Fareed Zakaria’s op-ed on CNN.com, urging greater Investment in basic research, merely scratches the surface of a larger problem that threatens US economic dominance: an epidemic of short-term thinking. Delaying infrastructure maintenance, and delaying or eliminating investments that can generate long-term growth (of which basic research is merely one), are merely some of the most visible symptoms of short-term thinking. Short-term thinking, arguably a significant contributing factor to the Great Recession of 2008-2009, continues to pervade the halls of government and boardrooms throughout the country.
As Zakaria points out, investments in basic research have generated substantial economic returns over the last one hundred years. The development of the integrated circuit, GPS, and gene sequencing technology were all enabled by government investments in research and technology. However, Zakaria ignores the most obvious and significant contribution of government research to recent economic growth: the Defense Advanced Research Projects Agency (DARPA)’s development of communication protocols that would enable command and control systems to route around damage and survive a Soviet nuclear attack. The technologies that were developed at DARPA evolved into the early Internet.
Government reluctance to invest in basic R&D is just one example of a more pervasive unwillingness to make investments today that have longer-term payoffs—even when those long-term returns are material and high-probability. For years, economist Lawrence Summers has been arguing that the US should be taking advantage of low interest rates to bring forward infrastructure maintenance expenses and increase investment in public infrastructure. In October 2014, he cited the findings of the International Monetary Fund (IMF) World Economic Outlook:
”the IMF asserts that properly designed infrastructure investment will reduce rather than increase government debt burdens. Public infrastructure investments can pay for themselves.” (emphasis mine)
Summers’ math is not difficult to follow, but there is little appetite for increased government investment in the short-term—even when that short-term increase in investment is likely to reduce government borrowing over the long-term. Short-term thinking is not limited to the public sector, however. In fact, this same problem manifests itself in the private sector as well.
Back in 2011, Sheila Bair, former head of the Federal Deposit Insurance Corporation, addressed the causes of the 2008-2009 recession:
”The common thread running through all the causes of our economic tumult is a pervasive and persistent insistence on favoring the short term over the long term, impulse over patience. We overvalue the quick return on investment and unduly discount the long-term consequences of that decision-making.”
Much of the earnings per share (EPS) growth of S&P 500 firms, since the recession, has come as a result of cost cutting and share buybacks rather than investments in growth. As Bloomberg recently reported:
“investors are concerned that the money was made via means that are nearing depletion. Earnings have grown at an annual rate of 14 percent since 2009, about three times faster than sales, as companies cut costs. Rather than investing to meet demand that might not come, executives juiced returns by spending near record amounts on buybacks.”
While this has helped propel the stock market to new highs in the short term, there are natural limits to the EPS growth than can be achieved through cost cutting. In addition, the dearth of top-line growth that results from excessive cost-cutting (and the associated underinvestment in longer term growth initiatives) may hurt the long term prospects of these companies.
Increasing government investment in basic research, per Zakaria’s suggestion, would help make the US more economically competitive over the long run. However, underinvestment in basic research is merely one of the symptoms of the deleterious short-term thinking that pervades business and government.