The Science of Spending Stimulus Money Wisely

The New York Times carries an interesting article on the role of spending on science projects as part of a stimulus package.

29 replies on “The Science of Spending Stimulus Money Wisely”

But some other economists and business leaders defend this use of stimulus money, saying federal research grants gave birth to some important sector of the region’s economy, from microprocessors to computer networking, from biotechnology to the Internet.

“This is the best kind of government spending there is,”

I’m searching for that OECD report that shows no correlation between government spending on science and growth. Also, apparently, every dollar of government spending crowds out $1.25 of private spending on research.

Funding of pure research and design is something that most governments do in good times and bad. The payback is ten to thirty years out so it makes little sense to increase research expenditures in an economic downturn. In Ireland our economic problems are on our doorstep now. In Tralee there is an explosion of civic unrest and crime in general. As unemployment increases we will see similar outbreaks in other areas. Any program that takes 18 to 40 year olds off the streets and into productive activities is needed immediately.

It seems there is plenty of (borrowed) money in the country but unfortunately our brain dead government have no intention of helping those who need it (i.e. the unemployed). How about helping some of our recently unemployed and our recent graduates by using just a few of those 35 billions as a stimulus. I know graduates who have nothing to look forward to only the dole or emigration (if they are lucky). It is absolutely bizarre to think that the cost of educating a graduate (in one case to Master’s level at an estimated cost of €50,000) will be lost to the exchequer while we wait for more foreign direct investment!!

@ Michael: Lucky we are not in the US of A. Those bozos would be toting M16s!!! Laagers, or a re-run of WWI might do the trick.

Employing someone – you’d have to have a reason. Like making something or providing a service. These endeavors are subject to physical and mathematical limits. Pity this is not taught to undergrads.

That Laser is terrific!!! But would it provide me with a hot, as opposed to an atomized dinner??

B Peter

The article correctly points out that the positive effects of government spending on R&D take years or decades to materialise. It is not a stimulus.

The article omits that rapidly scaling up R&D (as the US is doing now, and Ireland used to do) leads to wage inflation rather than job creation. The supply of specialists is too inelastic to allow rapid expansion.

There are good reasons to increase public R&D spending in a downturn as firms cut back on R&D investment. Whether or not this increased public R&D expenditure can be called a stimulus is not the important message here. While its effects on innovation and growth are likely to materialise in the medium and long-term, fostering R&D investment and innovation in the downturn facilitates structural change and contributes to fiscal sustainability in the medium and long-term.
This OECD report makes a strong case for increased public R&D spending as a driver of a sustainable recovery from the current crisis.
The report also makes the point that evaluating and monitoring efficiency and effectiveness of public spending including R&D spending should be part of the policy design and implementation.

Public R&D is pre-competitive, while private R&D is about commercialisation. You cannot substitute public R&D for private R&D. Anti-cyclical public R&D keeps private researchers of the dole, that’s all.

Furthermore, R&D contributes to a stock of knowledge. A temporary lull in additions to the stock has little effect on the long-term growth rate.

In a downturm enterprises cut in particular high risk long term R&D projects which impacts negatively on innovation, productivity and competitiveness. The role of counter-cyclical public R&D spending is to reduce the depth and magnitude of the downturn in business R&D. Business R&D is an innovation input and innovation is a key driver of productivity and long term growth.

Increased public spending on R&D has short term, medium term and long term impacts.

In the short term, it pushes money into the economy, much like stimulus spending on construction or health. Depending on labour market conditions and the size of the increase, it may boost employment. Given the number of PhDs and people with post-doc experience we are pushing out, I don’t expect that we would have a problem staffing more public R&D, or publicly-funded business R&D, if we wanted to.

In the medium term, increased higher education R&D activity produces more research graduates and people with post-doc experience. It produces an environment where industry has more opportunities to benefit from informal and formal interaction and cooperation with academic researchers. If IDA can be believed (and I think they should know), these factors are attractive to many inward investors. In some parts of industry, they are also attractive to entrepreneurs and SMEs. Hence, more jobs.

With luck, publicly-funded research may even spin out a few businesses directly, and (on average) recover a small part of the original spend through licensing intellectual property.

