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Forum: Research and the national interest

STANFORD -- This is the first in an occasional series of discussions on issues of interest to the campus community. The following discussion includes Professor Roger Noll, Charles Kruger, dean of research, and A. Michael Spence, dean of the Graduate School of Business, who also has studied the issue of financing research and development. The discussion was convened and moderated by Kathleen O'Toole and David Salisbury of the Stanford News Service.

Q: When The House Appropriations Subcommittee marked up the defense spending bill in June, one cut would have meant $21 million of $42 million in defense-related work to Stanford. What would be the consequences of a cut of that size, and how did you react to it?

Charles Kruger, dean of research: The House Committee took $900 million out of the Department of Defense research budget. The Senate Committee restored $800 million and some odd thousand dollars. The Senate version had a 10 percent and the House version had a 50 percent cut. The Conference Committee will decide how that comes out.

Q: But in practical terms, what would the effect of a $20 million-plus cut have been?

Kruger: It's a little bit like asking what would happen if we had a 7.3 earthquake. You have to know how the earthquake manifests itself. On the DoD funding question, a 50 percent cut would reduce the overall sponsored research funding of the university by 7.5 percent. That would put it back, in nominal dollars, to where we were two years ago and, in constant dollars, back about 4 or 5 years.

The glass-is-half-full side of that is that the funding we receive from the Department of Defense is only part of the funding that the university uses to support its basic and applied research. Over half our funding is from the National Institutes of Health, and the DoD funding is important, but it's of the order of 15 percent of our funding. One of the strong points of the American system of funding in basic and applied research is that there are a variety of agencies that are involved. In the past, when one agency has had difficulties in their appropriations, our faculty have been quick to react to changing circumstances.

Q: What are the university and other research institutions doing about threatened cutbacks?

Kruger: Gerhard and others have written to our Congress and people in Washington. Condi had a visit to Washington and talked to several influential people there. We've tried to make it clear how important DoD funding is to the American academic enterprise.

Q: One of the people she met with was Rep. John Murtha, (D-Pa.), who is chair of the House Appropriations Committee. He indicates in press reports that he believes military preparedness is at stake and that universities have been spared so far in national budget-cutting. How do you respond to that?

Kruger: Condi feels that national preparedness is a very important issue, and she supports the Congress in that respect.

We aren't taking the position that somehow we're a sacred cow and that we should be immune from any reductions in budget cuts in Washington, but we do think it's important that whatever budget cuts are made, are made in a thoughtful way.

Q: But people like Congressman Murtha have cast this in the frame of "A dollar spent on DoD research is a dollar taken away from preparedness." Do you have a good answer for that?

Roger Noll, professor of economics: The defense agency's budget, which also includes DoE as well, contains an extraordinarily large proportion of money that supports universities compared to many of the others, and there is no natural connection between the university research money coming out of the Department of Defense, or Department of Energy, and whether the tank-warfare capability is capable of fighting two wars. There's no natural connection there at all. It's much more of an organizational phenomenon that can lead in the short run to irrationality in the budget allocation process.

A. Michael Spence, dean of the Graduate School of Business: You can't buy a single military aircraft, you can't come close to buying a submarine, you can't buy anything that matters [with the allocation at stake here]. The underlying issue of merits is whether or not that $900 million is a good expenditure, not whether you can do a hell of a lot with military preparedness if you didn't spend it on basic research.

Noll: The rationale that is given isn't necessarily what is really going on. What is really going on is the discretionary component of the federal budget is now down to about 35 percent of total expenditures and shrinking fast because of the rapid growth in Medicare and Medicaid and entitlement programs in general. As a consequence, universities face ever-declining real budgets until the entitlement problem is fixed. We have been extraordinarily lucky throughout the 1980s to have been insulated from the fact that the federal government has become a middle-class income redistribution entity and very little else. Our budgets haven't declined, whereas everything else around has. We are the last ones to get hit, and I think it would be a mistake to suspect that we can continue to be insulated from this general withering away of the discretionary part of the budget process.

Q: Was it the Cold War that insulated universities from these cuts?

