Funding Basic Research During a Time of Budget Cuts

Keith’s post raises important points so I’d like to add two thoughts.

1.  An optimist would point to Bill and Melinda Gates Foundation and  say that the rise of the benevolent billionaires will fill part of the void.   Such foundations will fund an increasing share of basic research.  Are their grant officers “smarter” than their government counterparts?  Can such Foundations co-ordinate so that they come close to replicating what the NIH and NSF could achieve back in the flush days of the 1990s?  In an era of public cuts, will there be a sharp growth in private foundations focused on funding basic research?

UPDATE:    Yes, I support basic research funded by government but we have to be careful about quantifying the costs of what would be lost by a 10% cut rather than a 100% cut.   Do you believe that President Perry will reduce the NIH’s research budget to $0? 

 The NIH has an annual research budget of $31.2 billion. I do not believe that Bill Gates is a perfect substitute for basic research funded by government.  Nobody is talking about a 100% cut to basic research.  The question is; if there is a x% cut will children suffer?    What offsetting forces might come into play?   This webpage highlights that the top 10 foundations control roughly $100 billion in endowment and the top 100 foundations control $230 billion.   If all of this money was invested in health research, this would yield $7 billion per year in grant funding that would completely offset a permanent 22% reduction in the NIH research budget. 

2.  The rest of the world is developing and doing more serious research.  Go to China, their nerds are hard at work.  If they make breakthroughs, they will be willing to sell us the new pills.  Knowledge is an international public good.  Why must it be produced in the USA?  If we are silly enough to drop the ball, won’t that create even greater opportunities for potential entrants to fill the gap?

Author: Matthew E. Kahn

Professor of Economics at UCLA.

16 thoughts on “Funding Basic Research During a Time of Budget Cuts”

  1. The Gates Foundation has an endowment equal to the annual budget of the NIH.
    Also, in the flush days of the 1990s, do you believe there was no valuable research that went unfunded? Why didn’t these billionaires close that much smaller gap?

  2. Why must it be produced in the USA?
    I swear, you free market fanatics won’t be satisfied until you’ve torn down everything worthwhile in this country and sold it off.

  3. ‘Are their grant officers “smarter” than their government counterparts?’

    Most likely, sometimes yes and sometimes no: I see no reason to assume that they will be, systematically–any more than I have seen evidence that, overall, the capital markets do a better job of promoting industrial innovation, with fewer failures, than government agencies do. Everyone points to government investment gone wrong: the bankruptcy courts are full of the same thing, done with private capital–is it true (as opposed to frequently asserted) that one has a higher success rate than the other?

    Yes, research is international, and has been for a long time: in 1910 the center of the scientific world, and the language to learn, was German. But I’m surprised to hear that “let someone else do it” is a good strategy for future well-being.

  4. Oy, veh. Kahn is making with the jackleg economics again.

    Knowledge is an international public good? Does this mean that Somalia plus an Internet connection has the same amount of knowledge as Silicon Valley? Since knowledge is valuable, the possessors of knowledge go to some lengths to keep it private. Furthermore, knowledge is not information; it is inherently embedded in people and their social interactions. Even if a Somali hacker could access every database in the world, I’m afraid that Somalia will not become Silicon Valley as a consequence. Finally, Country Dope might be able to buy the fruits of Country Smart’s knowledge (or might not–not everything useful is exportable), but how are they going to pay for it in any quantity? Does Somalia have full access to US jet planes and medical miracles? Or even Estonia?

  5. The Gates Foundation does a great job but it has a strongly applied focus – and a global rather than US one. Malaria and HIV, yes; replacement organs, no. Can you really abdicate judgements about the public good to billionaires?

    The best example of a private basic research outfit is the Wellcome Trust, which funds half of all biomedical research in the UK. Shifting half the $32bn budget for the NIH to private foundations would call, at a 5% rate of return, for fresh endowments of $320bn.

    The basic point is that the USA is richer than almost all other countries and rich countries have much lower welfare-adjusted opportunity costs than others in providing global public goods like knowledge and maritime security. The apparent burden of altruism has to be weighed against the leading role of rich countries, and especially the USA, in providing public evils like global warming, neocolonial adventures, and the risk of nuclear war. The NIH and NSF are one reason the USA is tolerated as hegemon.

    It’s entirely a political choice to describe the present as a time of (inevitable) budget cuts. A gradual 5-point increase on the share of government in US GDP over the coming decades is entirely livable and in line with the global convergence on social democracy. Obama’s agreement to a general cut in “discretionary spending” is dangerous and unnecessary. The Pentagon, sure. Why should the USAF and Navy both still get a third of its budget, like the Army, which has done almost all the fighting over the last troubled decade?

