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Government is guilty of short-term thinking, too

By / 8.9.2016

PPI was among the first organizations to highlight the business investment drought, starting in 2010 and 2011, way before it became commonly accepted  (see here and here). And our “Investment Heroes” annual ranking was started in 2012 precisely to contrast the companies that were investing heavily in the United States with the many others that chose to pare back.  So the issue of short-term business thinking is no stranger to us.

But we were pondering the recent annual revision from the Bureau of Economic Analysis, and noticed something very interesting: By some objective measures, government is more guilty of short-term thinking than business is. 

For example, one of the key measures of short-term vs long-term thinking is how much money is being invested in research and development. We found that over the past ten years R&D spending by the private sector has increased by 34%, in real terms. By comparison, real R&D spending by government at all levels has decreased by 2% (see chart below).   This decline is mostly driven by defense R&D. But even if we just restrict ourselves to civilian R&D (federal state and local), the real gain in government R&D spending since 2005 is only 12%, far below the private sector increase.*

shortterm1

The gap between private sector and government investment in software is large, but not as large as for R&D. Since 2005, the private sector has increased its investment in software by 51% in real terms, compared to only 37% for government. Similarly, growth in real equipment expenditures by the private sector outpaced the government sector by a wide margin.

Finally, we come to structures. The private sector, despite the recession, has managed to somewhat expand its real spending on long-lived structures over the past ten years. Meanwhile, real government spending on structures–especially infrastructure–has tanked. Real government outlays for highways and streets is down 21% from 2005 to 2014.

Now let’s focus down a bit more on R&D, which is one clear measure of long-term thinking. From 1995 to 2005, private R&D spending, civilian government R&D spending, and GDP all grew at roughly the same rate, adjusted for inflation. For example, over that period real GDP rose by 40%, and real private R&D spending rose by 41%.

But over the past ten years, the pattern is far different. GDP growth slowed sharply, from 40% to 15%, and so did the growth of civilian govt R&D.  But private R&D spending barely took a pause, dropping only to 34%. In other words, the private sector continued to boost spending on R&D at more than twice the rate of the rate of GDP growth.

compRD1

 

Finally, we can compare private sector R&D with civilian govt R&D, as a share of GDP,  over the past 45 years. It turns that private sector R&D is at 45-year high, as a share of GDP, while civilian govt R&D spending is near a 45-year low.

shareRD

 

 

So what conclusion can we come to? Clearly there is a business investment drought in many parts of the economy, as we have written repeatedly. But private sector R&D growth–a true measure of long-term thinking–has held up surprisingly well over the past decade, despite slow GDP growth. Meanwhile, civilian govt spending on R&D has slowed more or less in tandem with the overall economy.  Government spending on structures–including physical infrastructure–has simply collapsed

So if policymakers are worried about short-term thinking holding back US growth, they might find it easier and faster to boost government spending on R&D and infrastructure, rather than crafting complex policies to affect private sector decision making.

 

 

*Data from OMB shows that nondefense federal outlays for R&D rose by 3.5% from FY2005 to FY 2015.