US university science: The shopping mall model

Paula Stephan, 20 March 2014

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Universities have relied heavily on federal funds for research for many years. Yet, since 2005, federal funds have been flat in real terms, with the exception of funds received through the American Recovery and Reinvestment Act (ARRA). More importantly, the hope for a substantial increase in federal funds is dim. At the same time, public research institutions such as the University of California Berkeley, the University of Michigan, and the University of Wisconsin, face the added challenge that funds from state governments for higher education have been flat or have declined in recent years and are likely to remain low.

The economic rationale for governments to invest in university research was laid out more than 60 years ago by Kenneth Arrow (1962) and Richard Nelson (1959). It rests on the understanding that knowledge has properties of what economists call a public good in the sense that once research findings are made public it is difficult to exclude others from their use, and that research findings are not depleted when shared. Economists have gone to considerable lengths to show that, if left to the private sector, society would underinvest in public goods. An additional rationale is that research, especially basic research, is inherently risky and society has a tendency to underinvest in risky research without government support (Arrow 1962). Last but not least is the role that research plays in economic growth (Romer 1990).

Governments in the US have not always played a major role in supporting university research. Nor was much spent on university research historically. Indeed, prior to World War II, less than 1% of what is spent today was spent on university R&D (in real terms). The funds that were spent came almost exclusively from private foundations, donations and endowments. That was to change with the implementation of the vision spelled out by Vannevar Bush in Science: The Endless Frontier. Bush, who was President Roosevelt’s Science Advisor and Director of the Office of Scientific Research and Development during World War II, understood that the significant contributions made by research to the successful war effort meant the time was ripe to push for federal funding for scientific research. In 1945, at President Roosevelt’s request, he wrote the report laying out a federal course of action. The report recommended that the government fund basic research at universities and medical schools because these “institutions provide the environment which is most conducive to the creation of new scientific knowledge and least under pressure for immediate, tangible results.” (Bush 1945, p. 7). It also recommended that the government provide scholarships and fellowships to promote training. Both, Bush argued, were essential for economic growth and both addressed the concern that due in part to the War the US faced a scientific deficit in terms of basic research and the highly trained individuals required to conduct the research.

In recent work I examine how The Endless Frontier changed the research landscape at universities, the response of universities to the initiative, and subsequent stresses that have emerged (Stephan 2013). To cut to the chase: The Endless Frontier set about to grow research capacity at universities and increase the supply of individuals qualified to do research. The agencies that it established or greatly enhanced (NSF and NIH) supported faculty research in the form of funds for equipment, supplies and faculty summer salary. Occasionally, they paid for research assistants and postdoctoral trainees, although, as Bush intended, they originally focused their efforts on supporting training through scholarships and fellowships. The indirect rate was as low 8% at NIH; at NSF, which did not open for business until 1952, the rate was initially set at 15%. In the beginning, these agencies were in missionary mode, encouraging individuals to submit proposals and students to apply for fellowships. “It wasn’t anything to travel 200,000 miles a year” to accomplish this goal, to quote one NIH officer circa 1950 (Strickland 1989).

Universities were extremely responsive to the capacity-building initiatives of NSF and NIH, increasing the number of PhDs they trained and the number of grants they submitted. By the 1960s the tables had begun to turn and universities, having tasted federal fruit, aggressively began to push the government for more funds to cover academic-year salaries on grants and raise the allowable indirect. They also began to push faculty to bring in more grants. Training became less about building future research capacity and more about getting the research done today by hiring graduate students and postdocs off grants to work in labs.

Universities of today are a far cry from those of the 1940s, having been transformed from a focus on educating students and taking care of patients, to placing a high—if not the highest—value on research. In many ways universities in the US have come to resemble high-end shopping malls. They are in the business of building state-of-the art facilities and a reputation that attracts good students, good faculty, and resources (Stephan 2012). They turn around and lease the facilities to faculty in the form of indirect costs on grants and the buyout of salary. To help faculty establish their labs—their firm in the mall—universities provide start-up packages for newly hired faculty. External funding, which was once viewed as a luxury, has become a necessary condition for tenure and promotion.

