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F E D E R A L RESEA R C H E X P E N D IT U R E PO L IC Y AND IT S RELA TIO N TO ECONOMIC GROW TH AND S T A B IL IT Y Ralph E. Burgess, economist, American Cyanamid Co.1 The fruits of the pioneering studies of the Jo in t Economic Com mittee in the area of government fiscal policy will, in my opinion, be recorded 'as important milestones in the Nation’s progress toward con tinued economic growth and a greater measure of business stability. I am grateful for the opportunity again to participate in your ex plorations. H is t o r ic a l D a ta I should like first to present a capsule review of some of the perti nent historical data concerning the Federal research program in order that we may have some notion of the magnitude of the figures with which we are dealing. I must add that I have gathered the data from a number of sources. While they may differ slightly from others at your disposal, I feel sure th a t they reveal much the same story. The universe of statistical data with which we are to deal is actually split into two parts by the advent of World W ar II. Over the pre war years, 1929 through 1940, Federal research expenditures increased at a rate such as to double every 7 years (11.2 percent per year). They grew at a somewhat slower rate than overall Federal expendi tures (12.9 percent per year) but faster than research outlays from other sources (2.8 percentage points per year faster on the average). D uring these years Federal research expenditures amounted to about 20 percent of all research spending. The overall price change be tween the year 1929 and the year 1940 (during the 11 years involved prices fell and rose again to about the same level) was not extreme and growth rates for research expenditures stated in constant dollars fall only slightly below those just mentioned. While there was, to be sure, an increase in the complexity of research projects, it is our feel ing th a t the current dollar series pretty well reveals changes in the volume of Federal research activity. As a result of the enormous demands of the defense effort for World W ar II , Federal research outlays more than tripled in the single year 1941. This had the effect of shifting the base of the Federal research effort to a new level, after which it reverted to a more normal rate of growth. Price changes have been sufficiently large during the years 1941 through 1956 to distort materially our notions of the amount of Federal research being carried on. Thus, almost half the growth seen in the dollar series for research activities is accounted for by rising prices. F o r the period 1941-56 the annual rate of increase in Federal research spending drops from 18 percent in current dollars to 1The opinions expressed herein do not necessarily reflect the views of American Cyanamid Co. 1140 1141 ECONOMIC GROWTH AND STABILITY about 11 percent after adjusting for price changes. W hat this tells us is that the Federal research effort—from a high, defense-swelled level—is continuing to expand a t about the prewar rate. I t is still growing somewhat faster than the private research effort (11.2 per cent per year compared to 8.3 percent per year) and significantly faster than the rate of expansion in the economy as a whole (11.2 percent per year compared to 3.4 percent per year). Other interesting changes have occurred. First, the rate of in crease in total Federal spending has fallen off sufficiently th at research spending within the Federal budget is now growing faster than total expenditures (11.2 percent per year compared to 1.9 percent per year) and, consequently, is claiming a larger proportion of total Federal outlays (3.6 percent in 1956 compared to about 2.5 percent in early postwar years). Second, the private research effort lias also been expanding rapidly and since in peacetime it tends to be much larger than the Federal effort, the relative contribution of Federal spending to total research spending has declined from nearly 70 percent in 1945 to perhaps a third in 1956. Clearly, however, government still occupies a position of strategic importance in the area of research. Finally, the rate of expansion for the economy as a whole has been nearly three times as great in the postwar period as between 1929 and 1940. (In 1956 dollars, growth rate for 1929-40 was 1.2 percent per year compared to 1941-56 rate of 3.4 percent per year.) This in crease in rate of growth results directly from the massive changes of the war period and, as we shall see, also from the contributions of our aggregate research effort. The historical performance of Federal research expenditures dur ing the general business fluctuations covered by the data bears brief note. Research spending tends to be much less sensitive to cyclical fluctuations in general business than most of the economic series with which we deal. Private research expenditures, with the attrition of profits, tend to fall somewhat more than Federal expenditures but, again, neither declines much. F ederal R esea rch E x p e n d it u r e s a n d E c o n o m ic G row th I t is difficult to forge a clear causal link between a given research outlay and its ultimate impact upon the economy—or indeed, even upon the business of a single firm. Sometimes research results are striking. We can see a new industry emerge. But how much of the obvious gain may be attributed to research; how much to the other aspects of economic activity and how much to chance alone? Truly, about all that can be said with