Fig. 4 shows that movements in the total over time have been driven by cycles in real federal funding combined with a rapid buildup in industry spending between 1975 and 1991. Real federal spending peaked at about $60 billion (in 1994 dollars) in 1967, fell to about $47 in 1975, rose to about $73 in 1987, and then fell back to about $61 billion in 1995. Hence, federal spending today is essentially the same as in 1967. (We will see below that the composition of this spending is different today than it was in 1967.) Industry funding increased steadily to about $36 billion in 1968, was essentially flat until 1975, and then increased dramatically, surpassing federal funding for the first time in 1981, increasing to about $80 billion in 1985–1986, and then increasing again to about $100 billion in 1991, where it has leveled off. One of the most interesting questions in the economics of R&D is exactly why industry went on an R&D spending “spree” (2) between 1975 and 1990, and whether or not the economy has yet or will ever enjoy the benefits thereof.
[For an analysis of the effects of this large increase in spending on the private returns to R&D, see Hall (3).]
With respect to economic growth, the most important effect of R&D is that it generates “spillovers,” i.e., economic benefits not captured by the party that funds or undertakes the research. Although there is relatively little concrete evidence regarding the relative potency of different forms of R&D in generating spillovers, theory suggests that the nature of the research and the research organization are likely to affect the extent of spillovers. Specifically, basic research, whose output is inherently intangible, unpredictable, and therefore difficult for the researcher to appropriate, and research performed at universities and federal labs, governed by social and cultural norms of wide dissemination of results, are likely to generate large spillovers. In my paper with Manuel Trajtenberg for this Colloquium (4), we provide evidence that universities and federal labs are, in fact, quite different on this score, with universities apparently creating more spillovers per unit of research output. In this section, I examine trends in basic research and in academic and federal lab research.
Figs. 5 and 6 are analogous to Figs. 3 and 4, but they refer to that portion of total R&D considered basic by NSF. They show a very rapid buildup in basic research in the Sputnik era of 1958 to 1968, mostly funded by the federal government. Like total federal R&D spending, federal basic research funding peaked in 1968 and declined through the mid-1970s. It then