Fact of the Week: Government R&D Appropriations Account for About One-Quarter of Business-Sector TFP Growth Since World War II
Source: Andrew Fieldhouse and Karel Martens, “The Return to Government R&D: Evidence from U.S. Appropriations Shocks,” (working paper, Federal Reserve Bank of Dallas, May 2023).
Commentary: A recent Federal Reserve Bank of Dallas working paper analyzed data on public capital from the Bureau of Economic Analysis and congressional appropriations for R&D from the Budget of the U.S. Government and its appendices to estimate the impact of government-funded R&D on productivity growth in the business sector. The authors found that an increase in R&D appropriation for nondefense R&D increases innovative activities and productivity in the long run.
A congressional appropriation for both defense and non-defense-related R&D leads to a gradual increase in government R&D spending that peaks about eight to ten years after the appropriation. Although congressional appropriation for both defense and non-defense R&D increased government R&D spending, only non-defense R&D appropriations led to an increase in total factor productivity (TFP) for the business sector in the long run. In the first seven years after a non-defense R&D appropriation, the study did not find a significant change in TFP. However, at the end of a 15-year horizon, they found that TFP had gradually increased 0.2 percent higher. Even when using other productivity measures, such as labor productivity, the authors still found that government appropriations rose after 15 years (by about 0.30 percent).
Government R&D accounted for about one-quarter, on average, of the business sector’s TFP growth since World War II. Compared to public infrastructure, government R&D played an equal or more significant role in TFP growth. For example, from 1947 to 1969, government R&D contributed about 0.55 percentage points to TFP growth while public infrastructure contributed about 0.27 percentage points. The authors conclude from the study that there is “substantial underfunding of nondefense R&D.”