confidence is that economic growth has definitely been associated with research activity, private as well as governmentsponsored, that our research findings, particularly in the areas of ap plied research have made a vital contribution to our economy. Re search has served as the initiating factor or catalyst in almost every major industrial development. A t present, the defense category claims nearly two-thirds of both total Federal expeditures and Federal research outlays. Together with research expenditures for the Atomic Energy Commission it ac counts for 82 percent of recognized Federal research spending. F ind ings of defense-oriented research result in constant and rapid obso 1142 ECONOMIC GROWTH AND STABILITY lescence of ordnance and are clearly tied to spending for procurement of military materiel. According to one qualified student of the sub ject, about half of our current $38 billion defense spending really ought to be classified as for research rather than for procurement. There have been instances in which aircraft have become obsolete before producers could complete delivery of a full shipment. Thus, the de fense research budget plays a very im portant role in current levels of business activity. Imagine if you can what defense spending would be if it were limited solely to the replacement of worn out military equipment, or if when desired strength had been reached no attempt were made to maintain technological superiority. Except over a pro tracted period of time, it would be impossible to bridge with private business activity the economic gap created by any drastic reductions in the defense effort. However, the defense effort and the research effort connected with it do not contribute per se to the material well being of the people and, inasmuch as goods are not destined for ulti mate consumption (if strictly defined m ilitary spending amounts to economic waste) the impact of such outlays is inflationary in a period of full employment such as we enjoy today. Defense research spending bears two outstanding characteristics. The first is that it is removed from the reach of normal standards of evaluation by its veil of secrecy and its vital necessity. The second is that its real impact upon economic growth is so oblique as utterly to defy measurement in the aggregate. We can cite, however, specific cases. F or example, the synthetic rubber industry, which has been described as a “government-spawned war baby” has grown up largely in the postwar period and will presently be supplying more than 60 percent of our domestic needs for new rubber. And metallurgical re search has materially contributed to the appearance of the new socalled rare metals which are finding a place as parts in computers and many other electronic devices. Defense research and its products enter into our lives in many less obvious ways. The superpremium gasolines of today were the aircraft fuels of W orld W ar I I ; and jet propulsion will probably soon be extended to commercial air trans port. Thus, breakthroughs for m ilitary purposes have many civilian applications. I t is all important to our economic growth and stability th at this sort of transfer should occur. F or today, more than one-fourth of one of our most dynamic and yet limited resources—the inventive genius of research engineers and scientists—is being devoted to defense. In deed, this is perhaps a better measure of our defense effort (and sacri fice) than our cash outlays for this purpose. The Federal Govern ment currently maintains a large number of research laboratories staffed with scientific employees. These men devote their full time to government projects. B ut the effort accounts for only about onethird of total Federal spending on research. The bulk of the balance of federally sponsored research is performed by private industry under contracts with the Government. In 1952 nearly one-half of the trained scientific personnel in private concerns was involved with government research, and while the proportion thus engaged is certainly smaller today, it is manifest that the role of government as a consumer of re search time—hence an allocator or director of technological innova tion—is one of strategic importance. 1143 ECONOMIC GROWTH AND STABILITY The other 18 percent of the Federal research outlay is scattered over 31 research budgets administered by the remaining major Fed eral agencies. Again, the growth results are illusive, but it is certain th at phenomenal mileage is obtained from every research dollar under a most unique set of circumstances. Most of these ventures are entirely unprofitable from a business standpoint—hence, in all likelihood, but for Federal funds, they would not be undertaken. Progress toward the point where their commercial exploitation can begin is aided by Government through the free dissemination of knowledge gained in the areas of both basic and applied research. One need only cite the remarkable gains in agricultural output and efficiency to highlight the growth contributions of these programs in the economic use of resources. While the amount of Federal money spent on research is sufficiently large in itself to have some stimulating effect upon the economy, the timing in the past has not been such as to indicate its use for that purpose. The most persuasive argument for maintaining re search expenditures is that, despite the lacking quantitative link, it is certain that today’s research produces the growth of tomorrow. The nature of research spending (hence, the allocation