Common Tragedies

Thoughts on Environmental Economics

Energy and the NIH model

Posted by Evan Herrnstadt on November 15, 2007

Tyler Cowen addresses Jonathan Cohn’s now much-discussed TNR article about innovation in health care. Tyler boils down Cohn’s article to its essentials, and I’m extremely lazy not one to reinvent the wheel, so I’ll kind of use his post as a jumping-off point.

This is not to imply that I didn’t read Cohn’s beatifying account of public health care innovation. I briefly considered adopting NIH-worship as my new religion, but decided against it. However, I also wondered whether we can apply the good parts of health care innovation to energy technology. And if so, should we?

Tyler notes that, “Cohn has lots of (just) praise for the NIH, as basic research is often a public good.” I’ve written in the past how important basic research is for energy technology. As fusion continues to be perpetually “50 years in the future”, we don’t really have any silver bullet technologies on the horizon. Chances are we’ll have to choose from a suite of technologies and fuelstocks to keep ourselves metaphorically and (for the Floridians in the audience) literally afloat. Revolutionary technologies lay the groundwork for expansion of this piecemeal energy menu. At the same time, basic research has enormous spillover issues; an advance can spawn technologies in a wide range of fields without creating appropriable returns for those who made the discovery. Thus, the private sector obviously invests in basic research at a suboptimal level.  So should we just throw billions upon billions of dollars at the DOE?

Probably not. Although I think that basic research is really cool and interesting, I am an energy nerd who is not in Congress. Tyler writes:

The NIH works as well as it does because the money is mostly protected from Congress. It is not a success which can easily be replicated. The more money is at stake, the more Congress wants to influence allocation. We should guard this feature of the system jealously and try to learn from it. If we can.

I pointed out in an earlier post that DARPA has been so successful, in part, due to strong Congressional and Executive support. The NIH gives us a model for federally funded research that isn’t necessarily so loved on the Hill.  Still, it has had its problems in the past.  From the NIH website:

Toward the end of the 1960s, the growth of NIH budgets slowed considerably, in part because of inflation in the U.S. economy and the advent of new programs such as Medicare and Medicaid that competed for congressional “health” funding. Tighter budgets also led to debate over the relative efficacy of unfettered basic research versus goal-directed applied research.

This historical situation is analogous to modern-day energy. Suppose fuel prices continue to rise due to scarcity, we enact a binding carbon policy of some sort, and energy prices start shooting through the roof. Budget time comes around, and the DOE has been doing lots of crucial basic research. Unfortunately, most of it never really progressed beyond that stage. The aforementioned tension that NIH experienced in the 1960s will arise, and it will probably be more pressing. This won’t just be a budget crisis; it will be a full-out energy, economic, and security crisis.

Even if energy Armageddon never arrives, Congress might get antsy simply because money is money. As Megan McArdle points out:

The fact that you can do something awesome with $15 million does not mean that you could do something super-awesome with $150 million. It may simply not be possible to broaden what you are doing very much before countervailing forces–such as congressional interference (Exhibit A: the goddamn Acela)–kick in.

She goes on to discuss scale in educational pilot programs. However, this surely applies to energy. First, as I already mentioned, Congress will get pretty antsy if they’re throwing billions upon billions at energy research and not seeing almost immediate results. After all, the U.S. Congress doesn’t just throw money away.

Second, a scientist/engineer (S&E) has to be on the receiving end of most of those dollars. In the long run, more money in energy research might lead to more graduates in relevant S&E fields. However, in the short run, there will be diminishing marginal returns to R&D spending. The most talented S&E’s will, cetis paribus, probably get funded first. Also, consider that more total R&D money is flowing for scientists and engineers. This basically means that there is more labor demand in energy-related fields. The supply might go up as competent non-energy researchers move where the money is. However, at some point, we are going to hit our short-run ceiling of S&E labor supply. Thus, we will be increasing the price of S&E R&D more than the quantity. Of course, higher funding levels will result in better equipment and facilities, and thus better research. However, on the margin, an R&D dollar will probably become less valuable. At some point, it’s no longer going to cover the opportunity cost.

All in all, we can’t really just turn to the current institutional structure. If I had a great answer to the problem, I’d probably be advising someone important instead of writing a blog post about the subject. But there are proposals out there, such as John Deutch’s Energy Technology Corporation. Despite my doubts, I think it’s one of the better ideas out there. The ETC would be funded through a lump-sum endowment, and although it would necessarily be subject to review, the review could be performed by an independent board of energy technology experts. Any benchmarks must consider that a successful ETC means funding lots of failed experiments that never spawn commercial applications.

To claim that we should only focus on the NIH aspect of health innovation is to completely overlook the process of applied research, development, and demonstration. Cohn has been crucified for interpreting NIH success as private failure, which is simply not the case. Applying NIH principles to energy is one thing, but we must also consider the next steps, which are crucial for energy technologies to make it to market. I will post on these soon.

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