Congressional Budget Office What Changes in Federal Policy Might Spur Innovation? Presentation at the NBER Conference on Innovation Policy and the Economy Douglas W. Elmendorf Director April 23, 2013
Possible Policy Approaches for Increasing Innovation: Increase or Redirect Federal Funding for Research and Development Increase or Redirect Federal Support for Education Change Tax Treatment of Private Investment Increase Immigration of Highly Skilled Workers Pursue Patent Reform Reconsider Regulatory Goals C O N G R E S S I O N A L B U D G E T O F F I C E 2
Possible Policy Approach for Increasing Innovation: Increase or Redirect Federal Funding for Research and Development C O N G R E S S I O N A L B U D G E T O F F I C E 3
Federal spending for R&D has increased in real dollars in a few areas during the past few decades (Billions of 2012 dollars) 160 140 120 100 Health 80 60 Defense 40 20 Other 0 1982 1987 1992 1997 2002 2007 2012 Data from American Association for the Advancement of Science , Trends in Federal R&D by Function, FY 1949-2013. C O N G R E S S I O N A L B U D G E T O F F I C E 4
Although federal spending for R&D has increased in real dollars, it has declined slightly relative to GDP (Billions of 2012 dollars) (Percentage of GDP) 160 1.4% 140 R&D as a Share of GDP 1.2% 120 1.0% 100 0.8% 80 R&D in Billions of 2012 Dollars 0.6% 60 0.4% 40 0.2% 20 0 0.0% 1982 1987 1992 1997 2002 2007 2012 Data from American Association for the Advancement of Science , Trends in Federal R&D by Function, FY 1949-2013; Office of Management and Budget, Budget of the U.S. Government, Fiscal Year 2013 : Historical Tables , Tables 9.8 and 10.1. C O N G R E S S I O N A L B U D G E T O F F I C E 5
Relative to GDP, federal spending for research has changed little and for development has declined (Percentage of GDP) 1.0% Basic Research (Percentage of GDP) Development 0.8% 2.0% 0.6% 1.8% 1.6% 0.4% Industry 1.4% 0.2% Federal 1.2% Industry 0.0% 1.0% 1982 1987 1992 1997 2002 2007 (Percentage of GDP) 1.0% 0.8% Applied Research 0.6% 0.8% 0.4% 0.6% 0.2% Federal 0.4% Industry 0.0% 1982 1987 1992 1997 2002 2007 0.2% Data from National Science Board, Science and Engineering Indicators Federal 2012 (2012); Office of Management and Budget, Budget of the U.S. 0.0% Government, Fiscal Year 2013: Historical Tables, Table 10.1. 1982 1987 1992 1997 2002 2007 C O N G R E S S I O N A L B U D G E T O F F I C E 6
Because of caps on discretionary funding under current law, federal discretionary spending is leveling out in real dollars (Billions of 2012 dollars) 800 Projected Actual 700 600 Defense 500 400 Nondefense 300 200 100 0 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2013 to 2023 (February 2013). C O N G R E S S I O N A L B U D G E T O F F I C E 7
Because of caps on discretionary funding under current law, federal discretionary spending is declining relative to GDP (Percentage of GDP) 7 Actual Projected Defense 6 5 Nondefense 4 3 2 1 0 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2013 to 2023 (February 2013). C O N G R E S S I O N A L B U D G E T O F F I C E 8
Possible Policy Approach for Increasing Innovation: Increase or Redirect Federal Support for Education C O N G R E S S I O N A L B U D G E T O F F I C E 9
Federal spending for education and training has been less than 1 percent of GDP (Percentage of GDP) 1.4% R&D 1.2% 1.0% 0.8% Education and Training 0.6% 0.4% 0.2% 0.0% 1980 1985 1990 1995 2000 2005 2010 Data from Office of Management and Budget, Budget of the U.S. Government , Fiscal Year 2013: Historical Tables, Tables 9.8, 9.9, and 10.1. C O N G R E S S I O N A L B U D G E T O F F I C E 10
Federal support for education could be increased in several ways STEM (science, technology, engineering, and math) education Increase funding for academic research in STEM fields Provide more scholarships for STEM students Train math and science teachers to be more effective Develop innovative approaches to math and science education General education Hold down interest rates on student loans Provide more generous Pell grants for lower-income students C O N G R E S S I O N A L B U D G E T O F F I C E 11
Possible Policy Approach for Increasing Innovation: Change Tax Treatment of Private Investment C O N G R E S S I O N A L B U D G E T O F F I C E 12
