Thursday, August 4, 2016

A Look in the Mirror

Tyler Cowen and Alex Tabarrok have written a splendid article, "A Skeptical View of the National Science Foundation’s Role in Economic Research" in the summer Journal of Economic Perspectives. Many of their points apply to research support in general.

The article starts with classic Chicago-style microeconomics: What are the opportunity costs -- money may be helpful here, but what else could you do with it? What are the unexpected offsetting forces -- if the government subsidizes more, who subsidizes less? What is the whole picture -- how much public and private subsidy is there to economics research without the NSF? Too many good economists just say "economic research is a public good, the government should subsidize it."

They go on to ask deeper questions, "Are NSF Grants the Best Method of Government Support for Economic Science?" The NSF largely supports mainstream research by established economists at high-prestige universities. Are there better "public goods," undersupported by other means, for it to support?

Yes. Among others, replication and data. There are few current rewards for replication, and much economics research is not replicable. We live in the age of big data, but it's expensive and hard to access. The NSF has done commendable work here -- and other government agencies including the Census, Bureau of Labor Statistics, Federal Reserve, etc. provide huge public goods by collecting and disseminating good data. Without data we would not exist.  That strikes me as the single most underfunded public good in the economics sphere.

I'm less a fan of their proposal to support "far out" research, naming "post-Keynesians, econo-physicists, or the Austrians." While they cite popular authors  and a "gadfly'" sensational claims for the end of macroeconomics in 2009, in fact Macroeconomics is not all that much changed since the crisis and recession, and none of these claims -- nor the wackier approaches -- have in fact borne any fruit.  Yes, it's easy to support mediocre incremental research, but government agency that must appear impartial can too quickly end up subsidizing crank research, of which there is plenty in economics (see my inbox!)

They ask a great question. If the government wants to subsidize economic research, why hand out grants, rather than hire people directly?

I think there are good answers here. Another big subsidy to economics research which they do not mention are the legions of government employees already doing it. The Federal Reserve, Treasury, OFR, CEA, SEC, CFTC, HHS, EPA and hundreds of other agencies employ thousands of PhD economists who spend considerable if not full time on "research," and are expected to write academic journal articles. Make up your own mind about the value of this effort. The success of the research university I think points to an important externality between doing research, teaching it, and evaluating it through service to the profession. Also, research coming out of government agencies always seems to find just how wonderful those agencies' policies are. However, replication and data production, or other more easily guided research seems a good fit.

Also not mentioned is the danger that government subsidized research ends up being politicized, or at least ends up calling for more government.

One of the main methods of NSF support is "summer support." Universities pay academics on a 9 month basis. If you get an NSF grant it pays for 2 months of "summer support."  This is, of course, a fiction. In fact, most universities chop up the "9 month" salary into 12 pieces anyway. And most academics are not about to go work elsewhere in the summer -- it's the only time to really focus on research, and as Alex and Tyler point out the rewards to publishing are huge.  By and large the NSF does not (or did not when I last looked in to it) buy off teaching or other duties, the one thing that might free up some marginal research time. Alex and Tyler mention low labor supply elasticities as a reason to be cautious about the effectiveness of support. They don't mention this system, practically guaranteed to be a pure transfer rather than induce more research.

On the other hand, NSF grants are typically awarded based on a working paper. They already are a "prize" as Tyler and Alex recommend. So perhaps the lump-sum nature of the reward is not such a bad idea, and ends up subsidizing good research rather than more effort.

I stopped applying for NSF grants some time ago. Sometime in the mid-1990s, I was driving through Indiana, and I saw a guy hooking a shiny new boat up to his pickup truck. It occurred to me, my NSF check for that summer was worth about 5 boats. I didn't think I could get out of the car and say with a straight face that he and four neighbors should forego their boats so I could work on unit roots for the summer. I'm not pure either; I still benefit from many government subsidies, not least of which the tax-deductibility of charitable contributions.


  1. There's another aspect to NSF grants: the overheads. Why are they reaching 60 to 70% (if not more)? At the end of the day, salary only amounts to about a third of the grant, at best (at least for me). Some of it goes to graduate student support, and the rest to the black hole of university bureaucracy. And no, the grant did not affect my research productivity in any way.

  2. Very interesting look in the mirror! Especially the blink in the last passage--full of humility!

    1. Yes, Dr. Cochrane gave up many boats but still manages to more than the standard deduction to charity.

      We call that the 'humblebrag' where I'm from.

    2. And why shouldn't he brag? He's a role model to many and his admirable respect for taxpayer funds and generous contributions is worth sharing. It's always struck me as peculiar that bragging about scholastic achievement, intelligence, athleticism, new purchases, and so on are par for the course. But brag about sacrifice and charity and we somehow view your motives as less pure. Well maybe if we all bragged more about our charitable donations the actual, you know real, good would outweight our feelings of self-rightous impurity. (I got your back John).

    3. I assume Cochrane was talking about the tax deductibility of donations to the Hoover Institution.

  3. It could be worse. Those NSF grants to could instead be going to Arthur Daniel Midland.

  4. Thanks for a thoughtful piece. One question: you didn't address the authors' section "Dissemination of Economics Research." I'd very much like to hear your thoughts on this topic.

  5. Yes, NSF has strange funding models. Here in Australia the ARC doesn't pay extra salary except to "Laureate Fellows" (15 or so a year across all disciplines). Main use of ARC money apart from research costs/travel is to pay post-doc/PhD salaries. They will pay for teaching buyout too. There are also a lot of early career fellowships, which pay (most of) the annual salary for junior researchers. Also, in the US there are lots of calls for proposals on specific topics while in Aus the ARC only really asks for ideas from researchers.

  6. "I still benefit from many government subsidies, not least of which the tax-deductibility of charitable contributions."

    I know this was not the main point of the post, but why do you say that you benefit from tax-deductibility of charitable contributions? Suppose you perform $100 worth of labor for your employer but, rather than receiving $100 worth of consumption, that consumption gets redirected to a charity's beneficiaries. The $100 still appears on your W-2 as taxable income, so the $100 tax deduction merely offsets that. Net result is that you aren't taxed on the $100 that you didn't receive anyways. You have not received any sort of tax "break". The charity's beneficiaries received a tax break ($100 of untaxed consumption), but that is the same tax break that derives from the charity's tax-exempt status.

    The situation is no different from one in which you do volunteer work for the charity and also pay no income tax on the "fair value" of your unpaid labor, which you never received. (Nor does the charity pay tax for benefiting from such unpaid labor, again due to its tax-exempt status.) A cash donation results from doing the "volunteer work" at your regular employer and donating the proceeds, which probably is more economically efficient than doing the volunteer work at the charity due to gains from specialization.

    I suppose one could argue that charities should not be tax exempt, but it seems to be a myth that the charitable tax deduction is a tax break for the donor. It seems especially erroneous to claim that the larger the donor's tax rate, the larger the tax break. The size of the tax break depends on the *charitable recipient's* tax rate, not the donor's, and if the charity's beneficiaries happen to be poor (admittedly not always the case), then the beneficiaries' tax rates are probably close to zero anyways.

    1. I just didn't want to seem like I'm claiming some sort of great purity. My employer, the Hoover Institution, is supported entirely by private, tax deductible contributions. I cash their checks. I also take any tax deductions offered, including those I disagree with as a matter of policy.


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