R&D Is Local, Global, But Not National

A recent Post article by Brad Plumer illustrates what is wrong with the usual research funding arguments:

One of the few things Republicans and Democrats have been able to agree on in recent years is that the government should be spending more on basic scientific research … Thanks to budget pressures and the looming sequester cuts, federal R&D spending is set to stagnate in the coming decade. …

As a result, scientists and other technology analysts are warning that the United States could soon lose its edge in scientific research — and that the private sector won’t necessarily be able to pick up the slack. “If you look at total R&D growth, including the corporate and government side, the U.S. is now at the low end … We’re seeing other countries, from Germany to Korea to China, make much bigger bets.” …

There’s a long, long list of world-changing innovations that can be traced back to federally funded R&D over the years. .. The key question here is how much of this innovation might have happened without government involvement. … Many economists agree that private companies tend to under-invest in very basic scientific research, since it’s hard for one firm to reap the full benefits from those discoveries. …

When the Congressional Budget Office reviewed the evidence in 2007, it concluded that government-funded basic research generated “substantially positive returns.” And it found that, on the whole, government R&D helped spur additional private-sector R&D rather than displace it. … The United States will soon spend less on all types of R&D as a percentage of its economy in the coming decade than countries like Australia and South Korea …

The sanguine view is that other countries are tossing more money at scientific research that will have positive spillover benefits for the entire world — including us. If China invents a cure for cancer, we all benefit. Others worry, however, that the U.S. economy could suffer from the fact that a greater share of research is happening elsewhere. (more)

Note the conflicting arguments: each small part of the world invests too little in R&D, because other parts gain without paying, but the US should fear falling behind nations that invest more. These two only makes sense together if the nation is the natural scale for innovation – innovations mostly leak away from their source within a nation, but mostly stay within each nation. The academic literature, however, suggests the natural scales are global and local – while there are gains to the world as a whole, gains are focused on related industries in the local area:

A recent body of empirical evidence clearly suggests that R&D and other sources of knowledge not only generate externalities, but such knowledge spillovers tend to be geographically bounded within the region where the new economic knowledge was created (Griliches 1992). That is, new economic knowledge may spill over, but the geographic extent of such knowledge spillovers is limited. … greater geographic concentration of production actually leads to more, and not less, dispersion of innovative activity. (more; see also and also)

While it would be great if the world could coordinate to promote R&D spending worldwide, there is little economic justification for forcing Wyoming and Louisiana, who spend 0.4% and 0.56% of GDP respectively on R&D, to pay for R&D spending in Massachusetts and New Mexico, where those figures are 5.49% and 7.65% (source), any more than the rest of the world pays for such spending. If the US government funds less R&D, it will be mainly states like Massachusetts and New Mexico that suffer, not states like Wyoming and Louisiana, relative to the rest of the world.

If R&D spending mostly helps the particular regions in which it happens, why do we pay for it at the national level? Probably because many see it as a national prestige good – people in Wyoming look good to foreigners by being in a nation where lots of impressive research happens in Massachusetts. Are they right, or is Massachusetts just getting a nice juicy transfer?

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    “Note the conflicting arguments: each small part of the world invests too little in R&D, because other parts gain without paying, but the US should fear falling behind nations that invest more”

    Prestige does offer real world rewards, but I’m thinking it might be a freeloader argument: countries base their R&D budgets on those of other countries, so if one of the big countries starts spending less the whole world might start spending less as a result and then we all suffer for it. This is in addition to the fact that the US spend a large percentage of global R&D spending, so a cut in the US would immediately affect the whole, including the US, quite drastically, even if no other countries cut their R&D spending (if the US spends 50% of global R&D spending then the line between US national benefits and global benefits becomes blurred), I think Robin assumed the US national R&D budget was negligible compared to the global budget (like the heat reservoir approximation in thermodynamics), which is true for most countries, but not the US. 

    “If R&D spending mostly helps the particular regions in which it happens, why do we pay for it at the national level?”

    Because it’s more efficient to concentrate R&D facilities and of course Massachusetts has higher income because of this, but they pay federal taxes over that income and part of that flows back to Louisiana and Wyoming, probably more than tohse states put in in the first place since they are not rural states and those tend to get a huge net transfer from the federal government.

