When the CHIPS are Down.

            In the wake of the Great Depression and the Second World War, there emerged a “neo-capitalism” in Western countries.  On the one hand, international bodies would create the framework for global trade and payments in order to encourage economic growth and respond to crises.[1]  On the other hand, national governments would create the framework for prosperity in individual countries through monetary policy, a favorable regulatory environment, infrastructure investment, and an expanded social safety net.   

The American rivalry with China has brought into high-relief one interesting aspect of post-1945 business-government relations.  As part of creating the framework for prosperity, the U.S. government once led the world in support for research and development as a share of GDP.  The examples of government investment in basic research include energy, automobiles, aircraft, pharmaceuticals, the internet,[2] and semi-conductors.  One could also include more historical examples like the Springfield Armory[3] and support for the trans-continental railroad.    

By 2017, at 0.65 percent of GDP, the U.S. had fallen to seventh place, lagging behind China, South Korea, Norway, Germany, Sweden, and Japan.  France spends almost as large a share as does the U.S., with Britain and Russia at or below 0.5.[4] 

Why does this matter?  According to a common theory, forward-looking entrepreneurs can develop new technologies without being able to see the practical application of those technologies.  Moreover, technology development (like any new product) is not guaranteed to work out.  At the same time, individual private businesses can’t afford to spend money on basic research which may not produce any useful outcome.  That can make it difficult to obtain financing to develop new technology.  Forward looking governments have often paid for some of the costs of basic research on emerging technologies.  Once developed, these technologies can be adopted by private businesses who understand the application.  The resulting economic growth and the tax revenue that flows from it more than repay the government investment.

Why did this happen?  American government spending on research and development rose sharply during the 1940s and 1950s, peaked at 1.8 percent of Gross Domestic Product (GDP) in 1964, then fell sharply through the 1970s, rose again during the 1980s, fell again from the late 1980s to 2000, and has bumped along 0.65 percent of GDP since then.  This roughly tracks the movements of the defense budget.[5]  Here it is worth knowing something about the Defense Advanced Research Projects Agency (DARPA).[6]  It may that an unforeseen consequence of various “peace dividends” came in unilateral basic research disarmament.[7] 

Recently, an effort has been made to revive government investment in technology.  At the same time, the spending authority seems to be shifting from the Department of Defense toward the Department of Commerce.  Will this industrial policy become ordinary industrial politics?  

[1] See: Bretton Woods system – Wikipedia 

[2] Look up J.C.L. Licklider (1915-1990) some time.  Where’s his statue? 

[3] See: Springfield Armory – Wikipedia 

[4] David Leonhardt, “U.S. Doesn’t Invest in Innovation Like It Used To,” NYT, 10 December 2021. 

[5] See: US Government Defense Spending History with Charts – a www.usgovernmentspending.com briefing 

[6] DARPA – Wikipedia

[7] That isn’t the only area of depletion.  Fact check: Trump exaggerates on munitions shortage | CNN Politics.  Except that the current world-wide scramble for munitions to send to Ukraine suggests that he did not exaggerate.