An Analysis by Rick Heffernon
Heffernon is a senior research analyst at the Morrison Institute for Public Policy. Read Bio (PDF)
Daring to Invest in Tomorrow
The Morrison Institute explores a burgeoning state strategy of investing in the knowledge economy. Is the payoff worth the investment?
Viewpoints — The Arizona Republic
Sunday, January 25, 2005
Most governors and state legislatures across the nation are now preparing for the next round of budget deliberations, this time for fiscal 2004-2005. If past is prelude, the negotiations could be epic. With that in mind, it seems appropriate to take a closer look at an apparent contradiction that has arisen in many state budgets in each of the last three years.
Since 2001, widespread economic weakness has led to massive revenue shortfalls that have punched big holes in state budgets. These have led to extended legislative sessions and fractious political debates over where and how to make cuts in discretionary program spending to avoid year-end deficits.
This is where the paradox comes in. At the same time that state leaders have agonized over the depth of proposed cuts to K-12 education programs, public safety, libraries, parks and a host of social services, they have initiated or continued dramatic increases in investment in science and technology research.
North Carolina, for example, has collectively cut more than $1 billion in spending from its last three years of budgets, mostly in education programs and health and human services, while it has simultaneously committed $3.1 billion in new bonds to build and modernize laboratory and classroom space at its universities and colleges.
Arizona, too, has eliminated billions of dollars worth of program support from its already approved budgets over the last three years, but has promised an estimated $1.5 billion over 20 years for university research in leading-edge fields such as genomics, bioengineering and embedded systems.
Cutting services for millions of voters to fund science initiatives that few can easily grasp? This would seem to fly in the face of "politics as usual."
After three straight years of troubling economic times, however, a resolve has grown to do something more, better or different to stimulate long-term economic development.
That "something," more often than not, has been to develop metro, regional or statewide economic strategies of public investments in science and technology research to become more competitive in the so-called knowledge economy. Most leaders appear to be convinced that this is the next wave of wealth creation, and nobody wants to be left high and dry.
Nevertheless, it is no surprise that skeptics have called into question the wisdom of making the potentially painful societal tradeoffs required by such budget decisions. Is betting the farm on our scientists good public policy? Have we begun beating plowshares into scanning electron microscopes and supercomputers? And if so, what can we reasonably expect in return?
A history of footing the bill
Keep in mind that public investment in science and technology research is nothing new. From a historical perspective, it has been so important that most basic research discoveries - particularly core investigations in medicine, agriculture and aeronautics -would not have happened without the support of government grants and incentives to both the public and private sectors.
But government investment in science and technology research has almost always been the realm of the federal government. What's new about this current round of public investment is that individual city and state governments have gotten into the game - and rather aggressively so.
In the West, for example, Colorado has committed nearly $400 million toward health science education and research at its flagship institution, the University of Colorado. Texas has plans to fund about the same amount to develop a statewide network of science and engineering research facilities at its universities. And these are not even the biggest investments in the country.
California, Ohio, Illinois, Michigan and Pennsylvania have all committed $2 billion or more for science and technology projects in the first two decades of this century, and previously mentioned North Carolina may see its total of bonds and allocations for such initiatives exceed $4 billion by the time its commitments are fulfilled.
This is big money, especially to states in economic crisis. The potential risk is that the dollars in these investments all tend to be concentrated in three hot areas: biotechnology, nanotechnology and information science. Each field has great potential, true, but common sense tells us that not everyone can win if everyone is executing the same game plan.
Complicating science and technology investment risk is the difficulty of keeping score. It's a challenge to determine which strategy is "winning" when evidence of results won't appear for many years. Big pharmaceutical companies have already shown us from their research and development experiences that when it comes to counting up return on investment, or ROI, from cutting-edge science, you can expect to wait at least a decade or two to see what pans out.
Spend now, or weep later
So, a dilemma faces Arizona and every other state. The height of fiscal foolishness would be to bet 10 years of revenue on an economic strategy that just might be doomed to fail. But equally foolish would be to pull out of a long-term investment just before it's ready to pay off a jackpot, or fail to invest in what might be the best vehicle for wealth creation in the 21st century.
Unfortunately, our state leaders have no easy, reliable method for calculating the odds of payoff from their policy choices in this arena. They will improve their odds, however, if they will identify what our return on public investment should look like for the economy, and then monitor ongoing activities to see if investments are stimulating the types of products and processes that are likely to deliver economic returns.
Where to begin? Leaders must first define what they mean by "return on investment." Opinions are sure to vary, but one thing is certain - public ROI won't mean turning a profit in the usual business sense of the word. The business of government is not profit per se, but to serve its constituents. And in today's globally competitive market, government must serve in a wise, cost-efficient and economy-friendly manner. That said, what should be the nature of public ROI?
5 questions seeking an answer
State leaders can start on a plan for determining public ROI by asking themselves five key questions:
1. What economic benefits can we reasonably expect to reap from Arizona's efforts to grow a science- and technology-based knowledge economy? Critical factors would include improvements in the state's gross domestic product, the number of new high-wage jobs created, growth in average wages, the length of time to obtain positive economic effects (as well as their duration), and the fiscal impacts on state revenues.
2. What kinds of related, yet non-economic, benefits can we expect, and will they help justify the investment? Considerations must include whether state taxpayers receive a meaningful return on investment from such results as recognition of Arizona as a world leader in scientific research, discovery of an inexpensive cure for an important health or environmental problem, development of a simple method for preserving antiquities, or encouragement of careers in science.
3. What are the potential unintended or secondary consequences of a fast-growing knowledge economy? Some potential risks - a future tech business crash causes major layoffs (which recently happened in Denver and the Silicon Valley); local research discoveries fail to turn into viable commercial products; Arizona's top scientists move to better paying jobs in other states just when our investment in them is about to pay off; housing becomes less affordable; rural economies are neglected; and the focus on science causes a failure to recognize and act on the next big wave of wealth creation.
Some potential benefits-a more stable, diversified economy (because science and technology becomes a bigger player); robust entrepreneurial activity due to research-inspired spinoff businesses ; and revitalization of downtowns by a creative class of knowledge workers.
4. What are the risks and rewards of betting public money on science and technology research? The challenge is to mitigate investment risks through better understanding how science and technology research moves forward, coming to terms with and accepting the uncertainty that is inherent in the process, and both analyzing and communicating the trade-offs and risks that arise from choosing a reduction in certain programs or services for state residents in exchange for the potential for long-term economic prosperity.
5. What are the consequences - or benefits - of not investing right now? Two competing issues must be resolved: First, the opportunity cost of not investing in science and technology research - that is, whether Arizona can afford to fall further behind current science and technology leaders; and second, the potential that biotech and nanotechnology might fail to live up to expectations - in other words, whether it would be wiser to wait and invest in the next really big thing.
Many of the above issues deal with "intangibles." They will always be difficult to value in numbers or dollars. State leaders could develop some useful approaches by studying how private industry calculates ROI for its important intangibles, things such as great customer service, new products in the development pipeline, and top-quality research staff.
The private model, however, will not be a cure-all. Public policy generally works on a grander scale than the operations of a single company, and a state's constituents demand a broader range of services than do most company shareholders.
The major difference between long-term investments by business and public investments made by government is that business must pay primary attention to its bottom line, while government is required to not only do well by its economy, but also do good for its people.
Rick Heffernon is a senior research analyst specializing in science and technology policy for the Morrison Institute for Public Policy at Arizona State University. His report, "New Returns on Investment in the Knowledge Economy: Proposition 301 at Arizona State University, FY 2003," will be released in January.