Then, there are the long term impacts …

I don’t think this is the right time to increase Irish public spending on R&D. But it’s not that all the impacts sit far off in the long term.

Rather, it’s because we need to work harder at maximising the economic benefits we derive from the existing spend, and because the severe public budgetary constraints we now face make it difficult to justify responding positively to any stimulus proposal.

Also, because after a period of rapid growth in publicly-funded R&D, I think it is time to take stock and ask whether what we are now doing is sufficient in volume for the country’s strategic needs. The 2008 stats (Forfas, August 2009) show Government Budget Outlays or Appropriations of R&D (GBOARD) running at 0.66% of GNP, which was approaching the European mainstream.

Exactly. Businesses cut that R&D that has no immediate return. So why should government pick up the slack?

Businesses also cut other frills, like business class travel. Should the government pay for the difference between economy and business?

Public R&D pushes money into a specific part of the economy.

If the government has money to spare for a stimulus, it should do so in a general way, preferably but cutting labour taxes. Shoving subsidies to specific sectors is less effective.

I know that there is difference in timing between government spending and tax cuts, but the government is broke to that point is moot.

There is a link here to slides I presented at Kenamre on the ‘Smart Economy.

The general thrust of my argument is that the in vogue approach to science and innovation (sic) policy is supply-side driven. There is no appreciation of the economics of a ‘smart economy’ which is that economic growth is driven by the use of new knowledge (not necessarily technological) rather than the production of new knowledge. Innovation is not an end in itself – it is desirable because it enhances productivity and competitiveness. It has never been well argued or even explained how funding basic science and research is intended to improve business productivity. I expect that businesses using new processes, products and technologies would improve competitiveness, productivity and, in time, prosperity.

There is no reason to think that this knowledge must also be generated in the same economy in which it is used.

Markets do not provide enough incentives to private R&D investment. This follows from the fact taht knowledge/ technology is non-rival (the marginal cost of an additional user is negligible) and is partially non-excludable (imperfect intellectual property protection). This implies that even in normal times firms underinvest in R&D/knowledge. Due to knowledge spillovers, social rates of returns to R&D investment are higher than private rates of returns. This market failure provides the rationale for government R&D investment to foster private R&D investment closer to the socially optimum level. However, as I said elsewhere on this blog, it remains to be proved that government R&D spending stimulates business R&D and it does not crowd it out.

Whether and how much to spend on R&D is a political choice. All I am saying is that existing empirical evidence suggests that there are good reasons for a counter-cyclical public R&D spending during the current crisis. The experience of Finland in the early 1990s is a case in point.

It is very true that foreign knowledge/technology is a source of productivity growth. Moreover, new technologies are created in a small number of advanced economies (US, Japan and Germany are the technology leaders). However international technology knowledge spillovers are not automatic, they are conditioned by past domestic R&D investment. To benefit from international technology spillovers firms, industries and countries below the technology frontier need to have the capability to internalise the external knowledge from technology leaders.

And a good case in point too. If I had taken longer writing my first comment, I would have noted that while we were approaching mainstream European levels of public spending on R&D in 2008, we were still a long way from Finnish levels.

However, there’s a related question as to whether our capability at translating research funding into economic results is as good as that of the Finns, and I would like to see clearer answers on this than I have seen to date.

@ Iulia

Of course your argument presumes that the only innovation that matters is technological. Technological advance is just one source of productivity improvement.

Also, while spending on R&D (though I would have a much broader idea of what is included in R&D – focusing on the D) is very important for businesses – there is no reason to think that Ireland should spend as much on R&D as other nations. If only it was as simple as more R&D spend means more innovation.

Of course we must also remember that we are already dramatically increasing our R&D spend as a % of GDP – even without touching the numerator.

Also, because after a period of rapid growth in publicly-funded R&D, I think it is time to take stock and ask whether what we are now doing is sufficient in volume for the country’s strategic needs.

I was interested in the points raised by the person who posted this.

Francis Ruane made the point at a Dublin innovation conference recently, that when we introduced the goal to double the number of Phd graduates in Ireland, we didn’t even know the number of the Phd students we already had in the country. Isn’t that strange? We intend to double ‘X’ without knowing that ‘X’ actually is.

