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EXECUTIVE SUMMARY

Increasing the productivity of the American workforce is the key to higher living standards and stronger economic growth in the future. Investments in research and development (R&D) are the key to increasing productivity, accounting for half or more of the growth in output per person, and to the creation of new products and processes.
Investments in R&D have high rates of return. The social rates of return, which may be close to 50 percent, exceed the high private rates of returns, of 20 to 30 percent, by a considerable amount because of the "spillovers" -- benefits that accrue as other researchers make use of new findings, often in applications far beyond what the original researcher imagined. Because innovators realize only a fraction of the total return to an innovation, there will be an underinvestment in R&D.
There has been a long record of successful government support for R&D, from its support of Samuel Morse's original telegraph line from Washington to Baltimore in 1842 to demonstrate the feasibility of his new technology, to the support of agricultural research, beginning with the 1862 Morrill Act establishing the land-grant colleges, to the development in more recent years of the Internet, the Global Positioning Satellite (GPS) system, and support of the basic research leading to the discovery of DNA. Examples of successful Federal R&D investments abound.
Federal R&D expenditures stimulate additional private R&D expenditures. An additional dollar of Federal R&D adds more than a dollar of R&D to the economy, as the private sector expands its R&D effort. Accordingly, a cut in Federal R&D expenditures is likely to cause the private sector to cut back as well.
The Congressional budget resolution would cut Federal R&D expenditures by about 30 percent by the year 2002. The Japanese government, by contrast, recently announced plans to double its R&D spending by the year 2000. While non-defense R&D expenditures in the United States, as a percentage of GDP, are already smaller than in Japan, as a result of the American decreases and the Japanese increases, the Japanese government will actually spend more, in total dollars, than the American government on non-defense R&D by 1997.
Current debates not only focus on the level of support for R&D, but also on the composition. Increased living standards and faster productivity depends on increased support for civilian and dual-use research (that is, research that has both direct military and civilian applications), not just support of "star wars" and other military research. Opponents of government support for pre-commercial technological development erroneously characterize government efforts as "picking winners," interfering with what would otherwise be efficient market allocations, and try to draw a clear line between basic and generic research (which all agree government should support) and applied research. In reality, there is a continuum, with many applied research projects yielding significant spillovers, so that absent some government support, there may be marked underinvestment. Government can aid the development of such potentially high- payoff pre-commercial R&D with large spillovers, but must involve the private sector in such efforts. These government investments can yield high returns.

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