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R&D and the Budget Deficit


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July 01, 2005

R&D and the Budget Deficit

Michael Mandel

pgl seems quite upset with my recent posts on the difference between hairshirts and growth proponents. He seems to think that I don't understand growth theory, and he has some advice for me:

If Mandel has not heard of the Denison residual in growth accounting, he might perhaps read Solow?? 1987 lecture describing the history of economic growth theory

Hmmm, 1987....I like Robert Solow a lot, but pgl should know that there's been quite a bit of progress in growth theory over the past 18 years. Besides, Solow doesn't seem to have much trouble with my point of view, since he was happy to provide a cover blurb for my 2004 book, Rational Exuberance. Solow wrote:

What I like about this book is that Mike Mandel understands that aiming for technology-driven growth is a risky policy, and includes in it a serious income-security program for those who lose out or fall behind. This kind of package is really worth thinking about.

Now let me answer another one of pgl's arguments. In a comment, he says that

your posts suggest it is the tax cutters who are for more R&D without providing a shred of evidence that tax cuts promote more investment in R&D.

Evidence you want, evidence you get. Take a look at the table below

(The data comes from the the Office of Management and Budget)

The first column reports the percent change in real nondefense federal R&D spending for the past five presidential terms. For example, the 1993-97 entry is the increase from George H.W. Bush's last budget (fiscal year 1993) to the last budget of Bill Clinton's first term (fiscal year 1997).

The second column report the difference in the real budget gap over the same time periods, in 2000 dollars. A positive number means that the deficit got smaller or turned into a surplus, a negative number means that a surplus turned into a deficit or the deficit got bigger.

Guess what? The biggest jump in R&D spending came into the two periods when the deficit was expanding. The smallest increase in R&D spending--only 1.9%--came in Clinton's first term, when the focus was on budget cutting.

This really shouldn't be a surprise to anyone. R&D is a discretionary expense which is easily cuttable, with few real defenders, in a government full of sancrosanct programs. Pressure to reduce the budget deficit will always fall heavily on R&D.

Now, let me put a caveat on this. This is not a full econometric study, and it may not hold for other time periods. But hairshirt economists shouldn't fool themselves--a fiscal policy focused on closing the budget deficit will almost certainly hurt nondefense R&D.

02:59 PM

Fiscal Policy

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I beginning to think we have more in common that we have differences - but this comes from my reading of discussions of your book. Check out my reply at Angrybear.

Posted by: pgl at July 3, 2005 12:10 PM

Mandel,

You don't seem to have stand on anything making me wonder why you are running this blog..

just to tell us "Economists cant predict stuff" ?

What is your stand on the macro economic outlook ? deficits.. emerging economies like India and China... how global forex will be ? etc ?

Just talk abt something you know.. other than bitching abt others.

Posted by: Puzzled at July 3, 2005 02:15 PM

Puzzled - to be fair to our host, he seems to want more public funding on R&D. I might agree but I'd like him to address the benefit v. cost questions over at my new Angrybear post.

Posted by: pgl at July 3, 2005 10:24 PM


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