Government Relations Update

Fed chief Bernanke endorses government support of basic research

Speech provides arguments for advocates of increased funding for NSF, NIH, and other science agencies.

The chair of the board of governors of the Federal Reserve System, Ben S. Bernanke, has laid out a detailed justification for expanded government funding of basic scientific research.  In a speech on May 16, 2011, Bernanke argued that long-term economic growth required continued scientific and technological innovation and that the federal government played a central role in supporting such innovation.  He asserted that although the private sector can be relied upon to support most areas of applied research and development (R&D), private markets do not allocate sufficient resources to basic research:

The primary economic rationale for a government role in R&D is that, absent such intervention, the private market would not adequately supply certain types of research. The argument, which applies particularly strongly to basic or fundamental research, is that the full economic value of a scientific advance is unlikely to accrue to its discoverer, especially if the new knowledge can be replicated or disseminated at low cost. For example, James Watson and Francis Crick received a minute fraction of the economic benefits that have flowed from their discovery of the structure of DNA. If many people are able to exploit, or otherwise benefit from, research done by others, then the total or social return to research may be higher on average than the private return to those who bear the costs and risks of innovation. As a result, market forces will lead to underinvestment in R&D from society's perspective, providing a rationale for government intervention.

Bernanke went on to note that federal funding of basic research, as a share of gross domestic product, has declined in recent decades and that this trend could serve to reduce future innovation and economic growth:

In the United States, total R&D spending (both public and private) has been relatively stable over the past three decades, at roughly 2-1/2 percent of gross domestic product (GDP).  However, this apparent stability masks some important underlying trends. First, since the 1970s, R&D spending by the federal government has trended down as a share of GDP, while the share of R&D done by the private sector has correspondingly increased. Second, the share of R&D spending targeted to basic research, as opposed to more applied R&D activities, has also been declining. These two trends--the declines in the share of basic research and in the federal share of R&D spending--are related, as government R&D spending tends to be more heavily weighted toward basic research and science. The declining emphasis on basic research is somewhat concerning because fundamental research is ultimately the source of most innovation, albeit often with long lags. Indeed, some economists have argued that, because of the potentially high social return to basic research, expanded government support for R&D could, over time, significantly boost economic growth.  That said, in a time of fiscal stringency, the Congress and the Administration will clearly need to carefully weigh competing priorities in their budgetary decisions.

If the federal government does decide to expand its support of basic research, Bernanke argued that funding should be stable over a long period of time:

However it is channeled, government support for innovation and R&D will be more effective if it is thought of as a long-run investment. Gestation lags from basic research to commercial application to the ultimate economic benefits can be very long. The Internet revolution of the 1990s was based on scientific investments made in the 1970s and 1980s. And today's widespread commercialization of biotechnology was based, in part, on key research findings developed in the 1950s. Thus, governments that choose to provide support for R&D are likely to get better results if that support is stable, avoiding a pattern of feast or famine.

Although it does not explicitly endorse any specific policies or budget numbers or focus on particular areas of science, Bernanke’s speech has been greeted enthusiastically by advocates for federal support of science across many disciplines.  It is viewed as providing a compelling and rigorous justification for increasing and sustaining the budgets of such agencies as the National Science Foundation and National Institutes of Health, even during an era of large federal budget deficits.  With adequate funding, these agencies can make long-term investments in basic research that can lead, often in unanticipated ways, to stronger economic growth and other societal benefits.  (Related points about the economic value and long-range impact of basic research were made by Francis Collins, director of the National Institutes of Health, in recent testimony (PDF, 106KB) before a Senate subcommittee.)

Bernanke’s speech, which was the keynote address for a conference in Washington DC on New Building Blocks for Jobs and Economic Growth, also touched on science education, science funding policies, and the globalization of science.  Previously a professor and chair of the economics department at Princeton University, Bernanke has been chair of the Federal Reserve Board since 2006 (see biography).