Francis Ruane also made the point, while it is nice to start off programs like that and announce them in public, often we don’t look at the next stage of the process, five years down the line, when those Phd graduates are available, how do we carry things forward from there.

My recollection is a little bit vague now, I would have to check my scribbles from the conference, but I think Francis indicated, that no information was being compiled properly at any stage in the pipeline. The many of the programs we are currently running, are being run without any overall framework. Because the institutions in participation are spread out so much and we haven’t an overall body who is looking at the program from end to end, over a longer period of time.

We don’t know effectively what model to follow, or what good examples abroad which may be applicable, because we have no proper picture of what is going on in Ireland right now.

I attended a good talk given by Tom Garvin this evening, in which he talked of the IDA. The IDA’s function originally was to look at the economy and what is going on in the economy. To identify niches that aren’t being served and so forth.

@ Declan Jordan,

It has never been well argued or even explained how funding basic science and research is intended to improve business productivity.

I can offer you a significant point in this regard Declan. If you look at successful R&D programs around the world – the development of the internet by ARPA funded research in the United States. Look at Finland and the development of mobile communications. Look at Israel and the development of defense oriented solutions. Heck, even look at on-shore wind turbines.

What is the under current in all of these cases?

It is quite simple actually. They didn’t care too much about producing the next killer product to compete against others in the markeplace. They didn’t worry so much about that.

They simply took a difficult or almost impossible problem, and decided to get a solution, that worked 100% of the time. The publically funded R&D produced innovations which couldn’t roll it out in six months time, like a commercial company would have to do.

Sometimes, the solution that worked reliably wasn’t favoured in the marketplace, because some other standard was already established and was sold by the biggest vendor or whatever. But if you look at the solution produced by public R&D money – inevitably it was different to commercial offers. It had made the right, as opposed to the wrong architectural design decisions for the long term.

Sometimes in technology you have to make decisions which look completely daft today, but are rather more relevant down the road. Can you imagine trying to sell the idea of wind turbines to private investment companies? You would be laughed out of the building not so long ago.

You can only do that kind of exploration using public R&D money.

Imagine asking for money to develop a large scale wind electricity generation turbine a couple of decades ago. Who is going to back that except the state? But then the world situation changed, energy got precious all of a sudden and the wind turbine all of a sudden appears to be the right architectural design.

On the other hand, much of the technology that commercial firms develop has to be thrown in the bin. It only has a very short life span. At any particular time it might appear to dominate its sector, and may seem unbeatable, if you believe the marketing.

But in general, the technological development that sustains itself over a longer period of time and grows into something really ‘big’ like mobile phones, or the Internet, originally comes from state funded R&D.

My understanding is a lot of the wireless networking technology that laptops and many devices use today, was developed by governments working on radar back in WWII. It is hard to believe, but much of the same technological ideas are built into wireless networking today.

Yet no company on its own could have funded the development of radar. In fact, after its military uses were exhausted, most of that technology was sitting on a very dusty shelf, until engineers re-discovered it again, when the context changed and wireless networking became all the rage.

It is simply too difficult for companies to invest their scarce resources into projects which seem daft at a particular time. If taxpayers in the US knew that their dollars were being spent on something like the Internet, they would have gone completely biserk. Presidents would have been ran out of office, literally.

But now, even citizen in the US thinks the Internet is a normal part of daily life, like TV or radio. If you only looked at the competing technologies that were ‘much better’ than TCP/IP protocol – they were owned by private companies such as Digital Equipment corporation. They were considered away better, but now DEC’s networking technology is resigned to the dustbin and to history.


But in general, the technological development that sustains itself over a longer period of time and grows into something really ‘big’ like mobile phones, or the Internet, originally comes from state funded R&D.

My understanding is a lot of the wireless networking technology that laptops and many devices use today, was developed by governments working on radar back in WWII.

You are correct in most of what you say. However it is important to note that there was no largescale funding of R&D in the US until the 1940s. The 19th century Americans, in their ignorance, didn’t know that funding of research was meant to be a state-funded enterprise.

