AB has been letting us know about a new blog from Mark Thoma.
Mark’s chart of R&D relative to GDP reminds me of the debate between Paul Krugman and Bill O’Reilly. O’Reilly was trying to suggest that the Reagan tax cuts increased economic growth. Never mind the fact that savings and investment fell and that real GDP grew by only 3% per year from 1981 to 1992. O’Reilly fired off this:
Mr. O’REILLY: OK. Wait a minute. When did the R&D that led to all of the technological advances take place, sir? When did it take place? Prof. KRUGMAN: Actually a lot of it in the ’90s right at the time.
Mr. O’REILLY: Oh, sure. OK.
Mr. O’REILLY: Call any corporation, any high-tech corporation in Silicon Valley, and just ask them when their R&D ramped up and when the machinery that has led the United States and the world–when it started getting developed. They will all tell you it happened during the Reagan administration. When corporate taxes were cut, there was more income to devote to that. I mean, look.
O’Reilly spent most of this debate constantly interrupting and just tossing out claims such as there was more private R&D in the 1980’s than in the 1990’s. Mark’s chart shows this claim was simply wrong.
Note, however, that his chart also implies government sponsored R&D was quite high in the 1980’s and lower during the deficit-reduction 1990’s. In fact, the decade averages for total R&D was almost 2.6% of GDP for both the 1980’s and the 1990’s. But might part of the reason for high Federal spending in the 1980’s been defense-related, which would be expected to fall as a result of the peace dividend?
Using the NSF data, we can separate Federal sponsored R&D between defense-related, space-related (NASA), and civilian related Federal R&D. The following charts plots the shares of GDP devoted to two categories: (1) defense-related plus NASA R&D; and (2) private plus Federal-civilian. The idea here is to capture how the Federal government is assisting the private sector in areas such as life science research. The first category fell dramatically from the 1980’s to the 1990’s, while the latter category rose. So Mr. O’Reilly apparently misspoke. Now some might argue that defense and NASA R&D has spillover effects, but that was not Mr. O’Reilly’s claim.
Mark also writes:
I wasn’t able to find or recall any specify polices enacted when Carter took office that would explain this, so if anyone has any ideas as to what might explain this I would appreciate the insight. The increase in private sector spending as a percent of GDP shown in the first figure (green line) continues beyond Carter’s presidency, so if it was a specific policy, it was one that remained in effect beyond Carter’s term.
Interesting question – to which I have a couple of tentative suggestions. Telecom R&D increased after we decided not to have a regulated monopoly in the form of AT&T. One of Carter’s legacy was less regulation – something Reagan, Bush41, and Clinton continued.
Interestingly, Brad DeLong asks:
Microsoft spent $4.4 billion on research and development in the year ending June 30, 2001. $6.3 billion on R&D in the year ending June 30, 2002, $6.6 billion on R&D in the year ending June 30, 2003, and $7.8 billion on R&D in the year ending June 30, 2004. Just what, exactly, is it doing?
It is true that Microsoft’s R&D has risen from 15% of sales to 21% of sales. Also note that its SG&A expenses have risen from less than 25% of sales to 36% of sales. But what does this company do to earn its persistent 82% gross profit margin besides doing minor R&D enhancements (Brad’s interpretation even though Bill Gates might argue they are working on new product ideas) and extensive marketing?
This fact pattern reminds me of the controversies as to the life science sector, which also tends to have low costs of production relative to high selling prices. And these entities generate profits despite the fact that R&D costs are very high and they expend a lot in marketing.
R&D in the internet, communications, and technology (ICT) sector as well as the life science (pharmaceutical and biotechnology) sector may have risen. But are the higher levels welfare enhancing?