Tag: Research and growth

Glenn on the Importance of Research

An image generated by GTP-4o illustrating research.

This opinion column by Glenn appeared in the Financial Times on March 10.

The Trump administration has wisely emphasised raising America’s rate of economic growth. But growth doesn’t just happen. It is the byproduct of innovation both radical (think of the emergence of generative artificial intelligence) and gradual (such as improvements in manufacturing processes or transport). Many economic factors influence innovation, but research and development is key. While this can be privately or publicly funded, the latter can support basic research with spillovers to many companies and applications.

Therein lies the rub: the new administration’s growth agenda is joined by a significant effort to reduce government spending, spearheaded by the so-called Department of Government Efficiency. Some spending restraint can enhance growth by reducing interest rates or reallocating funds towards more investment-oriented activities. But cuts to R&D, as the administration is advocating at the National Institutes of Health (NIH), National Science Foundation (NSF), Department of Energy (DoE) and NASA, are counter-productive. They will limit innovation and growth.

The link between R&D and productivity growth has a long pedigree in economics and has generally been acknowledged by US policymakers. In the mid-1950s, economist Robert Solow made the Nobel Prize-winning conclusion that sustained output growth is not possible without technological progress. Decades later, former World Bank chief economist Paul Romer added another Nobel Prize-winning insight: growth reflected the intentional adoption of new ideas, so could be affected by research incentives.

It is well known that research is undervalued by private companies. Private funders of R&D don’t capture all its benefits. The social returns of R&D are two to four times higher than private returns. These high returns are enabled in the US by federal funding. For example, publicly funded research at the NIH has been found to significantly impact private development of new drugs.

In a comprehensive study, Andrew Fieldhouse and Karel Mertens classify major changes in non-defence R&D funding by the DoE, Nasa, NIH and NSF over the postwar period. They estimate implied returns of as much as 200 per cent — raising US economic output by $2 per dollar of funding. This is substantially higher than recent estimates of returns to private R&D. According to the Congressional Budget Office, the high returns to public funding are more than 10 times that on public investment in infrastructure. With the higher tax revenue generated from additional GDP, an increase in R&D funding more than pays for itself.

In aggregate, productivity gains from federal R&D funding are substantial. Indeed, Fieldhouse and Mertens estimate that government-funded R&D amounts to about one-fifth of productivity growth (measured as output growth less all input growth) in the US since the second world war.

Combined with the high social returns of government-funded R&D, it is essential that policymakers in the current administration acknowledge the risks of underfunding R&D. Spending cuts are clearly harmful to productivity and even budget outcomes.

A shift towards government-financed R&D does not imply that policy in these areas should be beyond review. Some economists have questioned whether current R&D projects take sufficiently high scientific risks, particularly on the ideas of younger scholars. And policymakers can certainly investigate whether indirect cost subsidies to universities and laboratories—in addition to the direct costs of research—are set at the appropriate levels. But, if growth is the objective, the presumption must be that additional public spending on R&D is worthwhile.

Federal support for growth-oriented R&D can extend beyond research grants. Publicly supported applied research centres around the country offer a mechanism to collaborate with local universities and business networks to disseminate ideas to practice. This builds upon the agricultural and manufacturing extension services instituted by 19th-century land-grant colleges that enhanced productivity.

The Trump administration is right to promote growth as a public objective. Spending restraint and fiscal discipline can be growth-enhancing. But all spending is equal. Government-funded R&D is vitally important for innovation and productivity growth. The case is clear.

Glenn on How the Trump Administration Can Hit Its Growth Target

Treasury Secretary nominee Scott Bessent. (Photo from Progect Syndicate.)

By setting an ambitious 3% growth target, U.S. Treasury Secretary nominee Scott Bessent has provided the Trump administration a North Star to follow in devising its economic policies. The task now is to focus on productivity growth and avoiding any unforced errors that would threaten output.

