A new working paper from the National Bureau of Economic Research (NBER) finds that federal agencies may be underestimating the economic payoffs that result from federal investments in research and development (R&D).
Federal agencies such as the Congressional Budget Office (CBO) frequently issue estimates about the economic and budgetary effects of federal investments in physical infrastructure, R&D, and education. The NBER working paper, “Estimating the Economic and Budgetary Effects of Research Investments,” by Theresa Gullo, Benjamin Page, David Weiner, and Heidi L. Williams, contends that the frameworks CBO uses to issue those estimates may not be capturing the full economic effects of R&D investments because the CBO frameworks treat R&D as any other form of investment and ignore the unique characteristics of R&D.
Specifically, the paper finds:
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“The returns to federally funded R&D appear to be substantially higher than the returns to other forms of federal investment such as physical infrastructure.”
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There is no basis for “the standard assumption that public investments [in R&D] are less productive than private investments.”
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Public R&D often focuses on basic research, which can lead to immense returns and productivity in the long run. (Think, for example, about how research in atomic physics in the early 20th century gave way to the development of MRI technology decades later.)
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Federally funded R&D appears to generate returns sooner than what the CBO currently assumes.
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Federally funded R&D complements rather than substitutes private investments in R&D and “is unlikely to substantially affect state and local R&D investments.”
In a recent analysis of the NBER paper, James Pethokoukis of the American Enterprise Institute wrote that digging deeper reveals that “Public funding of basic research creates a pipeline for private sector innovation and commercialization, while also developing human capital through graduate training.”
The NBER paper suggests that federal agencies should refine their models to more accurately calculate the economic impacts of federal R&D. Better projections, the authors argue, will help Congress make better decisions when it comes to appropriating funds for R&D. This includes funds authorized in already passed legislation, such as the CHIPS and Science Act of 2022.
As Pethokoukis wrote, “It’s a no-brainer that American public policy should aim to significantly increase both government and private-sector R&D investment to boost innovation-driven productivity and economic growth.”
Kritika Agarwal is senior editorial officer at AAU.