Noll: Partly. During the Reagan and Bush administrations, during the period when the Cold War was in full flight, the basis of political support for the research budgets for universities included some very conservative members of Congress, because of its close connection to defense, and because the defense community made the case correctly and plausibly that tomorrow's weapons systems depend upon today's basic research in science and engineering.

They have begun to drop off. People no longer see the Cold War as a galvanizing force that can create a coalition that cuts across both parties and across both liberals and conservatives. The fact that that has withered away has hit defense substantially and likewise eroded that part of the coalition of support for universities that was tied to its connectiveness to defense. I think that is part of the explanation of why we're no longer in this.

Q: So you think people are having doubts about whether funding basic research is a good expenditure?

Spence: Yes. I think if they didn't have the doubts, it's a small enough fraction of the total, as is basic research in general, [that it wouldn't be an issue otherwise]. You can protect it if you have the right constellation of support.

Q: A lot of opponents of basic research see it as funding some overprivileged people just to satisfy their intellectual curiosity. One main defense of it is that it does have some economic long-term benefit. What's the strongest economic rationale?

Noll: The major facts worth citing are as follows:

In the past 15 years, several economists have done research on the social returns to various kinds of research and have found that the United States has a much higher return on basic research than its principal competitors. That's revealed in the national income statistics.

The second important fact is that most of the countries we regard as our economic competitors, in terms of high-technology industry in the world market, educate a very large fraction of their engineers and scientists in the United States. And this gets to the second important fact. The United States is the only nation in the world that does most of its research in a university environment involving students. The separation of teaching and research is a common mode throughout the rest of the world. The importance of the U.S. university system is that it does attract endless numbers of foreign students in science and engineering. But beyond that, it connects what goes on in research laboratories sponsored by the government and what goes on in industries. Students that are taking undergraduate and graduate science and engineering today will be working in the Silicon Valley two or three years from now, taking the forefront knowledge they're learning in their classrooms and applying it to their companies. We have a built-in natural mechanism of technology transfer to our students that other countries lack.

Q: Why should the taxpayers fund that? Some of those students are going to be going into Japan and Germany instead of the Silicon Valley.

Spence: Roger and I each wrote papers, and there were some other ones in this conference on economic growth and development [that the Stanford Center for Economic Policy Research held in June], and I think we might differ marginally on how much the political process is becoming concerned about the fact that the basic research enterprise and the very important concomitant educational enterprise that goes right along with it, as a joint product, is free. All the output is essentially freely available to the rest of the world. So there are people asking, why should that be? There are two ways to deal with that. One is to say that we're the richest country in the world, and that's one of the things we should do. That was essentially the answer for about half of the postwar period and continues to be the autopilot answer, but now it probably isn't going to fly. The second one, I think, Roger feels has gone a fair ways, which is to try to close the system on a multinational basis.

The concern we all have about that is that if you think about what you have to do to close the system, you have to take a set of steps that badly impair its efficiency which is its crowning glory at the same time.

The third possibility is that we essentially try to edge toward multilateral agreements with the major advanced industrial countries of the type that we have in trade and were inching toward in defense before the Cold War ended, admitting that we will specialize to some extent, that we'll all invest an appropriate share of the GNP, which would be very small, in basic research and maintain a sort of openness. Now if we went that direction, then the political defense internally is that we made a deal that was good for everybody, and that we're not going to renege on it, and under budget pressure you can't solve budget problems by reneging on it.

Q: Can you explain what the difference is between you and Roger Noll?

Spence: I don't think there's much difference. If there's any difference at all, it would be a question of how far down the road [the nation is in] thinking of our research enterprise as a potential weapon to promote our economic self-interest. How far down the road are we to try to close our system? I hear a lot of noise, and I think Roger and Charles do, too. The question is, have we done anything dramatic yet? What kind of noise do you hear? Questions in Congress; rules designed to limit Japanese investments in MIT or purchases of supercomputers; mumbling about the use of federal grants to support Ph.D. students functioning as research assistants if they're not citizens of the United States. Things like that haven't turned too much into real restrictions, yet. But that's not a reason not to be a little worried.

