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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Thoughts on ‘Disinvestment’ and Growth



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A thought: public investment and investment aren’t the same thing. Most investment in an open economy is undertaken by private citizens. It is widely believed that shifting the tax base towards consumption, through, for example, a progressive consumption tax, would have a large and significant impact on investment levels. And the beauty of this kind of decentralized private investment is that it involves risk-takers (and risk-bearers, ideally!) making bets with their own money.

One of the tricky things about discussions of public investments is that it is hard to separate out real investment from wasteful spending that is driven by the political process. We often hear that education spending constitutes an investment, but of course this raises the question of how education spending is actually deployed in practice. Jacob Vigdor wrote an instructive essay on this subject for Education Next. While there’s no doubt that some component of the money we spend on education constitutes a very shrewd investment — there is no arbitrage in human capital, which is why there is a particularly strong case for public investment in education — it is safe to say that it is less than 100 percent. 

Much the same can be said of infrastructure spending, for the reasons Barry LePatner has exhaustively explained in two excellent books. Yet we tend to have a charmingly simplistic conversation about our infrastructure, and the misaligned incentives that account for its lackluster condition.

I’d recommend reading a new report from the Center for American Progress with all of this in mind:

Investment is the cornerstone of job creation, economic growth, and long-run prosperity for middle-class families and our country as a whole. Investments—in new scientific research, new factories, transportation infrastructure, and the education and health of our workforce—contribute to growth by putting new technologies to work, lowering costs for businesses, and increasing the productivity and competitiveness of American workers. Both the private sector and the government have critical roles to play in the investment process. Business investment drives the economy, but public investment paves the path on which business investment depends. That’s why countries with the highest levels of combined public and private investment are leading the world economy in recovering from the Great Recession.

Is that why? And does all money that CAP characterizes as public investment pave the path on which business investment declines? Are there no wasteful expenditures, and is the best and most effective way to curb wasteful expenditures to reward ineffective public agencies with … more debt-financed resources, or more resources extracted from taxpayers who might otherwise make investments of their own? 

I was particularly interested in an arresting chart tracking “disinvestment” in science and technology, i.e., NASA, the National Science Foundation, and general science programs at the Department of Energy, etc. It reminded me of Amar Bhidé’s take on what he calls “techno-nationalism,” which The Economist ably summarized in July of 2006:

Mr Bhidé says that the doomsayers are guilty of the “techno-fetishism and techno-nationalism” described in 1995 by two economists, Sylvia Ostry and Richard Nelson. This consists, first, of paying too much attention to the upstream development of new inventions and technologies by scientists and engineers, and too little to the downstream process of turning these inventions into products that tempt people to part with their money, and, second, of the belief that national leadership in upstream activities is the same thing as leadership in generating economic value from innovation.

But nowadays innovation—a complex, gradual process, often involving many firms making incremental advances over many years—is not much constrained by national borders, argues Mr Bhidé. Indeed, the sort of upstream innovation (the big ideas of those scientists and engineers) most celebrated by those who fear its movement to China and India is the hardest to keep locked up in the domestic market.

The least internationally mobile innovation, on the other hand, is the downstream sort, where big ideas are made suitable for a local market. Mr Bhidé argues that this downstream innovation, which is far more complex and customised than the original upstream invention, is the most valuable kind and what America is best at. Moreover, perhaps the most important fact overlooked by the techno-nationalists, notes Mr Bhidé, is that most of the value of innovations accrues to their users not their creators—and stays in the country where the innovation is consumed. So if China and India do more invention, so much the better for American consumers.

The most important part of innovation may be the willingness of consumers, whether individuals or firms, to try new products and services, says Mr Bhidé. In his view, it is America’s venturesome consumers that drive the country’s leadership in innovation. Particularly important has been the venturesome consumption of new innovations by American firms. Although America has a lowish overall investment rate compared with other rich countries, it has a very high rate of adoption of information technology (IT). Contrast that with Japan (the original technology bogeyman from the East) where, despite an abundance of inventive scientists and engineers, many firms remain primitive in their use of IT. [Emphasis added]

I was struck by the numbers in the CAP chart. Relative to the constant 2010 level, U.S. public spending on “science and technology” falls rather gradually, from roughly $95 billion to roughly $75 billion. Given that this represents investment in “upstream” R&D in the basic sciences — the most internationally mobile form of innovation — it occurs to me that we’d want to know if either countries might be picking up the slack during this period. Will China, Europe, etc., create upstream innovations at a markedly slower pace than they do now, or might these other economies increase their investment in upstream innovation in response to some combination of political incentives, a desire to transition from imitative to innovative growth, and all the rest?

And if “venturesome consumption” is crucial to profiting from innovation, and to developing the more valuable and less-mobile downstream innovations, can one make a decent case that maintaining a low, stable, and sustainable tax burden is pretty important to maintaining a healthy level of disposable income?

To review, Mr Bhidé is suggesting that upstream innovation doesn’t contribute to growth nearly as much as downstream innovation. We could posit that overinvestment in upstream science and technology, financed by a much heavier tax burden, could actually reduce our ability to consume and to develop downstream innovations devised by creative managers and marketers. 

One of the things I believe very strongly is that I’m not likely to convince anyone of anything. But I do want to encourage some mild skepticism.



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