Business Week Makes the Economic Case for Federal R&D Spending

Michael Mandel notes in today’s BusinessWeek Online op-ed that President Bush’s proposed cuts to federal support of R&D in his FY 06 budget request are shortsighted because of the impact they’ll have on the U.S. economy. He focuses on multifactor productivity (MFP). a measure of productivity that, when it goes up, means “output per hour of the average worker goes up without any additional skills or a change in equipment.”
“An increase in MFP equals free money, extra production that you don’t have to pay for,” he writes.
The key, according to Mandel:

Multifactor productivity is borne of the essence of technological innovation — the creation of new products and new opportunities out of ideas and thin air. For example, the spread of the Internet has not only made doing business easier and cheaper but also allowed people to do things that weren’t even possible in the past. Think about Amazon, Google, and eBay. Wireless phones aren’t just a substitute for landlines; they enable people to organize their activities in very different ways.
The rate of multifactor productivity growth represents the single best indicator of the economy’s true strength. When MFP is increasing rapidly, the size of the economic pie expands, real wages rise, profits go up, and everyone feels good. When that figure stagnates, things are tough all around.
For example, multifactor productivity didn’t rise at all in 1973-83, a period that included the era of runaway inflation, President Jimmy Carter’s famous “malaise” speech, and the deepest recession since the Great Depression. During that stretch, the stock market, adjusted for inflation, fell by 34%, while real hourly wages for production and nonsupervisory workers descended by 11%.
By contrast, the birth of the New Economy can be clearly seen in the sharp acceleration of multifactor productivity growth starting in 1996. From that point to 2002 (the latest year for which figures are available), MFP gained a bit more than 1% a year. From 1995 to today, real wages have risen by 9%, while the inflation-adjusted stock market is up by 68%.
An economy with rapid multifactor productivity growth is potentially quite profitable for investors, which helps explain why the U.S. can attract so much foreign capital to fund its trade deficit. High MFP also generates lots of extra output, useful for paying for, say, military actions or better health-care benefits. It’s like having a cushion or a security blanket.

Mandel notes that the President’s cut to nondefense R&D spending “can only hurt the nation’s ability to maintain a rapid pace of multifactor productivity growth.”