Maybe the worst long-term outcome of the Obama administration’s malinvestment in Solyndra and other dubious clean energy firms is the confusion of industrial policy — the favoring of certain sectors or government involvement in commercialization — with a policy of spending on basic research.
As my AEI colleague Ken Green has noted, we don’t need government as a venture capitalist, picking winning and losers: “Studies show that government ‘investment’ in applied research and development does not add new money to the pot, it displaces private capital, and does so disproportionally. When government steps in, it displaces more money than it throws in the pot.”
In the WSJ today, Nobel laureate economists Gary Becker and James Heckman outline a proper role for government:
The guiding principle is basic and obvious: We should cut federal government activities that can be performed at least as well by the private sector, and maintain, or even increase, productive federal activities that the private sector alone cannot handle effectively. There is legitimate disagreement about which activities belong in which category, but the great majority of economists have long agreed that the federal government should have an important role in the sponsorship of basic research. For-profit companies have weak incentives to invest in basic research partly because the results are not patentable, and partly because the culture of basic researchers, and the journals they publish in, makes the results of basic research available to all.
For these reasons the U.S. government has long played a leading role in supporting research in physics, chemistry, biology and medicine, and to a smaller extent in economics and other social sciences. It has also played a leading role in creating objective databases on which to make wise policy. This research and data have paid great dividends in helping to provide a better understanding of DNA, genetics and the human genome, and many other phenomena crucial to the modern world.
Indeed, the remarkable growth in life expectancy in the developed world in the past 60 years has been the result of the combined efforts of federally supported basic researchers at universities and elsewhere, and applied researchers in for-profit drug and biotech companies, and nonprofit institutes.
But more and more America is becoming just a Welfare State rather than a Innovation State. As a recent report from Third Way concluded, ” … as the Baby Boomers enter retirement, entitlements will encroach upon an even greater portion of the federal dollars once reserved for building roads, educating kids, and paving the way for technological breakthroughs. Entitlements are a critical part of economic security, but without change, investments will all but dry up, threatening our economy’s ability to grow and create opportunity in the 21st century.
And these charts from Third Way tell the story:
And the best way to go about basic research funding? Well, the best projects shouldn’t be decided by the White House political team. In a speech last year, Fed Chairman Ben Bernanke offered his thoughts:
1. Direct government support or conduct of the research may make the most sense if the project is highly focused and large-scale, possibly involving the need for coordination of the work of many researchers and subject to relatively tight time frames. Examples of large-scale, government-funded research include the space program and the construction and operation of “atom-smashing” facilities for experiments in high-energy physics.
2. Outside of such cases, which often are linked to national defense, a more decentralized model that relies on the ideas and initiative of individual researchers or small research groups may be most effective. Grants to, or contracts with, researchers are the typical vehicle for such an approach.
3. Some critics believe that funding agencies have been too cautious, focusing on a limited number of low-risk projects and targeting funding to more-established scientists at the expense of researchers who are less established or less conventional in their approaches. Supporting multiple approaches to a given problem at the same time increases the chance of finding a solution; it also increases opportunities for cooperation or constructive competition.
I agree with Beck, Heckman, and Bernanke, the declining focus on basic research by government is a bad sign for the future of American innovation. Cut the Welfare State — or at least severely restrain its future growth — not the Innovation State.