Had the Smithsonian Institute invented the aeroplane with their government grant, we would all be praising government funding of science for having lifted man off the ground. But as we all know, that’s not how it panned out.

Here’s a link to that OECD paper that I mentioned earlier. It states that “a marked positive effect of business-sector R&D, while the analysis could find no clear-cut relationship between public R&D activities and growth, at least in the short term.” (pdf warning).

Your recollection is right. There are decent surveys of the alumni of first, second and third level education, but not of fourth level (master’s, PhD).

Nor do we know much, by the way, about the impact of the money spent by SFI, universities etc on basic research. You can find the number of patents filed, but not the number of successful commercialisations. You can find the number of companies founded, but not their profits or employment.


My point is about international knowledge spillovers being conditioned by domestic absorptive capacity. I am not saying that only technological innovation matters. I agree that there are other innovation inputs in addition to R&D investment in particular in relation to non-technological innovation and innovation in services (I have a piece of research with colleagues in ESRI on determinants of innovation in services which is forthcoming in our Working Paper Series).

Also I am not saying that Ireland should have the same R&D intensity like other countries. Indeed my view is that without accounting for industrial structures (ie specialisation) country rankings of R&D intensity are misleading. R&D intensity varies across industries. For example the high R&D intensity in Finland is related to its specialisation in ICT industries and ICT industries have the highest R&D intensity. Whle Ireland is also specialised in ICT industries, they are dominated by multinaltionals and R&D is carried out to a large extent in their headquarters.

I pointed out to the experience of Finland in relation to government R&D spending during the crisis in the early 1990s. A painful fiscal adjustment was implemented with cuts in all spending areas with the exception of R&D. Government R&D spending was actually increased, in particular government funded business R&D and higher education expenditure. This increased R&D expenditure contributed to strengthening competitiveness. I agree that increased R&D investment is not sufficient, institutions and other enabling framework conditions matter including entreprenership.

@ Richard Tol,

Did you ever read ‘The Man Behind the Microchip’, a biography of Bob Noyce, by Leslie Berlin.

There is a very funny chapter at the end, where Bob Noyce produces the shoe box full of all his shareholder paper work, from all his days seeding various startup companies in the valley. What you describe about fourth level, startups and so forth is similar. Many of the startup companies Noyce put money into had a very short life time. Noyce looked at it only as replenishing the stream from which he had fished.

Another very interesting little reference, if you search google video, you can find a video with Alan Kay: Croquet, A collaboration architecture. Fast forward to the end of the talk in particular, where Kay gets into a very frank discussion about ways to do funding.

I think it was in that talk, that Alan Kay describes what I meant by ‘making it work 100% of the time’. At the time the ARPA Net was set up, other successful commercial companies were content to aim a way lower. There was no way you could take the commercial company’s architecture, scale it up and ensure it worked 100% of the time.

Of course the commercial companies didn’t actually care either, because they made as much money from selling services and maintenance, as they made from selling the original product. In fact, if it didn’t work 100% of the time, it didn’t bother the companies too much.

@ Iulia,

This is just a simple observation I said I would mention.

I have walked around university campuses in Finland and boy are they nice places to go to study in. I was amazed actually, they are very well funded and you simply know it. Our universities here in Ireland aren’t bad by any standard, but they would fall somewhat short of the standard I saw up at Helsinki.

What little money there is available in Ireland to spend on universities is not always spent wisely. When we got a little bit of spare cash during the Celtic Tiger, some of the money got wasted on over fancy buildings. Architects are compromised in that regard. They will inevitably use up all the budget if they can and find some way to squander it, if it is there. I haven’t liked a lot of what I have seen built on campuses in Ireland in recent times. But I will not go into it here.

I understand MIT university embarked on a building spree recently. I don’t know how it worked out for them, but I would certainly like to take a trip to Boston some time and have a good look for myself. Increasingly, cities are more important now than countries. What seems to make a city special is often a public building such as a gallery or concert hall. The other thing that speaks volumes of the calibre of the particular city, is the quality of its university.