Noll: The flip side of Mike's point about closing the system is that the reason you close the system is that most of the benefits of research do not accrue to the person who invents it or who exploits it for the market. Most of the benefits actually accrue to the downstream users - the consumers or the industries who buy the products that come from the research.

The principal beneficiaries of the rapid technological advances in chips that go into computers are not chip manufacturers. They're us, as users of computers. The computer sitting on my desk, which cost Stanford about $2,000, is 10 times larger than the entire computer capacity at Harvard University when I was a graduate student.

Spence: That's just Harvard! (Laughter.)

Noll: So it's not just IBM or Intel that have benefited from the technological progress at places like Stanford or at companies because it's so easy to copy. It's so easy for Advanced Micro Devices a few years later to come in with Intel chips. Because of that, it's society in general that reaps most of the benefits of research. It's not the private sector. That explains what Mike was talking about, the attempts of the federal government to close the system, to construct something like Sematech,[a federally subsidized research consortia of U.S. semiconductor manufacturers], where a foreign-owned firm can't be a member, and then proprietize the work that comes out of it so that only U.S. firms can benefit. That's the rationale to try to keep more of the benefits inside the U.S.

Of course, the dilemma that arises from that kind of policy is that, if you really did create a circumstance where IBM and Intel kept all the benefits from future technology in chips, then you would not have the future counterpart of cheap high-capacity computers sitting on my desk. You would start to pay a million dollars for them again instead of two thousand. That's the problem. There's a fundamental dilemma going on in policy. Closing the system and trying to generate more national benefits also has the effect of reducing the extent to which the user, the consumer, the citizen, in general, benefits from research. If that ever happens, I think, the rationale for public support at universities would actually go down a lot, because it's not clear why the ordinary working citizen should pay scientists and engineers at Stanford to do research that is going to increase the profits of Intel.

Kruger: Roger, earlier you commented about the effectiveness of the research system in the U.S. The argument is sometimes made that although the U.S. is the nominal leader in basic research, we don't do nearly as good a job as the Japanese in carrying that research into economic applications and into industry. Are you saying that there are studies that show that we, in fact, are better than the Japanese and others in translating research into practical results in economic growth?

Noll: Well, we do a better job in some industries; the Japanese do a better job in some industries; the Germans do a better job in some industries; the British and even the French do a better job in some industries.

I think that the important fact is that in the first 15 years after World War II we were dominant in virtually everything; that we had the most advanced technology, in part due to the decimation after World War II. It's just not realistic to expect a country with 6 percent of the world's population will produce 99 percent of the world's innovations [indefinitely.] Most of what has happened in the last 20 years is simply the observation that other countries have become very adept in certain things.

One of my favorite examples is the debate about the flat- panel displays for computers and aircraft. We're about to embark on an extraordinarily expensive $2 billion program for the purpose of generating more production in flat-panel displays in the U.S. Simultaneously it looks like Japan has lost that to Korea, because it's a relatively prosaic manufacturing process, and it's not something that you need an enormous research capability in order to be able to produce.

Meanwhile, back in the U.S. we completely dominate the high end of all kinds of displays - flat panels, everything else - even the prosaic cathoderay tube where we don't make any for television sets at all. The most sophisticated ones that have the most sophisticated applications are still made in the U.S. So, that, I think, actually supports the notion of what the U.S.'s role is, and it answers Charles' question: What we're really good at is the most sophisticated, most difficult things. And we're good all the way to the production lines. What we're not particularly good at is prosaic mass-production manufacturing of this stuff, and why it's so is a debatable point. But I don't think it has much to do with the value of the research enterprise at a place like Stanford. It has more to do with the fact that the kinds of things that come out of research laboratories at places like Stanford are, in fact, industries in which we are extremely efficient.

Kruger: The part of your argument that I like is that our most important product is our graduate students. If there were empirical data that showed that the technology transfer through graduate students from the system we have or the basic research in graduate education are one and the same thing, if there really were data that could be demonstrated as more efficient than the targeted research development that takes place mostly in industrial and national laboratories in places like Japan and Germany, that would be pretty interesting.

