Stagnation despite ongoing innovation: Is R&D expenditure composition a missing link? An empirical analysis for the US (1948-2019)

Giovanna Ciaffi (Roma Tre University, Department of Economics), Matteo Deleidi (University of Bari “Aldo Moro”, Department of Political Sciences), Stefano Di Bucchianico (University of Salerno, Department of Economics and Statistics)

Abstract

Among the explanations for prolonged economic stagnation in advanced economies we find those that highlight the role of technical progress and its weakening impact on potential growth. Several contributions stress the apparent paradox of technological development and innovation going hand in hand with slowing labour productivity growth. This discourse is in turn linked to numerous factors, among which the pattern of research productivity, that appears to be falling in the last decades. The contribution of this article is to analyse the role of innovation expenditures composition, and its effects on productivity. We study whether productivity stagnation can be (partially) explained by the continuously falling ratio between public and private expenditures in innovation in the USA. We carry out an SVAR analysis of the US case during the period 1948Q1-2019Q4. In the empirical exercise we estimate the effect of public expenditure in innovation on productivity, private R&D, and GDP, comparing the outcomes with those relative to private expenditure in innovation. According to our results, the public type of innovation spending exhibits a positive effect on productivity and GDP, and it has a greater effect than private expenditure in innovation. In addition to this, public expenditure in innovation exerts a strong crowding-in effect on private investment in R&D. Therefore, according to the evidence we find, we maintain that the focus on the prolonged and sustained fall of public expenditure in innovation in relation to private expenditure of the same type helps in explaining lasting stagnation.

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