Thursday, October 11, 2012

R&D, the Other, Better Stimulus [EBP2]

John Maynard Keynes, the reason for stimulus packages. Source.
So,

It's been too long a time since I've last posted, and you have my apologies.  I assure you they are many, and quite well reasoned.  Now that's out of the way, let's take a long, rambling walk through my thoughts.

The impacts of the 2008 recession can still be seen and felt throughout the developed world, co-dependence and international trade ensuring that we all go down together.  Admittedly, we here in Canada are doing quite well when compared to our counterparts in Spain, where youth unemployment is over 50%.  At least most of us are only underemployed, here.  Now, when faced with this economic crisis, governments did what they usually do, they utilized fundamentals of Keynesian economics.

Keynes, not long ago in terms of world history, hypothesized that recessions were ultimately caused by a lack of demand for products and services.  Without any demand, a company's revenue would fall, and necessitate the firing of staff.  Now these former employees would be out of work, and not able to spend money, decreasing revenues elsewhere, until you have a recession.  People by and large have accepted this interpretation to be true, and it is generally accepted that the only way to put a stop to it is with government stimulus.  This is a way to pump a large amount of money into an economy.

Say the government needs some buildings put up, or some roads repaired.  It hires workers to do the construction.  Those workers then have money, and are able to maybe spend a little at the bar, and on some fancy new electronics.  Now the bar owner has a little more money to spare, as do the factory workers making the electronics, and they can afford to spend a little more on luxuries.  This, simplistic and not at all well-developed example, is how government can stop, or at least mitigate the downward spiral into a recession, and help its population out.

Now, spending on infrastructure is great.  We need it, the population needs money, it's about as win-win as it gets in a global recession.  And that's exactly what most of the western world did, but a lot of that world is still hurting economically.  However, one nation seems to be leading the pack, and the rest of us might be able to learn from them.

I speak of South Korea (because the North isn't doing so well).  Foreign Policy ran an article on the "winners" of the Great Recession, and South Korea came out on top.  What did they do, you might ask?  They took their research and development budget, 3.4% of their GDP (a figure which is competitive with the best in the world), and increased it to 5%.  We can debate the true cause until we are blue in the face, but they were the first country to emerge from the recession, and the average household income has increased for the past 11 quarters (three months under three years).

Dr. Neil deGrasse Tyson, a popular astrophysicist, is fond of promoting funding to NASA whenever he has a captive audience.  He notes that not only does it inspire a generation of youth, but it also contributes to the economic growth and well-being of the United States.  I honestly think he presents a biased view at least in part.  I am currently a professional chemist, and I cannot recall being drawn to science by viewing the space program as a child.  That fact aside, Tyson is absolutely right about R&D spending being good for the economy.  Most of the consumer electronics you use today are a result of the space program trying to make computers lighter so that they could reduce payload costs.

When money is pumped into R&D, it develops new technologies and processes.  The company or body responsible now has an automatic, albeit temporary, monopoly because everyone else is now catching up.  The new product or service will make money for the company, and the government in the form of new tax revenues.  In fact, Dr. Tyson points out that NASA spending actually makes the government money.  Further, in a post that is as-yet unpublished, I point out that the Government of Canada gets increasing dividends the more it spends on the National Research Council.

Gerhard Herzberg, a Canadian Nobel Laureate, would agree.  He was a big fan of basic research - research for the sake of gaining knowledge, not necessarily with any economic or technology in mind.  He told a story in a short publication on the subject, which I will repeat [poorly] here.  A small team of Canadian scientists received funding from the government once upon a time, and they used the funding to investigate a very particular physical process.  This investigation led them to believe they could make a new, better balance (like a scale, but fancy and science-y).  They did, they made a bundle of money when every standards/measurement body from all over the world ordered this state-of-the-art balance, and the government made a tonne of money in tax revenue.

When governments spend on infrastructure, it's necessary, and a recession is a great time to do it.  However, at least in the latest recession, I would argue we could have spent a lot more on R&D than we did.  Canada has the National Research Council, an existing body into which we could have pumped funds.  The evidence suggests that governments tend to make back what they spend in R&D through increased tax revenue.  R&D spending can develop entirely new economies, and spin-off companies can hire not only scientists, but general labourers (the very people construction projects are meant to help) and support staff.  The government makes money, Canadians make money, and Keynesian economics would suggest that Canada will be all the better for it.

NM

P.S.  Not proofreading; too tired.  If anyone finds any mistakes, message me and I'll do my best to fix it.
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