Productivity is one of the most fundamental determinants of our income and overall wellbeing, so the question of where productivity growth comes from is extremely important. There are many different ways to increase productivity, but increases that have a continued impact over time are the most important because accumulated productivity increases end up having a much larger impact than one-off changes.
Economists have understood for years that R&D is an important source of productivity growth. However, it hasn’t been entirely clear whether R&D affects productivity growth in short, one-time boosts, or whether it raises growth rates for longer periods.
A new paper by Italian economists Antonio Minniti and Francesco Venturini looks at data from the U.S. manufacturing sector and concludes that R&D policies have indeed created “persistent, if not permanent” changes in the rate of productivity growth. It also drills down into the type of R&D spending, finding that only R&D tax credits have a long-term impact on the growth rate while R&D subsidies provide just a temporary boost.
These results are good news for both the economy and for policymakers because they show the powerful impact that innovation policies have on growth–and the importance of getting those policies right. And they show the shortsightedness of recent proposals to reduce the R&D tax credit. Instead of cutting R&D tax credits, we should expand them because they bring lasting productivity growth and thus greater income in the future. Another recent proposal in the House would increase the Alternative Simplified Credit to 20 percent from its current 14 percent rate, which would be an excellent step in the right direction.
(Photo credit to UC Davis College of Engineering)