Friday, February 22, 2013

The Midas Touch

This week a facebook friend who is a scientist posted this quote from the state of the union address:

"Every dollar we invested to map the human genome returned $140 to our economy. Today, our scientists are mapping the human brain to unlock the answers to Alzheimer's; developing drugs to regenerate damaged organs; devising new material to make batteries 10 times more powerful. Now is not the time to gut these job-creating investments in science and innovation. Now is the time to reach a level of research and development not seen since the height of the space race."

Because arguing with strangers on Facebook is the best part of Facebook, I posted this rejoinder: “As a scientist, you should be skeptical about a claim that $1 of investment in anything has ever yielded $140 of benefit, or that it would continue to do so in the future. He could have claimed we've finally discovered a perpetual motion machine, and you would have laughed your ass off. You should be doing the same with this claim. (That said, I am a proponent of funding the sciences, but I am not a proponent of crazily stupid claims to get others to buy in).”

And that is when it got interesting, because someone with 30 seconds more time on their hands posted in a comment a link to a study with the subtitle: “How a $3.8 billion investment drove $796 billion in economic impact.”   (  That’s a ratio slightly over 200, which suggests that Obama was understating the case for government funded R&D.  Damn fact checkers!  That’s always my first thought.  But I am way too skeptical of my mad skills, as the kids these days say.  

The key here is the distinction between “economic impact” (the subject of the study) and “return,” which is what is stated in the speech.  The return consists of the combination of benefits to consumers (called consumer surplus) added to any corporate profits (producer surplus) derived from new products that have stemmed from such initial research efforts (assuming there are corporate profits, this implies that the costs of the investment and any production costs are recovered in the price of new products that arise out of that research). Follow-up research efforts would form part of the economic impact, but have nothing to do with the "return" on the initial investment.  

The economic impact is really meaningless. Suppose, for example, that the government dug a $1 billion ditch in the wilderness under the mistaken impression that there was gold in that area, and that following this a multitude of private investors dug 140 ditches at a cost of $140 billion, and not one ditch yielded any gold. Now, the economic impact of the $1 billion spent by the government is 140 times its initial investment, but the entire investment of $141 billion is a loss of $141 billion. Why is it a loss? Because all of the $141 billion of resources that went to the hunt for gold would have otherwise been employed in more productive pursuits. The economic impact is simply a measure of the follow-on investments, which may or may not yield a combination of consumer and producer surplus that exceeds the initial investment amount. I am not suggesting that these investments will not yield a return (as in the gold example), only that what is measured in that article has nothing to do with the return.

Some may take issue with the claim that the resources that went to the hunt for gold would have otherwise been employed elsewhere in the economy, but during the time frame of the study, the economy was, but for some minor exceptions, running at full employment.  Usually when people speak of a stimulus effect of government spending, it is during periods of recession, although even then the “multiplier” effect – i.e. $1 of government spending yields more than $1 of additional GDP – is not universally accepted among economists (although it clearly is among politicians).  Professor Vic makes a living debunking these same specious arguments in relation to public subsidies for stadiums and sporting events.

In fairness to Obama, the report itself uses the term “return” in speaking of the impact of the human genome project.  But this is not a harmless matter of semantics, and it is somewhat startling that this line was left in the state of the union speech.  Taken to its logical extreme, it is an argument for taking the entire federal budget and spending it all on R&D.  As the federal budget has been running at roughly 25 percent of GDP for Obama’s term (up 5 percentage points from the historic average over the last 30 or so), if you dedicated that amount to R&D, that simple investment would increase GDP by a factor of 35 – we’d be 35 times richer as a country!  As for those wide-eyed fans of the President (the press), there is a halo effect at work that has them take this claim at face value – if this President can finally right the injustice of women having to pay for their own $7 a month birth control, than surely he can pick R&D investments that yield a 14,000 percent return on investment.  Forget about Midas, who merely turned everything he touched into gold, or Jesus with the miracle of the loaves and fish, we have Obama, who does both simultaneously. 

As with most of the content of Obama’s speeches, the R&D schtick is a straw man.  If you are against government funding of R&D, you are against the human genome project, because all government research is as valuable as the human genome project.  (Never mind that the beginning funding of the human genome project occurred in the Bush 1 years, and continued on through the Bush 2 years.)  The essence of his political speeches is to constantly suggest we can all have something for nothing (the one percent accepted of course), and that all that prevents this is Republican intransigence.  The truth is that there are very few pieces of fruit hanging low on the tree that we've simply failed to see, and now we can all sit down and enjoy; government is more about redistributing the fruit, and in the process it kills the tree. 

There is a legitimate potential benefit from government financing fundamental science – first off, although follow-up research coming from the findings of that fundamental research may yield commercially beneficial innovations, the cost and risk of the basic level science may be too large for a corporation to embark on such fundamental research.  Or, assuming that is not the case, it may be in the interest of the government to finance such research so that the intellectual property created by the fundamental research is in the public domain, which can allow for multiple parties to build on that base knowledge in deriving innovations with commercial value.  (Even in the case of the human genome project, there was a private company making the same efforts as funded by government.)  If all in the hands of one party, dissemination of such knowledge may be slower, leading to a slower pace of innovation or higher costs to consumers.  This is the theoretical case for a legitimate government role.

So much for theory – as a practical matter, not every government research project fits this mold or even has any potential commercial or policy value, and there is a real public choice problem regarding whether the most promising R&D possibilities will be funded, as opposed to those that are most arduously lobbied for. Witness all of the subsidies to alternative energy companies that are all going bust. These are monies channeled away from potentially more lucrative private sector R&D investment possibilities, which have yielded nothing for us commercially, but which have handsomely rewarded those who have supported Obama and the Democratic party.  Governments are generally not very good at “industrial policy” – picking certain industries to support – and to the extent inflated stories about the magic of R&D are used to justify de facto industrial policy in support of pie in the sky green energy, all they serve to do is make Al Gore rich.  It is much as I predicted about Obama back in January of 2009:

“Here’s my prediction – the Obama administration will do very little in connection to the environment. There will be some payola to the parties that benefit from the alarmism created by the wild claims, enough perhaps to keep them quiet. I would say it will take very little to keep them quiet once Obama is in office, and in fact a little extra their way will have them lauding the policies of Obama even if in fact they are mere lipstick on what we’ve been told for eight years is a pig. (I suspect he may go a little too far and choose a policy that reaps great economic harm without any real prospect of confronting seriously the devestation we are told is imminent.) We’ll see, in short, if Al Gore really drinks his own kool-aid, and I suspect that he doesn’t. If he is honest, the policies he will see should make him the Kierkegaard to Obama’s environmental church [i.e. he should be incensed], but something tells me he will quietly glide into the pew and keep quiet in exchange for the promised donuts in the parish hall. At the end of the day, it will be a moral posture that is good for business and the Democratic party, and nothing more. Like homeless people circa 1992, environmental problems will largely disappear.”

Hate to say I told you so.


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