  6. Lars says:

    “The Gates Foundation has an endowment equal to the annual budget of the NIH.
    Also, in the flush days of the 1990s, do you believe there was no valuable research that went unfunded? Why didn’t these billionaires close that much smaller gap?”

    Excellent point, Lars. In addition, IIRC the US DOD cut malaria and tropical disease research funding quite a bit in the late 1990’s or thereabouts. Matt, what was that cut compared to the total endowment of the B&MG Foundation?

    Brad DeLong once commented that he thought that accounting was a basic skill which gave economics its bite.
    What you’ve done here is make some statements with zero consideration (and likely knowledge) of the quantities involved.

    As for skill of grant officers, wasn’t the B&MG Foundation involved with hiring of Michelle Rhee?

  7. Ebenezer has it. Knowledge is nothing like an international public good. Maybe in the long run, or for some tiny select subset of “international” and “public”, but in general knowledge is something that transfers money and other resources from them those who lack it to those who have it.

    Kahn’s simplistic analysis also elides the fact that NIH money doesn’t actually go to research, it goes to people who do research and people who build the toys that support that research (and all the people they interact with in the economy). And those are the people who train the folks who apply research, and the folks who will do research in the future. So if you want someone who can understand the indications and contra-indications for those pills that chinese nerds will no doubt sell to us at rock-bottom prices, or people who can invent new pills in 20 years when the confidence fairies have miraculously rebuilt the US economy, you’ll have to import those too.

  8. An optimist would point to Bill and Melinda Gates Foundation and say that the rise of the benevolent billionaires will fill part of the void.

    I’ve heard that there’s data that suggest that when the rich get richer, some fraction of that marginal wealth goes to philanthropy. I have not heard that cuts in government spending lead to greater philanthropy. I’d like to see Prof. Kahn’s evidence for this.

    The rest of the world is developing and doing more serious research.

    Ditto for medical research by other countries. I’d like to see the details on how the U.S. cutting research spending leads to greater spending elsewhere.

    There’s a Panglossian view underneath almost everything Prof. Kahn writes. It’s a very dangerous view. The flip side of saying that progress is inevitable is saying that efforts to bring about progress are futile, as we see here.

  9. Knowledge may be an international public good in theory, but most countries still erect fences made out of patents around it.

  10. Katja,
    You’re basically right, but you are leaving out a few steps.

    In a very real sense, patents actually encourage the flow of information. You can’t patent a secret art; you must publicize it in the patent. If you don’t disclose enough to enable “someone skilled in the art” to duplicate your invention, the patent can be invalidated. (Some industries–e.g., jet engines–don’t get many patents for this very reason. They’d rather keep the sauce secret. This is especially true for industrial methods.) Since there are many individuals on this planet who can and do read patents, this information translates to knowledge.

    So the knowledge derived from the information in patents is free. What is locked up is the economic utility of this knowledge. Not all. People can often invent around patents, or may be inspired the the patent to do something else useful, outside the scope of the patent. But patents only lock up utility of the knowledge; not the knowledge itself. They free the knowledge.

    And no, I’m not a patent advocate. Outside of Big Pharma, I’m not sure that the world would miss patents much. Big Pharma’s business model is completely dependent on patents, but it doesn’t have a very good business model.

  11. Here’s the brute fact: The NIH is now funding about the top 7% of its grant applications. We could probably double the budget with little loss of average quality. No private foundation is going to match that.

    As a nation, we’re astoundingly rich. And running a big basic-research enterprise (with a better balance between biomedicine as represented by NIH and everything else as represented by the much-smaller NSF) is one way of getting richer, meanwhile contributing to the improvement of humanity in the longer term.

    And instead we’re giving more tax breaks to billionaires? Why?

  12. Once again, Matt, your profession has ensured that your response is abhorrent and short sighted, kudos.

  13. Don’t worry everybody! Kahn is optimistic about the future! Researchers will adapt to austerity, and budget cuts will unleash a wave of private sector innovation!

  14. And instead we’re giving more tax breaks to billionaires? Why?


    This has been another edition of ‘Simple Answers to Simple Questions’.

  15. Ebenezer, I don’t disagree (and if I had the time, would have written more than a one-liner to avoid the confusion).

    But there’s a definite mercantilist dimension to patent protection these days that’s becoming more and more important. For example, in Europe there’s been a fair amount of tension between proponents and opponents of software patents; despite a general dislike of the idea, proponents often argue that they’re needed to protect local industries from non-EU countries (which is presumably one of the reasons why the EPO seems to use a much broader interpretation of article 52 EPC than many member countries).

    Note also that a patent is not necessarily just an economic obstacle to use, since a patent holder can deny competitors a license entirely. This is less of an issue in practice in the United States because of 28 USC 1498 (though hardly unknown), but there are plenty of other jurisdictions with weak compulsory patent licensing provisions (google, e.g., Philips v. SK Kassetten).

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