U.S. Treasury Secretary nominee Scott Bessent is right to emphasize faster economic growth as a touchstone of Donald Trump’s second presidency. More robust growth not only implies higher incomes and living standards—surely the basic objective of economic policy—but  also can reduce America’s yawning federal budget deficit and debt-to-GDP ratio, and ease the sometimes difficult trade-offs across defense, social, and education and research spending.

But faster growth must be more than just a wish. Achieving it calls for a carefully constructed agenda, based on a recognition of the channels through which economic policies can raise or reduce output. While a pro-investment tax policy might boost capital accumulation, productivity, and GDP, higher interest rates from deficit-financed tax or spending changes might have the opposite effect. Similarly, since growth in hours worked is a component of growth in output or GDP, the new administration should avoid anti-work policies that hinder full labor-force participation, as well as sudden adverse changes to legal immigration.

While recognizing that some policy shifts that increase output might adversely affect other areas of social interest (such as the distribution of income) or even national security, policymakers should focus squarely on increasing productivity. The three pillars of any productivity policy are support for research, investment-friendly tax provisions, and more efficient regulation.

Ideas drive prospects in modern economies. Basic research in the sciences, engineering, and medicine power the innovation that advances technology, improvements in business organization, and gains in health and well-being. It makes perfect sense for the federal government to support such research. Since private firms cannot appropriate all the gains from their own outlays for basic research, they have less of an incentive to invest in it. Moreover, government support in this area produces valuable spillovers, as demonstrated by the earlier Defense Department research expenditures that became catalysts for today’s digital revolution.

This being the case, cuts in federal support for basic research are inconsistent with a growth agenda. Still, policymakers should review how research funds are distributed to ensure scientific merit, and they should encourage a healthy dose of risk-taking on newer ideas and researchers.

In addition to encouraging commercialization of spillovers from basic research and defense programs, federal support for applied research centers around the country would accelerate the dissemination of new productivity-enhancing technologies and ideas. Such centers also tend to distribute the economy’s prosperity more widely, by making new ideas broadly accessible—as agricultural- and manufacturing-extension services have done historically.

To address the second pillar of productivity growth, the administration should seek to extend the pro-investment provisions of the Tax Cuts and Jobs Act that Trump signed into law in 2017. While the TCJA’s lower tax rates on corporate profits remain in place, the expensing of business investment – a potent tool for boosting capital accumulation, productivity, and incomes – was set to be phased out over the 2023-26 period. This provision could be restored and made permanent by reducing spending on credits under the Inflation Reduction Act, or by rolling back the spending – such as $175 billion  to forgive student loans – associated with outgoing President Joe Biden’s executive orders.

If the new administration wanted to go further with tax policy, it could build on the 2016 House Republican blueprint for tax reform that shifted the business tax regime from an income tax to a cashflow tax. By permitting immediate expensing of investment, but not interest deductions for nonfinancial firms, this reform would stimulate investment and growth, remove tax incentives that favor debt over equity, and simplify the tax system.

That brings us to the third pillar of a successful growth strategy: efficient regulation. The issue is not “more” versus “less.” What really matters for growth is how changes in regulation can improve the prospects for growth through innovation, investment, and capital allocation, while focusing on trade-offs in risks. Those shaping the agenda should start with basic questions like: Why can’t we build better infrastructure faster? Why can’t capital markets and bank lending be nimbler? Not only do such questions identify a specific goal; they also require one to identify trade-offs.

Fortunately, financial regulation under the new administration is likely to improve capital allocation and the prospects for growth, given the leadership appointments already announced at the Securities and Exchange Commission and the Federal Reserve. But policymakers also will need to improve the climate for building infrastructure and enhancing the country’s electricity grids to support the data centers needed for generative artificial intelligence. This will require a sharper focus on cost-benefit analysis at the federal level, as well as better coordination with state and local authorities on permitting. Using federal financial support programs as carrots or sticks can be part of such a strategy.

Bessent’s emphasis on economic growth is spot on. By setting an ambitious 3% target for annual growth, he has provided the new administration a North Star to follow in devising its economic policies.

This commentary first appeared on Project Syndicate.