Kurt Mitman | Internalize this

The University stands to lose $80 million in research funding as a result of last month’s sequester.

In light of the highly successful $4.3 billion Making History campaign, you might think, what’s the big deal? Penn can just cover the lost funding money (Jeff Nadel sure thinks so).

Despite the fundraising effort, it’s not like Penn just has a free $80 million sitting around in an Amy Gutmann spa-time fund. Allocating money to make up for lost federal funding would mean $80 million less to spend on student financial aid, funding new student groups or hiring diverse faculty (in the spirit of full disclosure, I am wholly funded by federal research grants, so I do have an invested interest).

We could increase tuition to pay for the lost federal money — something I’ve advocated for in these pages.

But let’s not focus specifically on the sequester. More than 80 percent of Penn’s research budget comes from the federal government. Fundamentally, should the government be funding research at Penn or in general?

First of all, we should make a distinction between basic research and applied research. The National Science Foundation defines basic research as a “systematic study to gain more comprehensive knowledge or understanding of the subject under study without specific applications in mind.” Applied research, conversely, is to meet a specific, recognized need.

Consider, for example, the laser. Its invention in 1964 was basic research funded by the Department of Defense. That basic research spawned a whole series of applied research, which ultimately led to utilizing the laser in printers (1969), fiber optic communication (1970), the bar code scanner (1974), CD players (1982), vision correction surgery (1987) and the list goes on.

Basic research creates “knowledge spillovers,” or positive externalities, in the sense that my basic invention might enable you to profit by coming up with an application for it that I couldn’t have foreseen. Could a physicist in the 1960s have predicted his laser would be used to correct people’s vision today?

The private sector is great at applied research — it is easily monetizable. Basic research? Not so much. Don’t just take my word for it — the U.S. Congress Joint Economic Committee Report in May 2010 says that “basic research is underfunded by private firms precisely because it is performed with no specific commercial applications in mind. The level of federal funding for basic research is worrisome and it must be increased to overcome the underinvestment in basic research… ”

Indeed, in “Back to Basics: Basic Research Spillovers, Innovation Policy and Growth,” by Penn professor Ufuk Akcigit, Penn graduate student Doug Hanley and professor Nicolas Serrano-Velarde at Bocconi University, the authors document that more than 85 percent of basic research is undertaken by publicly funded entities, which includes the bulk of university research like that at Penn.

The authors estimate that the academic sector can account for more than a quarter of the growth that we experience in the economy. More than half of that is accounted for by the dynamic effects of academic innovation — the private sector building off the results of publically funded basic research.

Further, they find that in a competitive equilibrium without government intervention, there is too little basic research and too much applied research. Their policy prescription entails taxing private applied research, subsidizing private basic research and allocating between 0.3 and 1.6 percent of GDP to higher education sector research. In 2008, the government spent just 0.24 percent of GDP on such research.

The authors do find that the mixture between government subsidies to the private sector and direct funding to the academic sector involves trade-offs, and in some cases it may be better to subsidize the private sector instead of academic institutions. However, since it is difficult to enforce or differentiate basic from applied research in the private sector — not so much a problem in the academic sector — they advocate that 1.5 percent of GDP should be allocated to academic research.

While in theory it would be great for everyone — including Penn — to internalize the externalities of research, in practice we know that’s not going to happen. What’s also crucial to understand is that by funding research, the government isn’t burning this money — it’s making our lives better.

Kurt Mitman is a Sixth-year doctoral student from McLean, Va. His email address is kurt.mitman@gmail.com. Follow him @SorryToBeKurt. “Sorry To Be Kurt” appears every Friday.

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