation. As a result, market forces will lead to underinvestment in R&D from society’s perspective, providing a rationale for government intervention.” While it might be possible to correct this situation through stronger intellectual property protection, Bernanke said, “This approach has significant drawbacks of its own … in that strict limitations on the free use of new ideas would inhibit both further research and the development of valuable commercial applications.” “Is government support of R&D today at the ‘right’ level?” Bernanke asked. The question isn’t easily answered, but he noted two trends: Since the 1970s, R&D spending by the federal government has decreased as a share of GDP, and the share of R&D spending targeted to basic research has also been declining. “These two trends … are related, as government R&D spending tends to be more heavily weighted toward basic research and science. The declining emphasis on basic research is somewhat concerning because fundamental research is ultimately the source of most innovation, albeit often with long lags.” Bernanke discussed approaches government can take to support R&D, including “direct funding of government research facilities, grants to university or private-sector researchers, contracts for specific projects, and tax incentives.” He went on to observe that, “The challenge to policymakers is to encourage experimentation and a greater diversity of approaches while simultaneously ensuring that an effective peer-review process is in place to guide funding toward high-quality science.” Nevertheless, he continued, “However it is channeled, government support for innovation and R&D will be more effective if it is thought of as a long-run investment. Gestation lags from basic research to commercial application to the ultimate economic benefits can be very long. … Thus, governments that choose to provide support for R&D are likely to get better results if that support is stable, avoiding a pattern of feast or famine.” Major battles are looming in Congress over raising the U.S. national debt limit and the 2012 budget. The budgets of many agencies that support R&D saw increases in 2010 that have been carried over for the most part into 2011. In their zeal to cut budget deficits, I hope Congressmen of all political stripes heed Bernanke’s caution on the pitfalls of feast or famine funding of R&D. Thanks for reading.

Author: Rudy Baum

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