When I saw House Speaker Jake Flake at a barbeque the other day, I asked him why he was supporting the Legislature's bid to spend $800 million on research labs at Arizona universities. He told me what any rancher knows: to get growth, you have to put a bull in the pen with the cows.
As Flake contends, Arizonans do need to invest in the future. But the relevant debate is about where that investment originates. In other words, which bull do we put in the pen? Should the investment be voluntary, with private companies and individual investors taking the risk and choosing where to put their money? Or should it be done as a collective, with taxpayers taking the risk and government calling the shots?
The answer is that we should put the most potent bull in the pen. Otherwise, the investment will accomplish little more than steering the state in the wrong direction. ASU President Michael Crow believes that government is the best and strongest of the available bulls. He argues that Arizona will reap $11 for every dollar spent on the project. When asked for the basis of that estimate, Dr. Crow's office responded with a memo claiming that returns to public investments in university research across the United States range from 7:1 to 50:1. The 7:1 figure is supposed to be the return on investment from public funds spent at the University of California at San Diego. But according to UCSD's 2001 annual report, the nationwide economic impact of $2.5 billion is the result of $347 million in state money and $1.6 billion worth of private investment. Calculated properly, the combined return for the project is less than 2:1, not 7:1. Also, the economic return from that spending is spread out nationwide, rather than contained within the economy of San Diego. The impossibility of forcing research investment returns to remain local should give Arizona legislators pause. As Rep. Flake might say, there's no fence to keep the calves in.
The 50:1 figure is the purported return on investment for total federal funds invested in university research. But the source for that astounding return is a 2000 letter from the Council of Scientific Society Presidents to then Senate Majority Leader Trent Lott. The letter thanks the senator for increasing federal support for scientific research and claims, "Your annual investment of $18 billion in university research produces nearly a trillion dollar annual return to the economy in the high growth industries." That unsubstantiated statement, from a fawning interest-group letter to a senator, is hardly a solid basis for an academic claim. Dr. Crow's summary claim, oft-repeated in the media, is that Arizona will get an 11:1 return on university research spending. That ratio is based on a report by the National Association of State Universities and Land Grant Colleges (NASULGC), of which ASU is a member. The report claims that for every tax dollar spent on ASU, seven dollars are put into the local economy. As a source, it cites a report by the ASU College of Business. Perhaps it would have been simpler if Dr. Crow had skipped the middle-man and simply cited his own university. To get the return up to 11:1 from 7:1, Crow claims to have used "reasonable expectations for accelerated success."
Even if university research labs are capable of generating a return, investing is a role better initiated and managed by the private sector. According to a study by the late University of Minnesota economist Willis Peterson, the annual marginal rate of return on publicly invested capital between 1980 and 1990 was seven percent. Seven percent is not a bad return-until it is compared to private capital investment during the same period, which produced an annual marginal rate of return of 22 percent. Now that's a potent bull! And with private investment, taxpayers aren't asked to pick up the risk.
Arizona's legislators should spur growth in all sectors of the economy by creating a low-tax, investment-friendly environment. While it may not be as glamorous or politically appealing as paying for shiny new labs, lowering taxes and creating a healthy business climate is the best way to lead Arizona into a bright economic future. In the meantime, the last thing legislators should do is bet the ranch on a bum steer.