We support federal funding for basic R&D. We recommend that such support be made recognizing that we are a declining part of the global economy and that the fruits of basic research are available to the world and are unlikely to yield a significant comparative advantage to the U.S. Research that is likely to yield benefits to the U.S. because it is adopted rapidly by the rest of the world should therefore be favored. For example, we favor basic research in alternative energy technologies that will reduce the world’s dependence on oil and gas from unstable and antagonistic countries and greenhouse gas emissions. In the case of technologies which have clear implications for competitiveness, we recommend that these be supported through very general tax polices for private sector development. We, nevertheless, support basic research in the sciences where there is no known path to commercialization, realizing that such knowledge often has unexpected commercial value.
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The appropriate amount and the allocation of federal support for scientific research and development is a complicated topic.
The production of knowledge is a classic public good. Once the knowledge is produced, each individual’s consumption of that knowledge does not diminish the ability of anyone else to consume it. In a totally unconstrained market no one would be able to profit from their ideas for long. For this reason, we grant patent rights to individuals to commercially exploit new ideas exclusively for a period of time, in order to create an incentive to pursue commercially valuable research. For the same reason, we provide property rights to books, music, and movies in the form of copyright protection.
Basic research is the production of knowledge with no known, immediate, commercial application. As such, even with patent protection, too little of it would be done. For this reason, it is appropriate for government to directly subsidize basic research, since we know from experience that the production of knowledge produces substantial benefits for society even though we are not sure what that might be when the research is undertaken.
The problem is that knowledge cannot be contained for long. Others benefit from the research without paying for it. This is called the “free rider” effect in economics. For this reason, we rarely see local governments subsidizing basic research because they would effectively be subsidizing benefits to the entire world at the expense of a small population.
For a long time after WW II and until the end of the cold war, the U.S. was such a large part of the industrialized world, we could safely ignore the free rider effect and act like the U.S. was the entire world. This was especially true because our major strategic competitor, the Soviet Union, was, by virtue of its economic system, inept at transferring anything other than military technology. This is no longer true and, over time, it is likely to become less and less true.
For some kinds of research this is not an issue. For example, we actually like the world to take advantage of our research for the prevention and treatment of communicable diseases. Research that increases crop yields and thereby reduces world poverty is also in our best interest. So, too, is research in alternative energy technologies that could reduce the presence of carbon in the atmosphere by producing energy with less carbon or by sequestering it during the production process. In all of these cases and many others, we want our ideas to be taken and used as quickly as possible.
The problem comes when we think of basic research as a tool for increasing America’s economic competitiveness. In the latter half of the twentieth century, this was a viable strategy. We were large relative to the rest of the world and technology transfer happened rather slowly by modern standards. Today we account for a shrinking part of the world’s economy and technology transfer is occurring at lightening speeds. Because of this publicly supported, and therefore publicly available, basic research is likely to yield limited benefits in terms of American competitiveness.
This does not mean that we should not publicly support basic research and development. We just need to be more thoughtful than in the past about how we do it and where we allocate the funds. Technology for competitive advantage is complicated because making that technology available outside of the firm that develops it usually makes it available to the entire world. If we are really hoping to use R&D to produce an American competitive advantage, we should subsidize it within the private sector so that the transfer of knowledge outside of America is slower. The best alternative that works as a competitiveness tool is to provide tax credits for R&D, within the private sector, and not to try and direct that R&D in any particular direction. This is a blunt instrument since many things can be characterized as R&D.
We don’t oppose public support for R&D, in fact we applaud it, however, we must do it mindful of the fact that, in terms of competitiveness, the game has changed.