The federal tax treatment of private investment could be changed in several ways Enhance the R&D tax credit Make it permanent (at the end of this year, it will expire for the 16 th time in 32 years) Increase the credit for newer or merged firms from its current 14 percent to the 20 percent that older firms get Include other types of investment, such as software developed for internal use Lower the tax rates paid by U.S. multinational corporations Unclear if such a change would spur innovation because the specifics of the change would matter Increase support for manufacturing Unclear if such a change would spur innovation because innovation is valuable in other sectors as well C O N G R E S S I O N A L B U D G E T O F F I C E 13
Possible Policy Approach for Increasing Innovation: Increase Immigration of Highly Skilled Workers C O N G R E S S I O N A L B U D G E T O F F I C E 14
Immigrants represent larger shares of Nobel Prize winners and founders of public venture-backed companies than of the U.S. population (Percent) 30% 25% 20% 15% 10% 5% 0% Percentage of Founders of Public Percentage of U.S. Percentage of U.S.-Based Nobel US Population in 2000 US-based Nobel Prize Winners Founders of Public Venture- Percentage of U.S. Percentage of U.S. Percentage of U.S. Prize Winners, 1990-2000 Venture-Backed Companies Population in 2000 from 1990-2000 backed Companies Population in 2000 Population in 2000 Population in 2000 Data from Giovanni Peri , “Higher Education, Innovation, and Growth,” In Giorgio Brunello, Pietro Garibaldi, and Etienne Wasmer, eds., Education and Training in Europe (Oxford: Oxford University Press, 2007); Stuart Anderson and Michaela Platzer (2006), American Made: The Impacts of Immigrant Entrepreneurs and Professionals on U.S. Competitiveness , National Venture Capital Association (2006), www.nvca.org/index.php?option=com_content&view=article&id=254&Itemid=103. C O N G R E S S I O N A L B U D G E T O F F I C E 15
A small share of visas goes to workers because of their skills (Thousands of visas issued) 900 Temporary Student Visas 800 700 600 500 Permanent Family Visas 400 Temporary Worker Non-H-1B Visas 300 Temporary Worker 200 H-1B Visas 100 Permanent Worker Visas 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Data from U.S. Department of State , Immigrant and Nonimmigrant Visa Statistics, 2001-2011. C O N G R E S S I O N A L B U D G E T O F F I C E 16
Immigration of highly skilled workers could be increased in several ways Raise or eliminate quotas for H-1B visas Increase permanent visas for workers Allow foreign students in STEM fields to stay in the country after graduation, either temporarily or permanently C O N G R E S S I O N A L B U D G E T O F F I C E 17
Possible Policy Approach for Increasing Innovation: Pursue Patent Reform C O N G R E S S I O N A L B U D G E T O F F I C E 18
Faster growth in patents during the past 30 years has not translated into faster productivity growth (Annualized percentage growth) 7 Patent Applications 6 Patent Grants Potential TFP 5 4 3 2 1 0 1963 to 1983 1984 to 2011 Data from U.S. Patent and Trademark Office; and Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2013 to 2023 (February 2013). C O N G R E S S I O N A L B U D G E T O F F I C E 19
Possible Policy Approach for Increasing Innovation: Reconsider Regulatory Goals C O N G R E S S I O N A L B U D G E T O F F I C E 20
Policymakers balance innovation against other regulatory goals Innovation is balanced against safety, fairness, privacy, government cost, and other considerations. Areas of regulation where the encouragement of innovation has received attention in the past and might receive greater attention in the future include regulation of pharmaceuticals, auctions of wireless spectrum, and oversight of e-commerce, among others. C O N G R E S S I O N A L B U D G E T O F F I C E 21
Conclusion A wide array of federal policy approaches could be pursued to spur innovation, including increased spending on research and development, increased support for education, lower taxes on private investment, greater immigration of skilled workers, patent reform, and adjustments to regulatory policies. However, those approaches would necessitate a redirection of federal money from other purposes or compromises on other national goals, which would require that spurring innovation be viewed by lawmakers as an important national priority. C O N G R E S S I O N A L B U D G E T O F F I C E 22
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