of research funds to alternative projects) and the results from research are its vital features, rather than the sheer magnitude of the amount spent. F or some types of Federal programs it is possible to estimate the aggregate impact, in the form of a flurry of economic activity, of a iven amount of Federal spending as it flows throughout the economy, ut, because the amounts are relatively small, this is not particularly revealing in the case of research spending. Many, perhaps most, re search projects end in failure. Investment in these induces a small amount of consumption, and this is about all. I t is the few success ful projects which must carry us forward, and their importance escapes measurement. f F ed era l R esea rch S p e n d in g and E c o n o m ic S t a b il it y Do Federal research expenditures have the economic consequence of minimizing the violence and frequency of business fluctuations ? New spending in an amount as large as Federal research outlays could have some pump-priming effects, and discontinuing such spend ing could be deflationary. B ut the immediate goals of research spending; namely, (a) inducing obsolescence, ( b ) creating new prod ucts, and ( c ) increasing efficiency, are essentially divorced from overt efforts to stabilize the economy through compensatory Government spending. Much Federal research expenditure falls into a category that may be characterized as one of continuing necessity. Many of the activi ties of the Bureau of Standards, the Department of Health, Educa tion, and Welfare, and the Department of Defense are examples from this group. Funds for these programs support the economy in a small way, but they do not show profound cyclical fluctuations, and they are not likely to be cut off for the purposes of economy. Slash ing the budget for defense research would certainly not reduce our defense needs, but it might have the ultimate effect of cutting defense spending, both now and later. Commonsense tells us that any drastic cuts in the latter program could cause short-term havoc in the econ 1144 ECONOMIC GROWTH AND STABILITY omy, because offsetting extradefense and especially extragovernmental forces of parallel magnitude are uncommon. B ut defense re search and attendant defense spending seem to have grown into our economy since 1940, and they are likely to be with us for some time. Hence, any threat to stability arising in their discontinuance would seem rather remote. Furthermore, should the defense effort slacken, the scientists would presumably transfer to nondefense research and, after a difficult period of adjustment, the economy could go on as before. P u b l ic V ersu s P r iv a t e R esearch Research other than for m ilitary purposes, as we have seen, con stitutes a relatively small p art of the overall program. As to its vitality, its importance, and its contribution, it speaks for itself. There is, however, a “no man’s land” which borders on many segments of the Federal research program. I t is into this area th at I wish briefly to tread. I refer to a number of questions the answers to which defy quantification and rather, lie in the areas of theory or even conjecture. Because of this, I shall, where possible, present both sides of the issues for your consideration in the hope th a t an economist’s approach may cast some new light upon them. W hat effect has the existence of Federal research had upon private research, and how is this relationship reflected in economic growth and stability? One view holds th at private industry, in the area of research, competes with government just as among its members; th at government’s entry into a field of interest to business stimulates private, competitive efforts to beat government to the punch in order to gain exclusive benefits. By this means, research effort is m ulti plied, the likelihood of success increased, and growth hastened. The other opinion holds th at government research activity in a given field discourages private industry from entering it, largely because government findings might be made public; hence, no certain, competitive advantages would accrue to the discoverer. I f this opin ion prevails, there is considerably less activity in fields entered by government research than there would be without it. Fewer research attempts reduce the chances of success and, in the end, progress is delayed. Is too much emphasis in the Federal program placed on applied research, and how does this distribution of funds affect economic growth? I f government reduced its applied research effort, would private industry fill the gap ? Ninety-one percent of Federal research expenditure currently goes for applied research, i. e., finding new applications for old basic-research findings.2 The same distribution of funds appears to prevail, on the average, for all industry. I t has been suggested3 th at “our current technological advances are based on the application of accumulated basic knowledge which is, perhaps, 20 to 30 years old.” And it is generally agreed th a t basic research is poorly supported and lacking in vigor and quality. 