Upping the ante on the R&D tax credit - and an alternative

In a piece in yesterday's Financial Times (The free market is not up to the job of creating work), Mort Zuckerman includes but goes beyond one of the standard suggestions: more spending on infrastructure. His call for a $65 billion National Infrastructure Bank echoes many others' push for greater public spending to create jobs. What is especially interesting about Zuckerman's piece is that he also calls for a 100% research and development tax credit. In other words, the government should subsidize all private sector R&D.

The justification for these proposals is a concern over the type of jobs being created:

If there is any growth in jobs, it will come mostly from healthcare, education, restaurants and hospitality services. Healthcare alone made up all the net jobs created in the last decade. Such service jobs cannot, however, support growth and innovation.

and over the macroeconomic effect of not creating jobs:

Since spending depends on employment it is critical to determine whether the labour market will remain weak. Given the level of household debt, the drop of confidence, the decline in the value of homes and the tightness of credit, it is hard to see how consumer spending will rise enough to improve economic prospects beyond a weak recovery - which creates few new jobs.

I agree with the concern - but am not sure of the remedy. First of all, not all innovation comes from R&D. Second, while I support a permanent R&D tax credit, 100% is bad policy. It completely removes any market-based reality from the decision process. Third, if the concern is demand creation, it is not clear that more R&D will have an immediate increase in demand. Investments in the R&D infrastructure have a greater immediate impact - which was why it was included in the stimulus bill. Increasing R&D is important for long term growth - but not short term demand.

Let me suggest an alternative. As I've argued before, we need a knowledge tax credit that includes worker training and education. So rather than a 100% R&D tax credit, let us use those funds for a 100% worker training and education tax credit. This would have the dual effect: It would increase our human capital -- a major input to the innovation ecosystem. And it would immediately increase consumer demand as companies would use the funds to pay workers to take classes (thereby creating more employments slots for others to fill the working hours of those in the classes).

As I have said over and over again, rather than pay workers to stand in unemployment lines, let's pay them to sit in a classroom.