Bernanke's case for federal funding of R&D

If the United States is going to "win the future," what role should the government play in supporting research and development?

That was the topic of a speech by Federal Reserve Chairman Ben Bernanke on Monday at a conference about jobs and economic growth at Georgetown University.

While every word uttered by Bernanke right now is being scrutinized for hints of when the central bank may begin tightening monetary policy, this address reads like a lecture from his days as a Princeton University professor.

However, the questions he raises have great bearing on a Philadelphia region trying to build its economy on knowledge rather than manual labor.

One thing that Bernanke pointed out did surprise me: The United States has consistently spent about 2.5 percent of its gross domestic product on R&D over the last three decades. (That includes public and private-sector funding.)

Haven't we been wringing our hands over a decline in R&D spending? Well, the govern-

ment support has shrunk as a share of GDP since the 1970s, Bernanke said. The National Science Foundation has tracked a dip in spending on basic research vs. applied R&D.

But make no mistake - the United States still leads the world in overall R&D spending. Columbus, Ohio-based Battelle Memorial Institute estimates that the United States will account for 34 percent of the $1.2 trillion spent on R&D worldwide in 2011. China is now the second-biggest provider of R&D funds, or 12.9 percent of global expenditures, with Japan slipping to third at 12.1 percent.

The Philadelphia region might not be first on anyone's "best brains" list, but there are significant clusters of R&D activity locally. In the business world, you need only look at the $10.99 billion spent on R&D globally in 2010 by Merck & Co. Inc., which has major operations in Montgomery County.

Or how about the University of Pennsylvania, which received $481.6 million in direct grants from the National Institutes of Health in 2010? That amount was second only to the $610.5 million awarded to Johns Hopkins University.

The question, of course, is, is that money well-spent? After all, Big Pharma has been criticized for not being very effective with the billions spent on research. And I've often heard from readers that government should not be in the business of picking winners by backing some technologies over others.

Bernanke makes the case that government support is needed because of the "tendency of the market to supply too little of certain types of R&D."

He's talking about the basic research, with long gestation periods and little immediate payback. Ten years after the mapping of the human genome, critics may carp that the benefits have not been realized, but the potential for new treatments remains.

I like it when an economist admits up-front that he doesn't know what's the best way for government to support R&D. Is it direct funding of government research facilities? How about grants to university or private-sector research? Maybe contracts for specific projects or tax incentives?

All are tactics that government has tried, and Bernanke said it's not clear what's the most effective.

Bernanke wasn't out to scare his audience with visions of a United States losing its research edge. But he didn't duck the calls for the federal government to spend within its means either.

How Washington chooses to back R&D simply needs to be consistent, Bernanke said: "Governments that choose to provide support for R&D are likely to get better results if that support is stable, avoiding a pattern of feast or famine."