2 The Federal Research and Developm ent Budget, Federal F unds for Science, vol. V, N ational Science Foundation, p. 16. • Report of Committee on Social Aspects of Science, the Council of th e American A sso ciation for the Advancem ent of Science, as published by the New York Tim es, December 31, 1956, p. 6. ECONOMIC GROWTH AND STABILITY 1145 One side argues th at basic research is as much the responsibility of business as of government, since business stands to reap many of the gains. There is, therefore, no reason why government should do more than required to fill the gaps in its known requirements and to compete effectively with other nations’ defense efforts. Federal ac tivity in applied research likewise exists because of the immediate need for the research results, which we have no assurance would be forthcoming from private enterprise of its own initiative, so the argu ment runs. Need is sufficient reason for entering a new area. I t makes very little economic difference who pays for research, as long as it is done. In the end, most of it is done in the laboratories of private industry, anyway; therefore, efficiency is unchanged. I t is said, let the government buy research to suit the needs only it is able to assess. The other side holds that basic research is the responsibility of government—th at it is the appropriate agent for remedying our defi ciency in this area. This group suggests that there are broad areas in the Federal research program which could be and would be taken up by private enterprise if abandoned by government and if government communicated its needs; that, where private profit provides a sufficient incentive, there is no need for subsidy. For example, these critics in clude in this group portions of such activities as research in metals, chemicals, electronic devices, and areas of medical research. They con tend that, in undertaking many of its applied-research projects, the Government performs an allocation function not necessarily delegated to it. When government concentrates its limited funds on applied re search in natural sciences, basic research in general, and applied re search in social sciences suffer. The capstone of this argument is that, while the growth contributions from the Federal research effort are already great, they would ultimately be even greater if more emphasis were placed on basic research. I do not mean to resolve any of these disputes—and, to be sure, there are a great many more. But I do wish to suggest by discussing them that some distribution of funds other than that which prevails might prove to be more satisfactory and might better help us to attain our objective in progress. The efficiency of our Federal research effort would probably increase if it were carried out within the frame work of a clearly defined policy rather than being the net result of small projects meeting many small needs. S um m ary Federal expenditures for research and development have been rising rapidly. They provide an important stimulus to economic growth and are of minor assistance in achieving business stability. The role of government as a consumer of at least one-third of our research talent and, therefore, as an allocator or director of technologi cal innovation is of strategic importance. A fairly strong case can be made for a redistribution of Federal research funds with more em phasis to be placed on basic research. Basic research findings would then serve as a basis for the applied research of the future, and the conduct of the latter might be left more to the initiative of private business. 97735— 57-------74 1146 ECONOMIC GROWTH AND STABILITY I.— Growth rates for gross national product. Federal expenditures (total and research), research expenditures other than Federal, total national research expenditures, 1929-40 and 1941-56 T a b le Current dollars 1940 Increase or decrease, 1940/1929 Average annual com pound rate of growth B il lions Percent Percent Item 1929 Bil lions Federal expenditures: Total................................. Research......................... Research expenditures other than Federal....................... Total national research ex penditure............................. 1956 dollars $104.4 $100.6 M il lions M il lions - 4 .0 2,645 23 10,089 74 +281.4 +221.7 12.9 11.2 120 271 +125.8 143 345 +141.3 1929 B il lions Gross national product. . . 1941 1956 Billions Billions . $125.8 M il lions Federal expenditures: Total................................. 20,539 Research.......................... 198 Research expenditures other 602 than F e d e r a l................... Total national research ex penditures......................... 800 $412.4 M il lions Increase or decrease 1956/1941 Percent +227.8 Increase or decrease, 1940/1929 Average annual com pound rate of growth B il lions Percent Percent $187.1 $213.7 M il lions M il lions +14.2 1.2 +275.4 +216. 7 12.8 11.1 695 +122.0 7.5 885 +137.3 8.2 6,890 60 25,868 190 7.7 313 8.4 373 Current dollars Item 1940 1956 dollars Average annual com pound rate of growth 1941 1956 Percent Billions Billions 8.2 $247.2 $412.4 M il lions M il lions 71,400 2,538 +247.6 1,181.8 8.6 18.5 5,213 +765.9 15.5 1,576 7,751 +868.9 16.4 2,094 53,751 518 71,400 2, 538 Increase or decrease 1956/1941 Average annual com pound rate of growth Percent Percent +66.8 3.4 +32.8 +390.0 1.9 11.2 5, 213 +230.8 8.3 7, 751 +270.2 9.2 Sources: Gross national product, Economic Report of the President, 1957, p. 126. Total Federal expenditures—National Income 1953; Survey of Current Business, July 1957, p. 11. Federal research expenditures—1929, Varmevar Bush, Science, the Endless Frontier, 1945, p. 80; The Budget of the United States for Fiscal Year Ending June 30,1958, p. 1134. Total national research expenditures—1929 and 1940, Bush, ibid.; 1941 Applied Research in United States, National Academy of Science, p. 7, 1956—U. S. Budget, ibid, and McGraw-Hill survey.
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