December 3, 2008    Volume 15, No. 21

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Research And Development Will Not Be Included In President-Elect Obama's Massive Economic Stimulus Package

By Richard McCormack

Don't look to President-elect Barack Obama's chief economic advisor to direct any of the massive economic stimulus package toward funding for science and technology. When asked by Manufacturing & Technology News at a recent event at the National Academy of Sciences if there was a need for some of the stimulus to support R&D, and in particular the thousands of scientific grant applications that are going unfunded, Lawrence Summers, incoming director of Obama's National Economic Council, responded: "You're not going to much like my answer but I guess it won't be the first time I gave an answer that wasn't 100 percent diplomatic....In the context of a short-run macroeconomic stimulus, that is to say, programs of stimulus that are explicitly temporary, it does not strike me that running up the research budget and then running down the research budget is a terribly rational way to run a country."

Summers was quick to note that he believes there needs to be an increase in federal R&D funds for the sake of the long-term health of the U.S. economy. "There is an important role for more science....but while more may always be better, a lot of ramping up and ramping down comes with very substantial inefficiency," he said.

Obama's stimulus package would increase the short-term federal budget deficit, but the intention is to build the economy in such a way as to provide long-term growth in federal revenue, said Summers. There is a "certain logic" to providing tax cuts for two years, and for accelerating investments in infrastructure that have been cancelled due to state budget shortfalls. There should be temporary federal investments in renewable energy, in information technology in the health care sector to lower costs, in universal broadband and pervasive wi-fi. "I don't think turning a science program on and then turning it off has an enormous logic," he said. "So that is the sense in which science as a short-term stimulus doesn't seem quite right to me."

Over the long term, robust investments in science and technology will be perhaps the only driver of future economic growth, and there needs to be "much more public support," said Summers. "Basic science is basically very, very important....On the one hand, only government can provide the support at the most basic level and on the other hand, the track record of governments in picking winners and losers -- in deciding what are the most fruitful industries -- is not hugely encouraging over time and in the quality of its judgment. So I would be tilting a bit more towards basic research in part in the conviction that there are lots of examples: the pure mathematics of factoring algorithms is just one example of where what seemed like the most abstract and irrelevant thing actually turned out to be the source of very substantial national security impact and a very substantial commercial benefit."

Here are excepts from Summer's after-dinner talk hosted in October by the National Academies' Board on Science, Technology, and Economic Policy:

This financial crisis is unlike anything, frankly, I ever expected to see. The single indicator of that I point to most, is there was a stretch where the interest rate on government bonds in the United States of America was negative. People paid the government to store their money because they didn't find anyone else they could trust. The financial system may be now beginning the process of mending, but it is going to be a process that is going to take a considerable time. The diminished flow of capital that is going to follow from the losses of the banks and other financial institutions is surely going to cause a recession and most likely a serious recession.

I have long recognized that macroeconomic policy is profoundly important, but in a way like anesthesia is important in surgery. If it is not managed successfully, the consequences are catastrophic. When there are accidents or problems, the issues rise immediately to the forefront, but anesthesia -- no matter how brilliantly administered -- will not make the operation a success and will not bring the patient to health and no matter how skillfully the dials of fiscal and monetary policy are turned, no matter how precisely they are set, they will not make a country prosperous; they will not make standards of living and incomes increase; and they will not assure that those incomes are equitably and fairly distributed.

The ultimate potential of an economy depends on things far deeper than financial variables. It depends on the productive resources that a society has: physical capital, human capital and an educated workforce. It depends on the nature of the economic environment in which entrepreneurs and other potential innovators can function. It depends on the capacity to generate progress in developing better ways of producing old goods and ways of producing new goods as well. It depends on its capacity to innovate and adapt. In large part it depends on its relationship with science and technology.

....Somebody very knowledgeable told me -- and I haven't gone and checked whether this is true -- that on a business-as-usual scenario there is an 80 percent chance that Harvard Yard will be under water by the end of the next century. It's probably no more important than a thousand other statistics I have heard about the damage of global warming, but it did bring the point home to me. The largest wealth transfers in the history of planet Earth are taking place between market-oriented democracies and authoritarian states associated with the exportation of oil.