  • newqueuelure

    In most other measures, Massachusetts is the donor state (paying way more in taxes than it receives), so the idea that R&D is a “juicy” transfer of wealth is kind of silly as it is such a small portion of the Federal budget.

    As for basic research, I think it helps to lure otherwise idealistic youth into the sciences. If you told most physicists at the start of their career that they would more likely end up working for a defense contractor than for a university, I’m pretty sure they’d try something else.

    But isn’t such a transfer a Pareto improvement? If most researchers are in Boston, then a transfer of research resources to Boston takes money from where it is inefficiently spent at a low level and moves it to where it is more efficiently spent at a high level (with network effects and the like).

    If I have hundreds of engines running, most of which are inefficient, transferring fuel from the other engines to the more efficient ones increases the total efficiency at some level of transfer.

    (And before someone says this justifies taking wealth from the poor and transferring it to the rich, I’ll point out that in the engine scenario, I am talking about a prior egalitarian distribution … such as was implied about an egalitarian R&D distribution)

  • Dylan

    Uh…because that’s what it means to be a country. Why make Californians pay for Medicare in Florida? Why make wealthy people pay for welfare benefits to poor people? Why make pacifists pay for veterans’ benefits, or childless people pay for education? Why make people on the West coast pay for military contracts that happen in Virginia?

    Everything’s a “nice juicy transfer” if you pick a sufficiently small group to talk about.

    • They why ever have local taxes to pay for anything? Why not make all government national government, and not bother with city, county, and state governments?

      • Then why ever have local taxes to pay for anything?

        Why suppose there’s any principled reason? It’s a piecemeal matter of what the local and national coalitions can prevail on, isn’t it? To paraphrase (or reinterpret) Dylan, “having a country” means not requiring strong reasons to transfer wealth across regional lines.

      • IMASBA

        “They why ever have local taxes to pay for anything?”
        Most countries barely have any local taxes. What little local taxes they do have pay for strictly local matters. The United States is different because it has chosen to have large autonomy for the states, that’s a choice, nothing more.

      • I think you’re wrong, Spain and Finland are both very decentralized. Scott Sumner’s conclusion from his pre-recession research on the “Great Danes” is that their systems work in part because taxes stay with localities, and then of course Switzerland as one of the most decentralized countries in the world.

      • IMASBA

        “I think you’re wrong, Spain and Finland are both very decentralized”
        Finland is not decentralized (at least their tax collection is not), Spain is, but Spain is one of those exceptions where there is a strong decentralization to avoid civil war. Most other countries are nothing like that, and in the case of India I don’t think you can speak of a “local” level when states have a bigger population than most countries (three of them have more than 100 million inhabitants each).

  • Elithrion

    Why are most R&D benefits local? Is there a lot of money to be made in finding local benefits and spreading them around?

  • Siddharth

    Well, but the spillover benefit for Wyoming and Louisiana while less than that for Massachussetts, is definitely non-trivial. 

    Botswana spends on R&D about as much as Louisiana but last time I checked, Botswana doesn’t exactly enjoy as many innovation benefits as Louisiana or Wyoming.

  • I think that the positive-return story might be slightly overdone. Please see one of my recent posts on this topic: http://lemire.me/blog/archives/2013/02/26/does-academic-research-cause-economic-growth/

    • That is a good post on the subject, better than mine actually.

    • Ilya Shpitser

      How does Granger causality control for confounding?

  • Because that is the only efficient tax collection system.  All others are inefficient due to collection or incidence.  Collecting nationally reduces but doesn’t eliminate the free rider problem.  There are still some first mover advantages and language barriers to dissemination.  The only reason for local tax collection is it allows for local spending control where increased efficiency in spending makes up for decreased efficiency in collection, but there is little in the way of local priorities for basic research.  There is some advantage to pooling and directing it to the most promising areas.

  • Steve

    I think one way to think about it is that there are no “local” externalities within a country. If we spend $1 billion on R&D at MIT and a bunch of local biotech firms spring up it’s not purely a local boom when anyone from Wyoming or Nevada can move there and get those jobs etc. Note that this does’t extent to people in other countries since they can’t move to MA for the most part.

    You can formalize it with in a simple two-city Muth-Mills model where productivity (wages) and city size are exogenous and people can freely move. The equilibrium condition is that everyone gets utility U=c so people in both city B and city A have to benefit the same from a positive shock to either city.