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Is America falling behind the technological and scientific frontier? Does public funding effectively drive scientific innovation? And should the federal government ensure all Americans capture the benefits of new technologies? On this episode, MIT economics professor Jonathan Gruber discusses his new book “Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream.”
Jonathan Gruber is the Ford Professor of Economics at MIT. Jonathan has long been involved in crafting public health policy, and is considered a key architect of both Romneycare and Obamacare. What follows is a brief excerpt from our conversation. You can read the full transcript here or download the episode by clicking the link above, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.
Could you briefly talk about how the US originally decided to become an economic power that was based on science, and why we stopped doing that?
Yeah, I mean the history is fascinating. I’m not really that knowledgeable about it, so this is where I probably learned the most in doing the book. The history, as I said, really begins with Vannevar Bush in World War II.
When Hitler blitzed across Europe, meanwhile in 1939 the US produced six tanks. We had torpedoes that didn’t explode when they hit the ships. Soldiers practiced with broomsticks instead of guns. And Vannevar Bush knocked on FDR’s door. He was a prominent scientist, former Dean at MIT, and he said, “I think we can win the war if you give me unlimited money to hire as many scientists as I want to invent the technology we need to win the war.” And FDR amazingly said, yes, and at one point Vannevar Bush’s organization employed two-thirds of all the physicists in the US, and did in fact invent the technology that was crucial to us winning the war. For example, radar, which was originally invented in the UK, but was perfected here in the US and turned the tide of the Battle of the Atlantic. But more importantly, it set up not only wartime applications but peacetime applications. Remember, what was the first microwave called? The Radar Range.
So much of our private sector innovation came out of these public sector investments. And then after World War II, Vannevar bush really had his greatest insight, which was, “look, we won the war with science, let’s win the peace with science.” And he wrote a famous report called “Science the Endless Frontier,” which proposed that the federal government continue massive science funding. Now interestingly, coming to the politics point from a few minutes ago, that report kind of languished for a while, until Sputnik and then the man on the moon, which got people excited. That led to the ramp-up. And the ramp-up, as I said, was that by the mid-1960s we spent about 2% of GDP on public R&D.
But then three things happened. First, the scientist got a little ahead of themselves. We started doing things like promising free power for all or nuclear-powered pens, and not worrying enough about the dangers of radiation, or as Rachel Carson points out in “Silent Spring,” the dangers of DDT. Second, the politicians and the scientists stopped seeing eye-to-eye. It was easy to see eye-to-eye when there was a clear enemy. When there wasn’t, the politicians then wanted to do some silly things like supersonic jet aircraft. The scientists told them no, that’s not a good idea, and the politicians got mad. And as we say in the book, if you speak truth to power, power will cut your funding. Then the third thing that happened was that budgets got tight. First the Vietnam War, then the growth of Great Society programs, then the Reagan anti-tax revolution, and most recently the debt ceiling fights. So, the ramp up of science funding is bipartisan, and the ramp down of science funding is bipartisan, and it continues to fall to this day. Now, it’s about 0.7% of GDP and falling.
So, we’re spending $150 billion. You would want us to get back to the share of GDP level that we saw in the 1960s?
No, you know I don’t know what the right answer is. We proposed a very bold initiative of about another $100 billion, about another .5% of GDP, which is back to where we were in the early 1980s. So, importantly, it would take us back toward the top of the world is in terms of public funding of R&D. We’re not proposing going all the way back. I’m not saying it’s a bad idea, but we don’t want to be that bold. Others may want to go further, but that’s the number we’re putting out there.
That’s right. So when I think of some of the obstacles, one obstacle I think of is that while we need to do this to boost economic growth and productivity, there seems to be a lot more skepticism about the fact that even if science leads to more innovation, which leads to more productivity, which leads to more economic growth, whether or not the rest of the country really benefit from that growth? So why bother doing that if most people don’t benefit? That’s a criticism you must come across.
That is the motivation for the book. I mean, the book motivation was twofold: one was to get growth going, but the other was to do it in a way that shares the prosperity. So the first third is history, the second third is economics And the third part is our proposal, and our proposal really has three parts. The first is more money. We discussed why that makes sense. The second is spreading that money around the country and recognizing the opportunities elsewhere in America besides the six coastal cities that have dominated economic growth in the last 30 years. We can spread that to other places, places that have great opportunities. So, what we do in the book is, we just go to the data. We say look: how many places in America are big? They have least a hundred thousand people who are working age. Are well-educated? They have at least 25% with a college education. And are affordable? They have a house price of less than $265,000 on average, which up here in Boston sounds like monthly rent.
We found 102 places in 36 states with 80 million people in them that fit those criteria, from Rochester, New York, which has great promise for growth around the optics and photonics industry; to Ames, Iowa, which is doing incredible things with innovative agricultural technology; to Huntsville, Alabama, where they still have the legacy of the missile program. All around the country we have places that have great opportunities but are not growing rapidly because all the oxygen is sucked out of the room by New York, DC, LA, San Francisco, Seattle, and Boston. So, we have to share geographically. That’s the first way I can answer your question, but there’s another way too, which is the third part of our proposal.
One fundamental flaw of science policy in the post-war decades was that it was very elitist and focused on the coasts, you know. All the guys who did it were MIT and Harvard and Berkeley guys, and it was all about being on the coast. We want to fix that. The second problem was there wasn’t a recognition that the public sector needs to capture and redistribute the benefits of this growth. So, here’s a simple example: every single new pharmaceutical entrant from 2010 to 2016 was based on NIH-funded Research, yet much of the returns don’t go to the US taxpayer. Instead, they go to corporations that increasingly don’t pay tax. They go to very highly compensated executives. So, the other sense in which we need to share the prosperity is: how do we make sure the benefits of this new technology get delivered?
