5 questions for John Van Reenen on innovation and federal R&D spending

Can the US boost its productivity and tackle our greatest
challenges, like climate change, through innovation? What role should federal
R&D spending play in furthering our scientific and technological
advancement? And can we engage in such spending without falling into the common
pitfalls of industrial policy? John Van Reenen joined Political Economy to discuss
his research on these questions and more.

John is the Gordan Y Billard Professor and Management and Economics and Professor of Applied Economics at the MIT Sloan School of Management and MIT Department of Economics. In June 2020, he published “Innovation Policies to Boost Productivity” as part of the Hamilton Project at the Brookings Institution.

Below is an abbreviated transcript of our conversation. You can read our full discussion here. You can also subscribe to my podcast on iTunes or Stitcher, or download the podcast on Ricochet.

Pethokoukis: What is the problem that you are trying
to solve with your proposal?

Van Reenen: The big picture problem is that even before the COVID
pandemic, America was suffering from a productivity growth problem. Productivity
growth had slowed down since the Great Recession. And productivity growth, in
the long run, is the key to having sustainable wage growth. So if you want to
get better wages, you need better productivity.

We’ve increased our investments in R&D, which is one of the key
factors in increasing productivity growth. But the return in productivity
growth doesn’t seem to be as great as it was in the past.Andfederal R&D has
decreased a lot. In the mid-’60s, we were running at about 1.9 percent. Today,
that’s down to about 0.7 percent of GDP.

Now, private sector R&D has increased, which is good. But a
lot of federal R&D creates a lot of what economist call
“spillovers” to the rest of the economy, whereas some of the business
R&D provides value for the business itself without creating as many
spillovers to the rest of the economy. So the fall of federal R&D — and of
basic R&D — is one of the reasons why we’re not getting so much bang for
the overall R&D buck.

So what does the mix of government spending on
research look like, and how do you want to change it, if at all?

In my proposal, I give some indications about the types of
policies we know have had an impact. The US, under Ronald Reagan, introduced a
research and experimentation tax credit in the early 1980s, and there’s a lot
of evidence that this was successful in raising R&D and, indeed, innovation
for many firms. There are also direct grants which go to different companies. We
want to try and think about funding types of research which benefit not just
the firm itself but, potentially, other firms. We should also think about these
challenges which the economy faces as a whole.

Via Twenty20

The principles of allocation should be that the allocation is
based on having agencies which are not just controlled by politicians who are
trying to give out the money to people in their local area, but people who are
more independent from the government. And they should be evaluated very
rigorously to make sure that we’re getting good value for money for those
things. The obvious risk is that these become captured by the people who are
getting the money or captured by the politicians. You have to do a lot of
things to try and shield that.

A previous paper you wrote with Nicholas Bloom seems to suggest that mission-oriented policies are not one of the most effective ways to promote innovation. But you’re saying we need this kind of research in order to handle pressing problems like climate change and public health concerns?

Yeah. We need innovation and technological change to deal with climate
change, for instance. So we need to decide what we need — maybe that’s beating
the Chinese at artificial intelligence, maybe it’s climate change — and ask, “What
kind of innovation policies are going to make that happen?” The R&D tax
credits, the direct grants, the trying to get more people to study STEM, the
trying to deal with the fact that we have many potential smart people and kids
that are not becoming inventors — those types of policies are ways we could
actually improve the innovation pipeline to deal with the real missions that we
need to tackle.

Are you proposing a form of industrial policy, where
the government plays favorites with certain technologies and companies?

There is an element of industrial policy which is, in my view, a
total failure because it tries to erect lots of reductions of competition and
barriers to protect companies. A good innovation policy is actually to increase
competition, so the traditional industrial policy, which is about picking
winners and protection, I think is discredited.

But you can have missions where there are these things that we
have a pressing need for. So if we can identify where the market failures are,
we can set up institutions which can try and direct the money to where it could
be useful without saying, “We’re all going to be picking the winners. We set
the criteria for what we want firms or actors to do.” If you want to call that
innovation strategy, then fine. There is a role for the government in trying to
improve the economy, if you can define those things well and get the
institutions right.

Why did the US let this downshift in research funding
happen to begin with, given how important it is?

I don’t know for sure. The US was so dominant that a certain
amount of complacency probably set in, and we thought growth was going to
continue. I think, also, there was a view that the private sector would step in
and do the basic research which the government started to move out of. But if
anything, it’s become even more near-market. And that’s not surprising, right?
Because the incentives are not really there.

So I think we got complacent. We thought that many of these countries like China were good at copying but not good at innovating — good at fusion but not pushing the frontier. That’s not true. They’re not as advanced as we are, on average, but they’ve caught up. And in many places, they’re overtaking us. And now is the time to fix this complacency, when we’re thinking about what we need to do after the pandemic to get back to growth.