The shopping mall model puts tremendous stress on universities, especially in a time of flat resources. Three are noted here and discussed further in my research. First, incentives have arguably led faculty, as well as the agencies that fund faculty, to be risk averse when it comes to research. Applications are often scored for “doability” (Alberts 2009). The pressure on faculty to receive funding quickly in their academic career—at the end of their third year at many universities—means that faculty can ill afford to follow a research agenda of an overly risky nature. This proclivity for risk aversion should be of concern to the university community and more importantly to society. Incremental research yields results, but in order to realize substantial gains not everyone can be doing incremental research. Moreover, recall that one of the main reasons for research being placed in the university sector was the view that society needed to undertake basic research of an unpredictable nature. When university research begins to be practiced in a way that closely resembles the practices of industry, much of the rationale for federal support vanishes.

Second, the shopping mall model has a tendency to produce more PhDs than the market for research positions demands. Incentives again play a major role. Faculty actively seek graduate students and postdocs to work in their labs, supporting them on grants. They need ‘worker bees’ to get the research done so they can compete for additional research funds. They resist providing placement data to students. Yet increasingly graduates cannot find research positions—either in academe, firms or government—that use their skills. Nowhere is the problem more acute than in the biomedical sciences and nowhere have faculty and universities been more deaf to calls for reform. Such a model for staffing labs is inefficient in the sense that substantial resources have been invested in training these scientists and engineers. The trained have foregone other careers—and the salary that they would have earned—along the way. The public has invested resources in tuition and stipends. If these ‘investments’ then enter careers that require less training, resources have been used inefficiently. Moreover, the practice discourages highly able students from choosing careers in science.

Third, the shopping mall model encourages universities to overbuild, especially in areas where funding is large and thought to be growing, such as the biomedical sciences. Net assignable square feet for research increased by 30% at universities between 2001 and 2011. Most of the increase is for facilities in the biological, biomedical and health sciences (see Figure). But funding for NIH shrank in real terms by about 4.4% between 2004 and 2009. It has continued to decline since, with the exception of ARRA funds. Success rates at NIH are at an all-time low. The only way that a university can hope to cover the costs of these buildings is to outcompete other institutions when it comes to bringing in grants. But, as Princeton’s former President Shirley Tilghman notes, “this just can’t be true for every academic medical center. It does not compute.” (Mervis 2013, p. 1399). It is not surprising that today universities find themselves with excess capacity.

Figure 1. Net Assignable Square Feet at Universities for Research by Field and Year

Source: National Science Foundation (2013).

A widely held belief among university faculty and administrators is that the contract between federal funds and universities has changed dramatically in the past sixty-five years. Yes, the contract did change. But a careful reading of the record suggests that the change was orchestrated more by universities than by the federal government. Many of the stresses that the system now faces are a result of these changes. We are reaping not so much what Bush sowed but what universities and faculty pressed to put in place in the 1950s and the 1960s in response to the Endless Frontier and the opportunities it offered.

References

Alberts, Bruce (2009), “On Incentives and Innovation”,  Science 320:155.

Arrow, Kenneth (1952), “Economic Welfare and the Allocation of Resources for Innovation,” in The Rate and Direction of Inventive Activity: Economic and Social Factors, pp. 609-26. National Bureau of Economic Research. New York: Arno Press, 1975 (repr. 1962).

Bush, Vannevar (1945),  Science the Endless Frontier, Washington, DC.

Mervis, Jeffrey (2013),  “How Long Can the US Stay on Top?” Science, 340, 1394-1399.

National Science Foundation (2013), Science and Engineering Research Facilities, Arlington, VA.

Nelson, Richard (1959),  “The Simple Economics of Basic Scientific Research”,  The Journal of Political Economy, 67:297-306.

Romer, Paul (1990),  “Endogenous Technological Change,” The Journal of Political Economy, 98:S71-S102.

Stephan, Paula (2013), “The Endless Frontier: Reaping What Bush Sowed?” NBER Working Paper 19687. Forthcoming in The Changing Frontier: Rethinking Science and Innovation Policy, edited by Adam Jaffe and Benjamin Jones, Chicago: University of Chicago Press.

Stephan, Paula (2012), How Economics Shapes Science, Cambridge: Harvard University Press.

Strickland, Stephen (1989), The Story of the NIH Grants Programs, New York: University Press of America.

Topics: Education, Productivity and Innovation
Tags: external funding, R&D, Universities

Professor of Economics at the Andrew Young School of Policy Studies, Georgia State University; Research Associate, NBER
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