Noll: I think the right way to put it is that that form of technology transfer plays an extraordinarily important role in an impressive spectrum of American industry - chemicals, pharmaceuticals, Silicon Valley-type firms. We don't really know how to have governmentally subsidized end-stage developmental programs, because they start becoming pork barrels.

But we do know how to transfer the basic intelligence that goes on in the front end of research into the high-technology companies. And it's because not only do we use research in universities, but we even run a significant fraction of our national labs through universities. And that is a totally different system [than other countries have], and it's very beneficial to the U.S.

Q: Do you feel that there will be some changes in emphasis in federal research funding?

Spence: I believe there is a visible tilt toward the more applied, or slightly downstream, and that runs across a lot of areas. We see it in National Science Foundation - the budget allocations. I think you'll see some of that, because - by doing that - the relatively short- to medium-run benefits that might accrue appear to not be possible.

Q: Is a shift from more basic to more applied university research a good thing; is it a bad thing?

Noll: It's just a thing.

Kruger: For quite a few years, basic research at universities has grown, and applied research has grown faster than basic research. That means that schools of engineering have grown in their research volume relative to the science part of humanities and sciences, even though the science part of H&S has grown, too. Even within the School of Engineering, there is a big spectrum of what people are actually doing and whether they regard their research as basic knowledge or directly related to some particular application.

Q: So this is not a trend you're worried about?

Kruger: I don't think so, unless we get to the point where we are directed to do specific kinds of development-oriented activities in the universities as a result of funding changes.

Noll: I think there are two important observations to make. First of all, according to the way the NSF defines the term, the share of federal support for the universities that is defined as basic actually peaked in the early 1970s and has been falling ever since, and we're back now to where the basic share is below what it was before Sputnik; it is way, way back. It used to be the case that the federal government did not support much in the way of basic research.

The second point is, the distinction itself isn't really the important one for universities because a lot of what is "basic," according to the NSF definition, is very much problem-focused, whereas a lot of the applied stuff, according to the NSF, is not. They do it on the basis of things like areas of research - disciplines, subdisciplines - they don't do it on the basis of from whence did the researcher derive the motivation.

In the case of the National Science Foundation, for example, for the last 18 months, they've been required to justify 60 percent of their budget on the basis of direct applicability to productivity problems in American industry. Mike snickers. He has enough experience in government to know that this is not a difficult matter for a clever bureaucrat. But the fact is, this is our basic research agency - the basic research agency in some areas of science and engineering. and it is supposed to justify most of what it does on the basis of applicability. And I think Charles raised the point exactly correctly. The issue is really not basic or applied.

The issue is really the degree to which the university researcher is in control of his own agenda, whether he can pick research projects on the basis of the researcher's beliefs of what is important and what is not, as contrasted to letting someone in the external world set the agenda.

Q: We are increasingly seeing government programs set up in which industries do control the agenda. Is that affecting Stanford yet, and is that a bad idea?

Noll: At other universities, not here, entire multi-tens- of-million-dollar research programs have been established that are proprietary, where no one can enter the facility unless they're part of the project, including students and faculty, and where all the results are proprietary information for the corporate sponsor - the new neurological sciences building at UC-Irvine is that way. That raises a serious question. I think the notion that the taxpayers in California should support University of California science and engineering research is easily defensible, but I'm not sure it's defensible in a case of that kind.

Q: Why?

Noll: Because many of the benefits that an ordinary citizen of California would derive from that, such as the technology transfer through the students, such as the possibility for a biomedical science component [similar to] Silicon Valley to grow up around UC-Irvine, which is actually beginning to happen for some other reasons - those benefits are curtailed if one or two companies not even located in California should get it. They close off all the work and derive all the benefits from it. The vast majority of students at UC-Irvine are not getting access to that information, are not being taught it, they can't even go into the labs. The faculty who work in the same department can't even talk to their colleagues about what goes on in that laboratory. The biomedical technology firms in Orange County that have sprung up around UC-Irvine, because it actually is very good in certain areas of biomedical science, are not getting benefits - if it works, assuming it works, to close off the information. So it's not clear why a taxpayer should want to support that.