I am not at all impressed by the new building being built beside the Arts block in Trinity. I think it was a cheap, budget type of vulgar expression and only shows that the university is short of funds and doesn’t have great taste. Furthermore, the building will block a lot of the evening sun that used to shine into that nice square in the summer evenings. Bad choice of design by Trinity college. Otherwise, I have to complement Trinity college in general on the management and care it takes with its grounds and spaces. Very well done and thankyou.

An interesting read is Linus Torvalds autobiographical novel ‘Just for Fun’ some time. In it, Torvalds describes his life as a student in Helsinki and how desperate he was to get out of the place. He really was depressed at one stage, that he might have to work as a professor for the rest of his life, like his uncle did. That image of himself staying in Finland long term did not fill him with joy!

Torvalds seems to have settled in quite well into the community around San Francisco since then. It is amazing really how proud people in the Bay area around San Francisco are of their place, their culture and their community. That is a very strange mixture to have in a place, which has such a unique global focus in its business and industry.

BTW, if we are to have some sort of a ‘smart economy’ here in Ireland, those people who yearn to see a city which is an architectural master piece might be very disappointed. I would expect the city which houses a smart economy to be a little boring. The consistent observation people make of Silicon valley is that it always looks new. Nothing ever stays the same for very long and its is constantly changing.

I suppose we saw a little bit of that in Ireland during the Celtic Tiger. It can be a bit disorienting if you ask my opinion.

An author worth tracking down also, a professor of archaeology at Bristol university, is Dr. Christine Finn. She published a book in 2001:

Artifacts: An Archaeologist’s Year in Silicon Valley. MIT Press

Which looks at the reality of life in the valley post bubble bursting. She describes in vivid detail, the compression of time that she noticed in the valley culture. Looking at it from an archaeologist’s point of view, where you are used to dealing with huge bands of time across centuries and mellenia, she found this contrast interesting in Silicon Valley, where some piece of technology that was a few years old, was already considered archaeology.

Another way to look at it is, in human terms it is not so long ago since Dell set up in Ireland, or for that matter, since Digital equipment corporation shut down its operations here. However, in technological terms, those two events might as well be ‘ancient history’ now.

I’m aware of that stuff, although I have not read those books in detail.

The final chapter of Noyce’s biography is real, and it’s a good thing as there are many bad ideas out there (but often only bad in retrospect).

The corollary is that counting start-ups (a favourite indicator in Ireland) is irrelevant. You need to count survivors from the Valley of Death.

@ I guess, there is something biological about silicon valley. The small startup companies operate a little like the cellular leve – a couple of engineers or scientists and business people coming together. Then they build a ‘part’ which might form the hand, ankle or knee joint of a larger organism. It is about putting all of these parts together, bit by bit, until one reaches a profit making vehicle, which often floats onto the tech markets then.

I haven’t done much research about this sequence myself to be honest. But when I think about it now, Jeff Hawkins, who worked at Palm and 3Com etc, the fellow behind the palm pilot was a very unlikely startup owner. He will admit himself, that he hates, absolutely hates starting his own company and would never do it again. But somehow it worked that one time, but only because there were folk around him who compensated in the areas where he was reluctant.

The Jeff Hawkins story is quite interesting too, in that he succeeded where so many of the large companies had achieved nothing, having spent fortunes to try and make handheld products work for consumers. I think if you flick through Moore’s book, Crossing the Chasm, it contains a pretty decent account of how Jeff Hawkins succeeded where others hadn’t.


I am only getting to respond now and I appreciate and agree with you by and large. There is a danger than equating R&D spending (or intensity) with innovation however does tend to overstate (IMO) it’s importance as driver of commercial innovation. I accept the point that Finland invested significantly in R&D during recession – though I am unconvinced that this is an argument for a similar approach in Ireland. Two reasons – one is the issue of context in that what worked in one case may not be appropriate in another. The second is that the Finnish case does not enable to determine how much we should spend on R&D. What is an appropriate level is very very difficult to answer. (I agree that R&D spending can boost absorptive capacity). I think we are focused too much on teh supply side of innovation – creating the ‘killer technology’ rather than trying to support businesses achieve productivity improvements through innovation diffusion.

Thanks for the article – excellent work.

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