For much of the postwar era the United States led the world in technology, which brought significant economic benefits to the nation. That leadership was due in large part to generous federal government funding for R&D, much of it channeled through military spending. That this occurred during the Cold War was no coincidence: as William Janeway argues in Doing Capitalism in the Innovation Economy, nations have historically been unable to muster the political will for significant spending on innovation without it being part of a “national mission,” since such spending means giving up current consumption for uncertain future benefits. In the last half of the 1800s, nation building provided the mission for America—just as that does now for China. But after the late 1940s the animating mission that helped drive technology innovation was winning the Cold War, which we did.
The threat from the Soviet Union meant that Americans were willing to sacrifice present consumption for the good of the nation–in this case keeping the world safe for freedom and democracy. And it meant we did what it took to win—and that meant innovating. The fact that Lockheed’s Skunk Works could build the SR-71 Blackbird in 1962 that would fly at three times the speed of sound (faster than missiles launched at the plane to shoot it down) was not just an incredible feat of engineering, it was a feat of risk taking and willpower. Willingness to take risks allowed a place like the Skunk Works to successfully propose such seemingly crazy ideas. The will to commit the resources from society to such an uncertain task enabled these ideas and others from other defense contractors to become reality. But with the collapse of the Soviet Union and the end of the Cold War, that national campaign that had animated much of our innovation effort suddenly evaporated.
The result has been a lack of purpose and a significant decline in resources put into national innovation. With the decline of the Cold War in the early 1990s and now with severe budget challenges brought on by an unwillingness to raise taxes and cut entitlements spending, defense spending has been cut significantly. Military spending on technology is substantial and therefore any cuts to military spending negatively impact the overall U.S. innovation system. As Warwick University professor Mirko Draca writes in a new study:
“The amount of money flowing into high-tech, defense-focused production dwarfs the amount spent on other prominent innovation policy tools. For example, the Federal R&D tax credit costs around $6.5 billion per year while support for basic science through the National Science Foundation figures at $7 billion. By contrast, around $16 billion per year is spent on military R&D procurement alone, along with another $40-50 billion in spending on high-tech products. This makes defense spending–and military procurement in particular–one of the most significant topics for the study of induced innovation in the U.S. economy.”
In this case the key question is, what is the likely impact of current defense cuts on the innovation performance of the U.S. economy? There are opposing theories of how military procurement, relative to civilian sales or other government procurement, affects the innovation economy. On one hand, military spending may be less helpful for growth because it is too specialized and directed primarily at non-commercial activities. In this case innovation in “guns” crowds out more commercially useful “butter” innovations. This argument has been increasingly made since the 1990s based on the view that much defense technology is no longer dual use and only helps defense innovation, failing to spill over to the broader commercial sector and provide non-security benefits.
On the other hand, some argue that military spending is better at stimulating innovation because firms are given incentives to push the technological frontier and develop new technologies. The study by Mirko Draca provides clear support for this latter view, showing that U.S. military spending in fact supports broader U.S. innovation.
Draca shows that military procurement has a greater impact on innovation than normal (civilian) sales. Using a database of U.S. military procurement from companies in the United States between 1966 and 2003, he examines the relationship (elasticity) between defence spending and company-sponsored R&D and patenting, finding that a 10 percent increase in military procurement leads to a 0.7 percent increase in both corporate R&D spending and patenting in the broader economy. This is twice the rate at which an equivalent increase in civilian sales raises the same innovation indicators. Thus it appears that military spending does effectively spur overall innovation.
Draca also measures the aggregate impact of military spending over different time periods. He finds that military spending during the early Reagan administration led to 11.4 percent of all patenting and 6.5 percent of all R&D spending by corporations. Military procurement accounted for only 4 percent of all firm sales, so it clearly had an outsized impact on innovation. Cutbacks in spending during the Bush and Clinton administrations acted as moderating influence, however, slowing U.S. innovation by as much as 2 percent.
Draca finds that his results “do strongly suggest that defence procurement sales are a source of demand for high-tech goods. The magnitude of this relationship for patenting indicates that this could be a very strong effect, with twice as many patents produced for a given dollar of defence sales compared to the same dollar of civilian sales. The effect on R&D is also twice as high as the civilian benchmark.” (23)
The important take away from this paper is that military spending has positive spillovers for the rest of the economy: by providing a source of demand for new technologies that do not have existing markets, military spending provides an important impetus for R&D that impacts broader innovation and by extension economic welfare. Reductions in military R&D and procurement, besides weakening military readiness, are likely to have negative consequences for U.S. growth and innovation. As Draca notes, “The high-tech composition of procurement spending also makes it a significant de facto innovation policy, alongside more explicit policies such as R&D tax credits and government support for basic science.”
This is not to say that government should not also expand support for civilian R&D agencies like the NIH and NSF. But the political will for such expansion—both on the part of the public and elected officials—appears to be weak. In contrast, because defense spending can be dual use–helping keep America safe and strong while also keeping us innovative–and has strong bipartisan support, we should look to it as a core feature of our national innovation policy system.
(Photo credit: DVID)
School kids feel the bite of high food prices – May. 5, 2008
A classic method of teaching the basic economic concept of the production possibilities curve is to illustrate the relationship between a nation’s decision to invest in military goods versus civilian goods. The model typically includes two “products” that a nation can choose to invest in: guns and butter. The specific goods themselves are not so important, rather what they are meant to represent: the tradeoff any nation faces between allocating more of its scarce resources towards national defense versus goods and services that benefit the nation’s consumers.
