The Innovation Nation vs. the Warfare-Welfare State

This is our national identity crisis in a nutshell: Do we want government spending half its money on redistribution and military, or re-dedicating itself to science, infrastructure, and health research?

615 american innovation iphone.jpg

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We like to think of ourselves as an innovation nation, but our government is a warfare/welfare state. To build an economy for the 21st century we need to increase the rate of innovation and to do that we need to put innovation at the center of our national vision.

Innovation, however, is not a priority of our massive federal government. Nearly two-thirds of the U.S. federal budget, $2.2 trillion annually, is spent on the four biggest warfare and welfare programs, Medicaid, Medicare, Defense and Social Security. In contrast, the National Institutes of Health, which funds medical research, spends $31 billion annually, and the National Science Foundation spends just $7 billion.

innovation welfarewarfare.pngSource: Economic Report of the President 2010 and Federal Budget 2010.

The federal government does spend some money on innovation, but mostly for innovation in warfare. The Department of Defense, for example, spends $78 billion on R&D. Good for the DoD, at least they are thinking about the future. But most defense R&D is for weapons research that is unlikely to generate significant spillovers to other areas of the economy. The basic and applied non-weapons research that has the best chance of creating beneficial spillovers is a small minority of defense R&D. DARPA, the Defense Advanced Research Projects Agency, for example, helped to develop the Internet but DARPA's budget is only $3 billion. Even when we lump all federal R&D spending together regardless of quality it amounts to just $150 billion, a mere 4 percent of the budget.

Putting innovation at the center of our national vision is not simply about spending more money. An innovation nation would think about all problems differently. The long debate over the Patient Protection and Affordable Care Act (aka: Obamacare) for example, was almost entirely about welfare and redistribution, about dividing the pie. During this debate how much did we hear about health innovation?

From an innovation perspective, two facts about health care are of importance. First, a huge amount of health care spending is wasted. A strong consensus exists on this point from health care researchers along the political spectrum. Hundreds of billions of dollars are spent on health care today with little or nothing to show for it in terms of improved health. Second, although spending more on health care today doesn't get you much, spending more on health care research gets you a lot. The increases in life expectancy from fewer deaths brought on by cardiovascular disease over the 1970-1990 period, for example, were worth over $30 trillion. Yes, $30 trillion. In other words, the gains from better health over the period 1970-1990 were comparable to all the gains in material wealth over the same period.

Looking at the future, if medical research could reduce cancer mortality by just 10 percent, that would be worth $5 trillion to U.S. citizens (and even more taking into account the rest of the world). The net gain would be especially large if we could reduce cancer mortality with new drugs, which are typically cheap to make once discovered. A reduction in cancer mortality of this size does not seem beyond reach. Medical research spending is far more valuable on the margin than medical care spending yet because we lack an innovation vision, we endlessly debate how to divide the pie while we overlook potentially huge improvements in human welfare.

Presented by

Alex Tabarrok is associate professor of economics at George Mason University and research director for the Independent Institute. He is the author of Launching the Innovation Renaissance.

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