Underfunding of Research Offers States an Economic Opportunity

Research and development may be one of the best ways to boost local economies, yet states (and the feds) have slowed spending on it.
by | May 28, 2015

When trying to grow the economy, it's really tempting for elected officials to spend the public's money on things that have an immediate impact on jobs and wages. What better way to endear yourself to your constituents than to be the driving force behind a new shopping center or luxury hotel that not only brings jobs but also increases local spending? It's certainly a lot sexier than spending money on research for some scientific mumbo-jumbo that most people haven't heard of -- especially when you can't guarantee that research will yield any significant results.

It may be unsexy and it may be risky, but it also may be the best way for states and localities to drive innovation and economic growth. At least that's the hunch of a growing number of think tank analysts. As the federal government spends less on research and development, they say, states could have a key role to play.

In recent years, states have slowed their spending on research and development, according to the National Science Foundation. In 2013, state government agency expenditures for research and development totaled $1.8 billion, which was virtually unchanged from the prior year's spending. The top spenders were California, Florida, New York, Ohio and Texas, which accounted for 57 percent of the spending. The total represents a flattening off of what had been a period of increased spending since 2010. Meanwhile, federal investments declined by 9 percent during that time.

The federal government has traditionally been the driving force behind funding scientific research. The most successful example, arguably, is the Defense Advanced Research Projects Agency (DARPA). Launched in the 1950s as a military research agency, DARPA's scientific advancements paved the way for things like computers, jet planes, civilian nuclear energy, lasers and biotechnology. In her book The Innovation State, scholar Marianna Mazzucoto noted that DARPA funded a laboratory affiliated with the University of Southern California that helped expand the pool of people designing faster and better microchips. It was during this time that Apple introduced the first personal computer. "Following this, the computer industry's boom in Silicon Valley and the key role of DARPA in the massive growth of personal computing received significant attention," Mazzucoto wrote, "but has since been forgotten by those who claim Silicon Valley is an example of 'free market' capitalism."

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Still, Mazzucoto uses it to illustrate the importance of government investment. Given the attention at the federal level on reducing the deficit by cutting spending, many are now looking to the states to invest. That could be tough: Many states are still under budgetary pressure from the Great Recession. At a recent event hosted in Washington, D.C., by the Greater Phoenix Economic Council, John Lettieri of the think tank Economic Innovation Group noted that tight budgets have a ripple effect on the economy. "It makes it harder for entrepreneurship to take root, harder to take business to market, harder for research at the local and regional level to take off," he said.

Nevertheless, there's already a subtle shift under way from a more nationalized focus on research and development to a regional one, according to researchers Scott Andes and Mark Muro of the Brookings Institution. But it's not a simple matter of states plugging in their dollars for the federal ones that have gone missing. Instead, the investment tends to come with specific expectations attached. For example, Texas created the Cancer Prevention and Research Institute of Texas via a ballot measure and issued $3 billion in bonds to support the institute. California and Ohio also went to the voters to ask for approval for research dollars. California voters approved $3 billion in general obligation bonds over 10 years for stem cell research; Ohio's voters approved $2.3 billion to create the Third Frontier program, which provides funding to Ohio companies, universities, nonprofit research institutions, and other organizations to create new technology products and companies. "So it's not as simple as states just picking up the ball," said Muro. "It may be the state becoming part of consortium or working with Fortune 500 companies, or going to voters with a general obligation bond vote. I think we're heading for a new complexity."

This brings us back to jobs and growing the economy. Also at the D.C. event was Doug Holtz-Eakin, president of the American Action Forum and former head of the Congressional Budget Office. He pointed out that small business startups, which have traditionally been this county's economic growth engine, have been at an all-time low. The national economic growth rate now is somewhere around 2.5 percent, but it's pegged to be closer to 2 percent in the out years. "So that means that unless we innovate better and come up with better productivity performance," he said, "these are the good times."