Research Grants Produce… Research. Wow!

One year into the spending spree that is the American Recovery and Reinvestment Act, we still have high unemployment, low investor confidence, and a ballooning federal deficit that threatens future economic growth. It is clear that we have yet to reap the short term economic benefits of the stimulus—mainly because much of the stimulus money has yet to be spent— but some continue to argue that the stimulus has provided valuable investments in American infrastructure, education and technology.

ScienceWorksForUS, which represents a coalition of hundreds of public and private research universities, recently released a report that highlighted the research that has been conducted using the 21.5 billion dollars of stimulus funding that was allocated for research and scientific infrastructure. Here are some notable scientific findings:

• Cornell researchers used their $1 million in NIH grant money to test different strategies to encourage healthy eating and nutrition habits among obese subjects.

• Scientists from Cornell and several other universities were awarded $12.2 million in NIH grant money to develop a online social research networking website exclusively for scientists to share their findings and find potential collaborators.

• Almost $1 million was spent on a training program that would help dental professionals identify patients with eating disorders.

• At the University of Delaware, $900,000 was spent on studying preschoolers’ knowledge of geometry

• At Case Western University, $1.3 million is being spent on developing a virtual coaching program that will help doctors more effectively talk to patients.

Alright, so some of the research addresses what might be called more obscure scientific areas of study, but it’s no doubt useful, right? Probably. I suppose nobody is harmed if dentists receive a pamphlet that makes them more aware of how to identify eating disorders in patients.

But does all this research justify the $21.5 billion appropriated to scientific research, or the entire stimulus spending bill in general? I think not. First of all, if the report intends to defend the stimulus on the basis that that federal funding has led to lots of great research, it is only restating an obvious and predictable outcome. If the government throws billions of dollars in grant money at top research universities, is there any surprise that they will produce, well, some good research? The report mentions nothing about the effectiveness of ASSA grant money—for example, some metric that measures the number of useful breakthroughs per million dollars spent— so there’s no way of knowing if the funding was actually worth while.

Secondly, insofar as the stimulus is intended to save jobs and spark economic growth, investing in scientific research is a bad way of “stimulating” the economy. This point requires a bit more explanation.

Even though I am a conservative with market-oriented opinions when it comes to the government’s handling of the economy, I will be the first to admit that there are many elements of theoretical soundness to the idea of “stimulating” the economy through massive government spending. If you have ever taken an introductory macroeconomics course, you know that macroeconomic equilibrium is achieved when aggregate income equals aggregate expenditure. When aggregate expenditure is greater than income, there is an unplanned fall in product inventories and output rises to compensate. The opposite happens when aggregate expenditure is less than income.

In simple models, aggregate expenditure is broken down into consumption, investment, and government expenditure. During a recession, when aggregate expenditure is down, it is difficult to raise either consumption or investment—people’s incomes are lower, plus there is little confidence in the economy so people prefer non-consumption over consumption and saving/hoarding money over real investment. Only two things can quickly knock the economy back into equilibrium: tax cuts and government expenditure. As a free-marketer I love tax cuts, but there is no denying that if done correctly, government expenditure has a greater effect in stimulating economic activity. It all boils down to the multiplier effect and people’s marginal propensity to consume, or the average fraction that people spend of each additional dollar they earn. If the marginal propensity to consume is .5 and the government spends, say, $100 million, we know that $100 million will be spent, then $50 million by the people who got paid, then $25 million by the people who got paid by the previous parties, and so forth. With a tax cut, only $50 million of the initial $100 million in cut taxes will be spent, then $25 million of that, etc. So you miss the first $100 million of spending when the government cuts taxes. The argument for government stimulus is that it is the best way to stimulate economic activity per dollar spent. This policy has a lot of real problems— it is slow and inefficient, racks up massive debt, creates potential for moral hazard, promotes bad business practices, and sets new expectations about the government’s future role in regulating economic activity— but here I merely wanted to justify its theoretical soundness.

So what are the best targets for stimulus funding? Giving money to industries for job creation stimulates economic activity, but so does paying someone to repeatedly dig holes and then fill them with dirt for eight hours a day. The most effective and efficient targets of stimulus are ones that do the best job of fulfilling the stated goals of the stimulus— job creation, economic growth, and preventing the collapse of the financial industry. Scientific research simply does not fall under this category. There are simply far too few jobs created per dollar spent, and we will not reap the benefits of this research until the distant future. Supporters of the stimulus must look only to the lingering weaknesses of the American economy to so the real “successes” of their policies.

by Dennis Shiraev