Wednesday 23 October 2019

US economy relies on innovation that needs helping hand

 

More money was allocated to research under Ronald Reagan than Barack Obama. Photo: AP
More money was allocated to research under Ronald Reagan than Barack Obama. Photo: AP

Noah Smith

Without technological innovation, humans would still be scratching out a subsistence living.

In the future, innovation will be essential to everything from feeding the world's growing population to saving the planet from climate change.

The US economy, meanwhile, is increasingly dependent on knowledge industries, which require continuous innovation in order to make their products.

And by boosting the potential rate of economic growth, innovation creates a positive-sum world where everyone can get ahead.

Unfortunately, innovation might be slowing down.

Except for a brief resurgence in the late 1990s and early 2000s, developed-country productivity - of which innovation is a major long-term driver - has grown more slowly since 1973.

Meanwhile, some studies suggest that research productivity is slowing down, so that it takes more scientists to glean each new insight across a variety of fields.

Fighting this slowdown is a worthy goal, but a difficult one. If countries could boost innovation at will, living standards would soar. Instead, the best that governments can hope for is to accelerate the rate of progress by a modest amount.

Economists Nicholas Bloom, John Van Reenen and Heidi Williams have a new paper outlining possible ways to make that happen.

They conclude that there are three policies that are fairly effective at spurring economically beneficial innovation: government funding, tax credits and skilled immigration.

Government grants are important, not just for academic research output, but for industry as well. Private inventors use discoveries from academia to create new technologies, while professors often work with businesses on novel inventions.

Increases in grants from the national institutes of health, for example, tend to increase private-sector patenting.

And public-private research cooperation tends to benefit local economies.

But US federal research funding has stagnated in recent years. During Ronald Reagan's presidency, the federal government spent about 1.2pc of the country's gross domestic product on research; by Barack Obama's second term that had fallen to about 0.8pc.

Private research spending has risen to plug this gap says the Bloom et al. paper. But private spending may be more product-focused and therefore less generally applicable, and it also spreads to the rest of the economy more slowly thanks to patent law and corporate protection of trade secrets.

The US also devotes less of its total economy on research and development than Germany, Japan and South Korea.

Given the stagnation in funding, the disparity with other countries, and the rising cost of scientific discovery, there's a strong case to be made for an increase in federal research spending.

But private-sector research is valuable too, and Bloom et al. present evidence that R&D tax credits are effective at boosting it.

Another sensible policy is skilled immigration. Plenty of research shows that allowing more skilled immigrants increases US innovation.

But there is also reason to think it boosts the global rate of innovation as well. US labs are much better funded and equipped than those in poor countries, and American universities and companies are home to some of the most advanced and supportive networks of researchers.

So admitting a smart person from India or Ghana to the US probably increases the likelihood that he or she will advance the boundaries of scientific knowledge.

These are all obvious steps. But there are other possibilities as well, though the research is less conclusive.

Given the scale and duration of the productivity slowdown, it's worthwhile experimenting with these approaches.

First, the government could try to reform how it doles out grant money. One idea is to give more to younger scientists, who are more likely to strike out in new directions rather than proceeding with established research programmes.

Another is to allocate more funding to less prestigious universities, where research gets more bang for the buck.

A third idea is to devote more money to novel research fields where huge discoveries may await.

The US could also try increasing the rate at which private research spreads, by reforming patent laws.

Top companies now invest a lot in intellectual property, and the productivity of leading companies is pulling away from the rest.

At this point the patent system may be stifling more progress than it creates, by allowing superstar companies to hoard innovation for themselves.

The government should try raising the hurdle for winning and enforcing patents.

Another idea is zoning reform, which would make big cities and college towns more affordable for researchers, engineers and other knowledge workers.

Finally, the US should improve its higher education system - increasing the supply of spots at good universities and taking steps to ensure access for the low-income Americans who all too often miss out on college.

If these experiments fail, then so be it. But the innovation stagnation is troubling enough that it's time to go beyond the traditional toolbox.

Bloomberg

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