Kruger: Back to your question: The impact of the programs you referred to at Stanford, at the present time, is small. The NIST [National Institutes of Standards and Technology] programs have essentially no impact at Stanford. There are a few - the Advanced Technology Program (ATP) of NIST, the science research centers, the Technology Reinvestment Program through ARPA, [the Advanced Research Projects Agency in the Department of Defense]. We have some funding at Stanford in collaboration with industry, not a whole lot, and what we do at Stanford is not particularly constrained.

Noll: There's a very important issue here about policy, which affects Stanford. Most of the universities deeply involved in these programs where a collaborative venture is set up [and] run by industry are not leading research universities. They would be, at best, second- or third-tier, and many are way below that.

In his speech of support for the cuts in the university funds coming out of the Defense Department, Senator Bob Kerrey (D- Neb.) said he believed it was deserved because the Department of Defense was prejudiced against Nebraska. I think a very interesting and important issue is, what is it going to do to the 25 or so leading research universities if, in fact, the popularity of this idea grows. What's going on is a democratization or an egalitarian principle of allocation of federal research expenditures as contrasted to a merits-based system. And that, of course, would be devastating to Stanford, but more than that, it would substantially reduce the effectiveness of overall research and development effort.

Q: Another example of that trend is the practice of putting in specific line items for research at individual campuses.

Noll: Recently that [practice] has gone down. [There has been] about half as much of that in the last two years as there was before. But the effect of what they did in the early 1990s is still apparent in the phenomenon that I've said. You don't need to earmark money for the University of Nebraska if the guy running some agency knows that he's supposed to set up one of these manufacturing technology centers at the University of Nebraska instead of Chicago. In last year's budget, the Advanced Research Projects Agency had their special Technology Reinvestment Program, which is their counterpart to ATP and all these others, all earmarked. The director of ARPA managed to get the earmarks removed, but the way he did it was, in fact, to come back to Congress and say he was allocating the budget by state and by industry in the same way it would have been, had the earmarks held. So it looks like there are no earmarks at ARPA but, in fact, there are. Because the agency head knows that if he doesn't behave according to the way that the relevant oversight committees in Congress want him to behave, he will, in fact, have earmarks.

Q: Let me play a Nebraskan advocate for a minute. If the justification for research is economic growth, which translates to jobs and better standard of living, then why doesn't the taxpayer expect some sort of per capita allocation? Are you saying that that's a short-term view and the real benefit is down the road?

Spence: It's very easy to slip into thinking what the current policymakers want you to think, which is that this stuff really benefits either a region or, at least, a country. It's entirely possible that the next thing that happens somewhere in science is going to produce a burgeoning industry in South Korea, if that's what the multinationals decide is the right location for it. And there is absolutely nothing to stop it. So, there's no reason on earth - other than local examples like the biotech collections around here and at San Diego and around Irvine and Silicon Valley, which is just one model - to believe that investments in that will produce a large set of benefits, like a military base in Nebraska.

Noll: Research laboratories of large companies tend to be located near universities. It's also the case that there's no reason at all to locate prosaic manufacturing facilities anywhere near where the research is going on. We've been witnessing that in the Silicon Valley with the migration of the chip manufacturing to Arizona or Texas. And that makes eminent good sense for the same reason that it makes good sense to have some of the lower-end things manufactured in newly industrialized countries in Asia.

Everything is being driven by relative cost. Where can you derive the lowest cost combined with the best spillover benefits from what other people around you are doing? When the issue is doing design work and research, and inventing new things, these spillover benefits from propinquity to other people who are doing similar things is large. But in the prosaic manufacturing part, they're not.

There's absolutely no reason to say that if the Stanford School of Engineering invented the next great mousetrap, that it wouldn't and shouldn't be manufactured in South Korea or in Africa. The benefits that derive from the research should not be measured by the location of the job. They need to be measured by the end-user benefits that derive from a product that is better.

Q: What are the other possible ways to fund the research? Should we have international funding?

Noll: Oh, of course. If this were the best of all possible worlds. Let me give an illustration of what the problem is, though. The problem is what happened in the Senate Appropriations Committee this year to fusion research.