That’s why we suggest what we call an innovation dividend. Here’s how that would work: the government would capture some of the returns to this new technology, invest it in a fund, and then redistribute that to every American as a flat dividend, just like Alaska does with their oil revenues. The Alaska Permanent Fund pays out a $1,000 to $2,000 dividend every year, it lifts 17 to 20 thousand Alaskans out of poverty, and it is widely popular in a very conservative state. So, let’s capture some of this upside, and let’s return that in a way to make sure that Americans see the benefits of this.
Now I’m going to say again that I like the idea of increasing this investment. I mean, I really like it. I might even go further than you and maybe raise taxes to pay for it. I wouldn’t have a problem with that. But I do have two problems with the other part of the plan. The first part is the geographical distribution. Here’s a quote from Enrico Moretti, an economist who has written a lot about innovation hubs and so forth: “If you look at the history of America’s great Innovation hubs, they haven’t found one that was directly, explicitly engineered by an explicit policy on the part of the government. It’s really hard. This is not how innovation hubs and clusters get developed. They often get developed because of idiosyncratic factors like a local firm succeeds and it starts attracting more firms like that. And this creates a cluster that then becomes stronger and stronger, and that feeds on itself.” So, is there an example that you know of, at least in this country, where government has been able to create a hub of innovation and science where none existed before?
Well, I think it comes down to the definition of government created. Is there a planned city where the government has said, “we’re going to plop in the middle of nowhere this city and create a technology hub?” No. That has absolutely not worked. That does work in China. Okay. But we don’t have a good record of that. That said, we have an incredible record of government investments in science leading to the growth of cities. So, I’ll give you two examples: one is my backyard, Kendall Square. Okay, Kendall Square, which is the dozens of acres around MIT, not a huge area, was a total dump when I was an undergraduate. My co-author Simon Jonson’s quote is, “you used to have to leave Kendall Square in order to get mugged.” It was a dump, no one was there. Today. It is the most expensive real estate in America, tied with Midtown Manhattan. Why? Because federal NIH funding, led by the biotech boom was centered in Kendall Square around MIT. Now did the federal government pick Boston? No. That’s absolutely right. But the federal government led it. Let me give, then, another example, which is my favorite example in the book. Which city in America is the home of the US computer microsimulation industry and the largest university by enrollment in the country? I’d ask how many of your listeners guessed Orlando, Florida. I’ve asked 700 people this question and only five have gotten it right. The story is fascinating. So, what happened was in 1956, the editor of the Orlando Sentinel endorsed a little-known politician for President named Lyndon B. Johnson. He continued to endorse him in ‘60, ‘64. In 1964 Johnson calls him up and says, “what would you like?” And he says, “well, Orlando would like a navy base.” Being Lyndon Johnson, he did not let the fact that Orlando’s landlocked stop him from granting that wish. He gave them a landlocked navy base. What do you do at a landlocked navy base? You train people, including a small battle simulation training unit.
So, in 1978, the president of a medium-sized university, the University of Central Florida, decided to buy a bunch of land below the university. He asked the navy if they would move their now computer simulation unit off the navy base to be below the university and to set up a research park around it. Today, the Central Florida Research Park, based on the government funding, still an ongoing $1.4 billion of government funding a year, is the third largest research park in America, with 10,000 employees. And that area of East Orange County, which is 45 minutes east of Disney, has added a hundred thousand jobs in 30 years, based on government investment working with the private sector.
So, the answer is no, we cannot do Soviet style, the government knows best and pick some corn field the middle of nowhere and build a city. But we can partner with the private sector to make this work. So, the difference is, Enrico is right that we haven’t said the government said this city’s going to win, but where I would differ from Enrico is that the government has partnered with the private sector to make many of the cities and technological hubs of America today work. I think we can do that again if — and this is the big if — we can set up a proper apolitical mechanism for doing so.
A couple of weeks ago we had biotech entrepreneur Safi Bahcall on the podcast. He also has a book out, and he’s made a similar argument to yours about the need to expand federal funding for science research. But he was very much opposed the idea of some sort of dividend, arguing that the point of this research system has been to seamlessly transfer knowledge to the private industry, which then turns that knowledge into useful products and economic growth. Those products and their benefits and the economic growth from them, that’s the dividend. That’s the benefit. If it results in a cancer cure, that’s the benefit — not something else. Do you worry that you might be muddling the idea of what the point of this system is for by saying that the actual products, and the growth generated by them, that’s not enough? That we have to have this other sort of benefit to sell it politically?
Well, you know, it’s really interesting. I mean first of all, let me be very clear Jim, we are not claiming that we have the only correct answer. Unlike many book authors, we are hoping to raise as many questions as we answer in this book. So, I think you’re asking a great question.
Here is why we think it’s a good idea: because we think that what your guest said is well and good. And you know, we’ve had other business leaders say that, they say, “don’t worry, we’ll just pay our taxes.” But they don’t. And growth, sure we’ll get more growth out of this, and that is a huge dividend. I think the innovation dividend we talk about is the minor part of the dividend. But we think, right now, we don’t want to put a lot of resources into something which just creates rich entrepreneurs who don’t pay their taxes. If I was setting up an ideal economic system, I would do this redistribution through a properly designed tax system, but we don’t have that. So, what we’re saying is, you can think of it as insurance. This would not be the major source of return, but just a backstop insurance to make sure that the public sees the benefits and the benefits don’t just go into the pockets of ultra-rich entrepreneurs who pay no taxes.
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