What are we going to do? How are we going to cause [green] technologies to come into being? What is the right way to think about it? There are two broadly different stories, and it's incredibly important for public policy to know which one is right. One story is the story told by optimists: that whenever we set an environmental goal, we always meet it and we meet it much cheaper than everyone expected. Look at sulfur oxides. Look at what happened with respect to the first smog requirements in Los Angeles, and even CAFE standards. People complied at substantially less cost than they said they would. If we are determined and we just insist, then the price will actually come down and it won't be that burdensome. That is many people's view and it may be right.

Here is another view: whenever we take a big leap into the unknown it always costs an order-of-magnitude [more] than we thought it would. Think about the Big Dig in Boston; any major piece of military procurement; the Space Shuttle; the estimates of supersonic transport made more than 40 years ago. The contemplated changes in energy efficiency are incomparably large to where we are now. So it's almost impossible to predict what the [costs] will be. Some have estimates of the impacts of the cost of carbon sequestration, but there isn't a single viable carbon sequestration pilot project that is working, so who knows how much it will cost when it becomes pervasive.

Which of these views is right? Can we figure it out? In all likelihood we can't. How should policy be set given the staggering uncertainties, not just about what the impacts of emissions will be, but what the nature of the technologies and the costs are?

It's a good idea to be flexible -- that's a basic principle of making policy. But here's another principle of making policy: if you want people to make 40-year investment decisions in a way that reflects your policy preferences, you better know what your policy preferences will be 10 years from now. How do you square that with the need for flexibility? I don't have all of the answers here, but I'm pretty sure that saying we should just let the market rip is not a viable strategy and I'm pretty sure that commandeering the whole thing by government is not a very viable strategy either. How do we create the right kinds of incentives for the kinds of patterns of energy efficiency that we want to do -- that balance the cost and benefits? I don't know the answer to that question, but it's profoundly important.

[Another] question that should be much more of a preoccupation for all of us is what are the animating technologies that are going to drive our economy going forward?

There was a tremendous wave of innovation in connection with the Second World War: the jet airplane, electronic technologies and much else. Their diffusion fueled a period of rapid productivity growth, which improved standards of living and made almost everything else work well for the generation after the Second World War.

At a certain point, the energy was lost; productivity growth slowed way down and we had nearly a generation of lousy economic performance, lousy productivity growth. This made it easy to have inflation, high unemployment that led to some substantial national loss of confidence from the late 60s to early 70s to the beginning and mid 90s. At that time, the rapid diffusion of information technology touched every sector. My Blackberry has more computing power than a pretty formidable mainframe 20 years ago. And the range of activities touched by IT was pervasive to very great benefit, from retailing, health care, finance.

It's hard to read the statistics, but the best reading of the statistics would be that it looks like even before the current cyclical downturn, there is a slowdown in economic performance.

So from where is the stimulus going to come? What is the transformative activity that is going to be like the interstate highway system, the building of suburbs, that's like electronics or the Internet? What is the next thing going to be? Having the next thing, making sure it drives the economy has to be of profound importance.

Many say it's renewable energy, but if you think about it, renewable energy is more defensive than offensive. It will prevent the price of oil from spiking to a ludicrous extent. It will have very substantial environmental benefits, but at the end of the day renewable energy ends when you're plugging something in the wall and you're getting electricity like you used to. It doesn't end in a totally new capacity to do new things that were previously un-contemplated, like my cell phone does or the Internet.

Biotech? Maybe. But how much of GNP is going to be touched? Pharmaceuticals, healthcare, agriculture, certain part of materials science. But is the pervasiveness quite there? Next wave information technology? Maybe. But what are the technologies that the military has today that civilians will have 10 years from now that will be transformative? How many of them are there? What will their impact be? I don't know the answer to the question. But I do know that the underlying rate of growth that history suggests the dissemination of pervasive technologies is a profound issue for our economic future.

It's a cliché that too little American talent goes into science, and that too many people go into banking, and that our education system is said to be failing because of those effects. To some substantial effects it must be true. I found myself on a business trip to Europe and lucky for me I was sitting in business class. Seated not far from me in business class was a young woman who had graduated from Harvard 14 months before and who was working for a major financial institution and she was traveling to Europe and when people travel for that major financial institution they travel in business class. I like to walk when I'm on a plane, so I wandered. I walked back to coach and on that airplane in coach was a distinguished physicist who I had known when I was president of Harvard who I think probably is close to even money to win a Nobel Prize one day. He was going to a conference like professors of physics do and he was going like professors of physics like him go, which is in coach. And I didn't say anything to either of them, but I thought to myself there was something odd about the reward structure of our society.

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