There are two big fusion projects. One is a U.S.-only project called the Tokomak, which is managed out of Princeton. And the other is an international cooperative venture. The Senate Appropriations Committee is considering two facilities, one of them being the domestic fusion reactor, which is the Tokomak. And the other is the ITER, which is a collaborative joint venture with Japan, the European Economic Community, Russia and us.

The Senate Appropriations Committee tried to emasculate the domestic-only one. It cut 75 or 80 percent of the budget for Tokomak before it could get to the actual construction of this experimental fusion reactor. The agreement among the four participants in the ITER is that the entity that has the location of the first commercial fusion reactor will bear two-thirds of the cost. And what the Senate said was, "Gee, if we can get one of these other guys to build it, we only have to pay 10 or 15 percent." Aye, there's the rub! What if all four entities say, "No, you build it"? Because the problem arises from the fact that if 10 countries are going to collaborate and stake 10 percent of the cost each, one of them is saying, "Hmm, suppose I sandbag? I'm still going to get all the benefits, but I don't have to bear any of the cost."

Q: But then you have to do it in a 10-project unit?

Noll: Yes, but then suppose you've done that. But unfortunately you've only gotten enough for nine projects that are worth doing, and Italy has been left out. You see, now you're pork barrel. You're back to "Let's divide the projects on a per-capita basis" instead of on a merits-basis. That's the problem.

Now this gets back to your question about why shouldn't Nebraska get as much per capita as California? I guess the right way to think about that problem is, suppose we reversed it and said, "Well, why shouldn't California and Nebraska have equal per-capita wheat-growing?"

The notion that what you want to do is allocate economic activities in any particular category equally everywhere is fundamentally absurd. Different areas specialize in different things and are better at certain things. There's no more reason to grow wheat in Palo Alto than there is to have Stanford be in Nebraska.

Kruger: Nevertheless, we suffer from our own success in funding in that the academic research enterprise is something like $20 billion a year and, even in Washington, that's real money. And people want a piece of it. Just for the employment.

Noll: But notice that they don't want a piece of it in the way that would actually be credible. You don't see the Nebraska legislature passing a billion-dollar budget to produce a first-rate University-of-California-like state university in Nebraska and attracting all the first-rate scientists and engineers, and then getting their grant. That's not how they want to do it. They want to do it not on the basis of merit, not on the basis of effort, but on the basis of per capita.

Spence: That's the way the competition is supposed to work, and works very well. States make decisions about investment and the kind of environment that is likely to produce excellent research and they think that - as part of that investment process - they anticipate that if they succeed, then they will, in fact, successfully compete in the flat-out competitive peer-review system. They think about it the same way we do at Stanford, only as a public investment. Nebraska could easily reach the conclusion they want first-class research capacity in their state university and just go for it.

Q: Why would you not expect allocation of research dollars to go along the same path that defense-related subcontracting does?

Noll: You've just described a reason for pessimism if you're a leading research university. We have been on a wonderful 50-year ride that has left us immune from most of the things that drive federal programs.

Kruger: I'm more concerned about statements like that of Senator Hinkle of Alaska - Is there something wrong with the peer- review process because Alaska doesn't get its fair share of the money? - than I am about the changes resulting from the end of the Cold War.

Q: So we really have two challenges in the long term. One is the prospect and pressure for decreasing overall university research spending with the end of the Cold War. And then we also have this democratization effect or trend which could also hurt Stanford.

Spence: American politics is very local. By almost any standard, Congress does too much stuff. A bunch of very smart people in government and business and universities set up a system in the post-War period that survived for a variety of reasons, and now it's under attack.

You can conduct a thought experiment and ask yourself the question, "What would happen to our monetary policy if the Federal Reserve was subject to exactly the same intense pressure as the DoD in locating military bases?" And the answer is, it would be a shambles. It wouldn't be anything that was even vaguely coherent or predictable.

Well, we haven't lost that bout yet, and there's a fairly elaborate structure that makes it hard to lose, but it's not impossible. Congress could pass legislation that essentially made the Fed an arm of the current administration or whatever they happen to be thinking.

These pressures are always there.


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