Promoting Research and Development the Government's Role: The Rationale for Federal Support for Basic Research Is Well Established, But the Best Policy for Implementing This Principle Remains Open to Debate (Government ROLE IN R&D‪)‬

The Nobel Prize--winning economist Robert E. Lucas Jr. wrote that once one starts thinking about long-run growth and economic development, "it is hard to think about anything else." Although I don't think I would go quite that far, it is certainly true that relatively small diferences in rates of economic growth, maintained over a sustained period, can have enormous implications for material living standards. A growth rate of output per person of 2.5% per year doubles average living standards in 28 years--about one generation--whereas output per person growing at what seems a modestly slower rate of 1.5% a year leads to a doubling in average living standards in about 47 years--roughly two generations. Compound interest is powerful! Of course, factors other than aggregate economic growth contribute to changes in living standards for different segments of the population, including shifts in relative wages and in rates of labor market participation. Nonetheless, if output per person increases more rapidly, the prospects for greater and more broad-based prosperity are significantly enhanced. Over long spans of time, economic growth and the associated improvements in living standards reflect a number of determinants, including increases in workers' skills, rates of saving and capital accumulation, and institutional factors ranging from the flexibility of markets to the quality of the legal and regulatory frameworks. However, innovation and technological change are undoubtedly central to the growth process; over the past 200 years or so, innovation, technical advances, and investment in capital goods embodying new technologies have transformed economies around the world. In recent decades, as this audience well knows, advances in semiconductor technology have radically changed many aspects of our lives, from communication to health care. Technological developments further in the past, such as electrification or the internal combustion engine, were equally revolutionary, if not more so. In addition, recent research has highlighted the important role played by intangible capital, such as the knowledge embodied in the workforce, business plans and practices, and brand names. This research suggests that technological progress and the accumulation of intangible capital have together accounted for well over half of the increase in output per hour in the United States during the past several decades.