Today the United States faces a very real version of the old “guns vs. butter” model. Rising global food prices have put public school districts in a bind: how to feed kids nutritious meals as the prices ingredients has risen at unprecedented rates:
Rising food prices are making it harder for schools to cook up ways to give kids the nutrition they need.
Right now, they’re taking shortcuts and shuffling ingredients to make up the difference, but that’s only a short-term solution with long-term consequences on the horizon.
“I’ve been in school service for 27 years and this is the worst it’s ever been,” said Sara Gasiorowski, food service director for Wayne Township Schools in Indianapolis. “I have never seen food prices jump up so far…”
Food prices nationwide have risen 4.5% between March 2007 and March 2008, according to the Bureau of Labor Statistics’ Consumer Price Index, with flour and eggs rising even more dramatically than milk. Grumbles said milk prices in her district are up 22% from last year, which means an increase of 3.5 cents for each of the federally required 16,000 half-pints she provides every day.
“For every penny on a carton of milk, it costs me $30,000 a year,” she said. “That’s $105,000 extra on my food bill.”
Flour prices have roughly doubled over the last year, according to Grumbles, to $19 per 50-pound bag. To make up for the difference, she substitutes canned peaches for fresh apples “to save a couple pennies” per meal, or she uses ground beef in place of chicken.
Unfortunately, federal funding for school lunches has increased at a much slower rate than cost to districts of providing those meals:
Federal reimbursement programs cover all or part of school districts’ lunch tabs. Congress lifts reimbursement rates every year, but Gasiorowski said it hasn’t been enough: “We need to be looking at an increase of 12% to 15%, instead of our usual annual increase of 2 or 3%.”
The current federal reimbursement program is based on household incomes; the poorest American students receive $2.47 of federal funding towards their “free lunches”, while students from the highest income bracket only receive $0.23 per meal. The problem is, the average school lunch now costs $3.10, so these days no one is actually receiving a “free lunch”, not even the poorest American students.
This article struck me in that is truly does illustrate the concept of tradeoffs as illustrated in the production possibilities curve. Society must allocate its scarce resources towards the goods and services it deems most desirable based on the needs of its citizens. Complications arise in this basic model, however, when government is involved.
The commitment to subsidizing school lunches is based on the idea that if the responsibility of feeding American school children were left to the free market, resources would surely be underallocated towards nutritious meals, representing a market failure. School lunches are a merit good, meaning they would be underprovided by the free market, since without public provision and support, millions of American children would come to school every day without nutritious meals to get them through the day.
National defense is another service that governments find it necessary to provide. If it were left completely up to the free market, national defense would probably not be provided at all. Instead, only individuals who could afford it would hire private security forces to protect their property. To protect a whole nation, however, government provision of defense is a necessity.
Clearly, both “guns” and “butter” create benefits for society. Among the countless other goods and services the government provides or supports the provision of, the United States faces a tradeoff arising from the scarce resources at the government’s disposal. Currently, the US government spends far more on its military ($660 billion in 2010!) than it does on lunches for American school children. Clearly, military spending is necessary, but it may be that in the tradeoff between these two important services more resources should be allocated towards “butter” at a period in the US economy when low income households are finding it harder than ever to provide their children with one of life’s most basic necessities, nutritious food.
- What do “guns and butter” represent on the PPC above? Why have economists found it useful to use these two goods on their analysis of the tradeoffs faced by nations?
- Why doesn’t the United States just make all school lunches FREE for all American school children? Wouldn’t that make sense? Give an economic argument against this suggestion.
- Why does the government feel it necessary to allocate any resources towards school lunches? Shouldn’t the government just let American families provide their own children with lunch?
- Say the US government decided to increase its provision of both national defense and school lunches, without reducing its provision of some other good or service. How would it do this? Why wouldn’t the government do this?
Update: I received an email message from a reader about the above blog post:
I have to say that your “guns and butter” diagram is “interesting.” I am not clear on why the United States should spend vastly more on school lunches than on defending the free world While government provided school lunches may have a place, most Americans feed their own children and do not depend on Federal financing.
Where did you get the notion that feeding our children would be “under-provided by the free market”
Here was my reply to this reader. I’m posting it here because I want to make it clear the the diagram above is not meant to make any political statement about US military spending:
Actually, the PPC was included simply to illustrate the basic tradeoff that society faces when it chooses how to allocate its scarce resources.
Having taught at least for a short while in public schools, I can say that nutritious lunches are definitely “underprovided” by the free market, that is, many students in poor communities in America depend on the “free and reduced” lunches that are provided through federal and state funding programs… I once volunteer taught in a poor Elementary School in Spokane, Washington where 40% of the students ate only two meals a day, both provided free by the school district: one at 8 in the morning, one at noon. Many of these children had parents who were poor, unemployed, often addicted to drugs, who failed to put any food on the table whatsoever.
In other words, I do think that nutritious meals are a “merit good” which by definition is one that is underprovided by the free market, therefore requires subsidies from the government. Otherwise, why would the government offer such subsidies at all, if these meals were something the free market could adequately provide on its own?
Again, I was not making any political statement with the graph, only pointing out the basic economic concept of tradeoffs and the idea that society must allocate its scarce resources towards an “optimal” combination of goods and services. The article indicates that in this time of rising food prices, not enough of America’s resources are going towards providing nutritious meals for school children, indicating that a movement along the PPC might be in order. The degree of such a move is irrelevant, only the fact that a movement must occur if nutritious meals are to continue to be provided. In fact, the x-axis could have represented any other public good the government provides for society, I chose “military spending” so that the current example was consistent with the classic example of “guns vs. butter”.
Hope that clears things up… Best regards,
About the author: Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author