Where is the investment?

Again we find ourselves watching a debate over government spending and how much it should be cut. The big players in this debate are defense and entitlement programs, these are both the largest items in the federal governments budget and huge sacred cows to those who support one or the other. What gets largely left out of this debate though is investment, and this is a very unfortunate state of affairs. This is unfortunate because infrastructure investment and R&D create profit, they increase the tax base by increasing economic vitality. And this isn’t just a matter of investing in new things, our basic infrastructure is crumbling, some estimates say that we would have to pay around 600 billion dollars a years, for many years to come, just to fix our existing infrastructure due to the years of neglect that has been heaped upon it.

So you can spend money on things which offer little or no profit or spend it on things which do offer profit and so make it easier to afford the things that don’t. Consider the following chart from the OECD.


It should be clear that in countries of decent size that are not endowed with great natural resource wealth R&D expenditures does relate to the relative economic vitality of a country. So it is very unfortunate that in the fiscal debate R&D and infrastructure are always the first things to be targeted for cuts, these are the things that allow us to afford everything else. I would rather see us fund these expenditures more and cut or re-structure social benefits instead.

These quotes from the Wall Street Journal, 12/17/2012, http://online.wsj.com/article/SB10001424127887324677204578185552846123468.html

“U.S. inflation-adjusted R&D spending is expected to decline 0.7% next year, according to the Battelle Memorial Institute, a nonprofit organization that conducts scientific research for government and industry.”

“Inflation-adjusted R&D spending growth averaged about 4% a year from 2004 to 2007 in the U.S. But since 2009, growth has failed to outrun inflation.”

“The U.S. is expected to spend $423.7 billion on R&D next year, which would ripple through to generate about $1.24 trillion across the economy. The spending would directly support the employment of 2.5 million full- and part-time workers, and, indirectly, a total of 8.3 million workers, according to Battelle.”

Yet we cannot even fund the patent office sufficiently. Of course that opens a whole other can of worms in that, from a policy standpoint, we are probably better off having much more R&D done by the government who can then auction off patent rights, (preferably to more than one company to insure competition). Why aren’t antibiotics being developed? Because drug companies make far more money developing drugs that people need to take over a long period of time, like cholesterol drugs, than they do developing one shot drugs like antibiotics. This is true of a lot of things which offer great social good but little profit potential, we need the government to be doing more R&D not less.

As for infrastructure according to the OECD the U.S. ranks about where it does in the R&D chart, not at the top but not falling to the back of the pack either. This ranking is complicated as different countries rate higher or lower in different things, for instance England ranks highest in airport investment, not surprising considering it is a major airline hub. The U.S. is not, however, ranked at the top of any category. Which re-inforces the point made about R&D, where the position of the U.S. is isn’t a catastrophy, but any cuts in current expenditures would make it so.

This is brought home especially considering the rapid development some emerging nations are making. What they are building is the latest version of what is available, where as the U.S. is working with an infrastructure in many cases 100 years old. This is like when Japan and Germany re-tooled post WW II, their manufacturing facilities were a step ahead of those in the U.S., where the latest investment has gone is where the cutting edge technology will be.

The sad thing is that it takes an exceptional set of cicrumstances to make the kind of investment China is currently doing. In their case a glut of capital available for investment. In the case of the U.S. and Europe during the industrial revolution huge leaps in productivity combined with a inexpensive labor pool. (Just imagine what the bulldozer alone made possible). The case of the U.S. is one of having to make prudent decisions about what it can and cannot afford.

Still we must accept that we cannot run such an expensive government without a broad tax base, and we won’t have a broad tax base unless we fund R&D and infrastructure spending fully, which means that these should be the last thing to be targeted in the fiscasl debate, not the first.



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