CBO Director Doug Elmendorf's Presentation at the NBER Conference on Innovation Policy and the Economy

1. 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

2. 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
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3. Possible Policy Approach for Increasing Innovation:
Increase or Redirect Federal Funding for Research and
Development
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4. 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.
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5. 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.
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6. 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)
0.8% Development
2.0%
0.6% 1.8%
0.4% 1.6%
Industry
1.4%
0.2%
Federal 1.2%
0.0% Industry
1982 1987 1992 1997 2002 2007 1.0%
(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
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7. Because of caps on discretionary funding under current law,
federal discretionary spending is leveling out in real dollars
(Billions of 2012 dollars)
800 Actual Projected
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).
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8. 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).
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9. Possible Policy Approach for Increasing Innovation:
Increase or Redirect Federal Support for Education
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10. 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.
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11. 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
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12. Possible Policy Approach for Increasing Innovation:
Change Tax Treatment of Private Investment
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13. 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 16th 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
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14. Possible Policy Approach for Increasing Innovation:
Increase Immigration of Highly Skilled Workers
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15. 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 2000
Percentage in U.S.
USPercentage of U.S.
Population of U.S. Percentage of U.S.-Based Nobel
US-based Nobel Prize Winners Percentage of Public Venture-
Founders of Founders of Public
Population in 2000
Population in 2000
Population in 2000 Prize Winners, 1990-2000
from 1990-2000 Venture-Backed Companies
backed Companies
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.
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16. 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
300 Non-H-1B Visas
200 Temporary Worker
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.
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17. 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
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18. Possible Policy Approach for Increasing Innovation:
Pursue Patent Reform
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19. 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
5 Potential TFP
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).
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20. Possible Policy Approach for Increasing Innovation:
Reconsider Regulatory Goals
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21. 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.
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22. 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.
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