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Economic Growth
The ideas that government must fund most basic research, that such research is crucial for advanced technology, and that advanced technology is a strong contributor to economic growth have all become cliches. Not only President Clinton, but also many others, assume that these ideas are true without bothering to examine them.
William Niskanen was not one of those people. More than almost any other economist of his era, he marched to the beat of his own drummer. In doing so, he often challenged accepted views. And in this case, his challenge hit the mark.
These are the last 2 paragraphs of David R. Henderson, “Underappreciated Wisdom from Niskanen,” Defining Ideas, November 15, 2023.
Read the whole thing.
READER COMMENTS
Thomas L Hutcheson
Nov 17 2023 at 10:36am
The view attributed to Niskanen on research do not make much sense.
The fact that firms benefit from their own R&D does not imply that the benefits are greater than the benefit to them. In other words there is an externality and like any other positive/negative externality could be the subject of a Pigou subsidy/tax. Now objecting to exaggerated claims about the size of the externality leading to a too large tax or subsidy IS a proper role for the skeptic. Perhaps that is what Niskanen was doing.
BTW, from a throwaway line I got the impression that Henderson thinks not expensing ANY investment is a good idea. I disagree. Even accepting that business income should be taxes at all (I do not), investment, not just R&D, should be expensed as this pushes combined business/personal taxes toward being a progressive consumption tax, not a progressive income tax. [In light of the positive externality, an additional tax credit for R&D might be appropriate.]
Question: were Feldstein and Niskanen on board with the tax cuts and deficits idea or did that come along after them?
David Henderson
Nov 17 2023 at 12:36pm
You write:
Correct. And fortunately, neither Niskanen nor I denied that.
You write:
True. And what do you think should be the size of that subsidy or tax? And, more important, why would bureaucrats and politicians, with little of their own wealth at stake and little information, come up with the right tax or subsidy? Or do you think that incentives matter in the private sector but not in the government sector?
You write:
I didn’t have any “throwaway” lines. I don’t write that way. And I find it insulting that you claim that I did.
Now, to the substance, I think all investments should be expensed.
Thomas L Hutcheson
Nov 17 2023 at 4:39pm
Sorry if I misunderstood your position on expensing investment. By “throwaway” I meant only said in passing.
David Henderson
Nov 17 2023 at 5:35pm
Thank you, Thomas. A friend suggested that I had overreacted and it looks as if I did. I sometimes take words too literally. This was an instance of that. I apologize too.
Knut P. Heen
Nov 20 2023 at 11:16am
I thought Coase buried the Pigou-tax long before I was born. What looks like a good to you, may very well be a bad to me. The same goes for so-called public goods. Should we tax Greta Thunberg to build the public roads she hates? National defense sounds like a public good until you are drafted into it, and realize you are putting your life on the line for a government you don’t even like (Nazi-Germany, for instance). The same point applies to R&D too. Should we tax or subsidy research on AI? Intelligent people have different views on that issue. The idea that basic research is a public good sounds good until you hear about all the nonsense that is defined as basic research.
JP
Nov 17 2023 at 10:39am
Your claim in the “From advanced technology to economic growth” seems too strong. While it is true that technology might not account for 50% of economic growth, this doesn’t mean there is no link between technology and economic growth. You could make your argument with just your last two points.
David Henderson
Nov 17 2023 at 12:31pm
Your criticism would be good if I had made the claim that you say I made. I didn’t.
JP
Nov 17 2023 at 2:32pm
Didn’t expect such a snarky answer to a relatively benign comment that I thought your argument worked, just that the first point was too strong. I read the paragraph starting with “The odds are high that…” several times and you are quite critical with the technology argument for growth, particularly in the context of that section, at least, that is how it reads to me. If that’s not what you meant, perhaps new wording is needed. As I tell my students, I can only read what you write, not what you think you wrote.
David Henderson
Nov 17 2023 at 3:26pm
When I say “the odds are high that,” I mean just that. I don’t mean that the odds are 100%. That’s why I’m saying that a careful reading of my article should not lead you to conclude that high odds mean 100% odds.
David Henderson
Nov 17 2023 at 5:13pm
I reread my article and I’m glad I did. I had taken your word for it when you quoted “The odds are high” and thought I must have said that the odds are high that technology was not a factor. (I wrote the article almost a week ago and didn’t go back and check carefully.)
I didn’t say that at all. What I said was “The odds are high that a mix of factors accounted for the residual.” That certainly leaves it open that technology was part of that mix and even an important part of the mix, something I do think.
steve
Nov 17 2023 at 11:13am
Kind of doesnt pass the smell test. Basic research funded by govt was important in developing fracking and deep sea oil research. Almost everything in the IT sector has been heavily influenced by basic research funded by govt. That’s also true for innovation in health care. I also think that the line between engineering and research can be a bit fuzzy. There is a culture of engineers that floats back and forth between the university and private entities using the research they did at university to start companies and introduce innovation.
Also, the world has changed a lot since 1969. Significant breakthroughs in basic science dont come every year or at least not ones relevant to a given enterprise and the cutoff of 15 years makes sure basic research doesnt get credit. Look at the transistor. You needed the basic research done years earlier before the first transistor was developed in 1947. Then it needed to be modified to a less fragile form and then it wasn’t until well into the 50s that they were faster than tubes. So any device that was made in the later 60s that had transistors would be well past your 15 year limit, but still needed that govt funded basic research.
Steve
Vivian Darkbloom
Nov 17 2023 at 3:22pm
I’m sure one could point to a number of areas in which US government financed research has influenced economic developments (as you have done). However, isn’t it necessary to evaluate the costs as well? Can you establish an overall *net return* on government research expenditures? I doubt we are going to solve that problem here; but, as a general principle, if someone comes back from the race track bragging about their winning ticket, I want to hear about all the losers as well.
robc
Nov 17 2023 at 5:06pm
Even assuming a winning ticket, there is the opportunity cost of what else could have been done with the money.
If instead of the government investing in basic research, or whatever, what if they had left it to the taxpayers and they had spent/invested it? Why assume we wouldn’t be even more advanced today?
Vivian Darkbloom
Nov 18 2023 at 1:35am
Yes. When I wrote “However, isn’t it necessary to evaluate the costs as well? ” I meant all costs, not just the direct costs.