I’m checking in (but don’t call it a comeback*) because there was a big announcement by Obama at the National Academy of Sciences yesterday. By now you all should know I can’t resist a good R&D policy post:
The president laid out an ambitious plan to invigorate the country’s pipeline for innovation, from grade-school classrooms to corporate, government and academic research laboratories.
Mr. Obama’s plan includes fulfilling commitments dating from the Bush administration to double the budgets of the National Science Foundation, the science office of the Department of Energy and the National Institute of Standards and Technology.
But he is also seeking increases in direct federal investment in medical and energy research, and he would make permanent what has been a sporadic research and experimentation tax credit offered to companies that push beyond the quest for quarterly profits to pursue breakthroughs.
Obviously the increased NSF, DOE, and NIST budgets are really important. I’ve discussed in the past that some of that money will probably go to increasing the incomes of R&D labor, and today N-Greg-Mankiw cites a kind of quick and dirty paper by Goolsbee to poo-poo this). This is due to the extremely inelastic supply of highly-skilled labor. You can’t just see increased salaries and decide to be a particle physicist. At the same time, at least some of the extra funding is going to go toward funding research that was shelved to lack of money and also toward equipment to increase the quantity of quality-adjusted R&D. In addition, Ryoo and Rosen (JPE 2004, sorry but it’s gated) find that the choice of an engineering career path is plausibly a combination of static (cobweb) and rational expectations models. The decision to become an engineer is determined jointly by current career prospects, and tempered by the assumption that others will behave similarly. That is, a spike in engineering income will result in more freshman choosing engineering, but this enrollment surge will be dampened by the subtle understanding that more of their classmates will also choose engineering and drive down wages in the future. I would guess, however, that the first-order effect will dominate due to its notably lower informational demands. Thus, we can expect that of the youths who are deciding between studying physics and a field likely unaffected by the income shock, say ethnic studies, this short-term income spike associated with new NSF/DOE/NIST $$$$ will likely draw some of them toward the hard sciences.
So beyond the fun in the skilled labor market, I think that Obama’s decision to pursue a permanent R&E tax credit is outstanding. Certainty is always really important for firms and organizations. There’s just the whole planning/budgeting aspect that yearns for a more reliable policy. However, it’s also important because a tax credit can grant firms the ability to maintain an unambiguously higher rate of R&D. Of course, some firms will substitute away (i.e. R&D is cheaper, so do the same amount or slightly more and shift the money saved into other parts of your business), but the income effect will stand as well. In general it is often forgotten that you can’t just decide to do a bunch of R&D one day. There is capital that must be invested to expand R&D, whether in terms of facilities, equipment, support staff, or skilled R&D labor. Thus, knowing for sure that you’ll be able to count on tax credits for R&D done in the future, you’re more likely to invest in the fixed costs necessary to carry out a higher level.
So yeah. Obama. R&D $. Woo!