Monday, November 10, 2008

Science Policy in the New Administration

In Greg Mankiw's Memo to the POTUS-elect, he writes:
Listen to your economists. During the campaign you assembled an impressive team of economic advisers from the nation’s top universities, including Austan Goolsbee from University of Chicago and David Cutler and Jeff Liebman from Harvard.
There is lots of good advice, so check it out if you haven't already. The reason I bring it up though is as an excuse to talk about an interesting paper by Austan Goolsbee in the American Economic Review from a few years back (pdf). From the abstract:
Conventional wisdom holds that the social rate of return to R&D significantly exceeds the private rate of return and, therefore, R&D should be subsidized. In the U.S., the government has directly funded a large fraction of total R&D spending. This paper shows that there is a serious problem with such government efforts to increase inventive activity. The majority of R&D spending is actually just salary payments for R&D workers. Their labor supply, however, is quite inelastic so when the government funds R&D, a significant fraction of the increased spending goes directly into higher wages. Using CPS data on wages of scientific personnel, this paper shows that government R&D spending raises wages significantly, particularly for scientists related to defense such as physicists and aeronautical engineers. Because of the higher wages, conventional estimates of the effectiveness of R&D policy may be 30 to 50% too high. The results also imply that by altering the wages of scientists and engineers even for firms not receiving federal support, government funding directly crowds out private inventive activity.
I'll return to this shortly when I discuss Amar Bhide's new book. As our new President thinks about science policy, it will be important to listen to his advisers, as Greg Mankiw suggests.

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