2004 SAES – ARD Workshop2004 SAES – ARD Workshop Oklahoma City Oklahoma City

Sept. 28, 2004Sept. 28, 2004

Implications and Use of the Counterfactual Implications and Use of the Counterfactual Study: Study:

Results and ConclusionsResults and Conclusions

By By

Wallace E. HuffmanWallace E. HuffmanC.F. Curtiss Distinguished Professor of Agriculture and C.F. Curtiss Distinguished Professor of Agriculture and

Professor of EconomicsProfessor of EconomicsIowa State UniversityIowa State University

I. IntroductionI. Introduction

Preliminary report was given in Baltimore (2002) Preliminary report was given in Baltimore (2002) using using

data for 1970-95 data for 1970-95

Today: Today:

Document recent changes in the SAES funding Document recent changes in the SAES funding situation situation

Give new guidance from public financeGive new guidance from public finance

Review updated results and conclusions Review updated results and conclusions

Demand for experiment station resourcesDemand for experiment station resources

Impacts of public agr research stocks and Impacts of public agr research stocks and composition of resources on state composition of resources on state

TFP growthTFP growth

II. Recent Changes in the SAES Funding Situation

A. Expenditure Record—Table 1. Obligations (CRIS)

Categories Change (2000 dol.)

1980 – 2000

Total budget +$336.1 mil CSREES - 28.9 mil Hatch, Regional and non-grant - 98.0 mil Competitive Grants + 44.7 mil Special Grants + 24.4 mil Other Federal Grants

and Contracts + 338.8 mil Private Contracts + 166.8 mil

Change (2000 dol.)

1990 – 2000 State Gov. Approp. - $ 79.0 mil

Change (2000 dol.) 2000 – 2003

+$61.7 mil + 50.0 mil

- 1.3 mil +44.5 mil +14.8 mil

+119.0 mil + 4.1 mil

-$115.6 mil

Table 2. Distribution of Major Sources of Revenues of U.S. State Agricultural Experiment Stations, 1980-2003._________________________________________________________________________________

DistributionSources (%) _________________________________

1980 1990 2000 2003_________________________________________________________________________________Regular federal appropriations 17.0 14.0 13.1 15.3

Hatch, regional research, and other non-grant funds [15.8] [10.3] [9.0] [8.7]CSRS/CSREES special grants [1.2] [2.5] [2.1] [2.7]Competitive grants, including NRI -- [1.2] [2.0] [3.9]

Other federal government research funds 11.4 12.1 16.2 20.9Contracts, grants, and cooperative agreements [3.0] [3.1] [3.4] [4.2] with USDA agenciesContracts, grants and cooperative agreements [8.4] [9.0] [12.8] [16.7] with non-USDA federal agencies

State government appropriations 55.5 55.0 50.1 43.7

Industry, commodity groups, foundations 9.2 13.2 15.3 15.1Other funds (product sales) 6.9 5.7 5.3 5.0

Grand total 100.0 100.0 100.0 100.0_________________________________________________________________________________Source: U.S. Dept. Agr. 1982, 1991, 2001, 2004.

III. CSREES AppropriationsIII. CSREES Appropriations

A. Competing InstitutionsA. Competing InstitutionsSAESSAES

1890 Institutions1890 Institutions Forestry SchoolsForestry Schools

Veterinary CollegesVeterinary Colleges OthersOthers

B. Appropriation Record Change (2000 dol.)B. Appropriation Record Change (2000 dol.) 2000 - 20032000 - 2003 Formula programs Formula programs -$23.1 mil -$23.1 mil (+(+

$2.9 mil)$2.9 mil) Competitive Grants + 39.2 mil Competitive Grants + 39.2 mil

(+46.7 mil)(+46.7 mil) Special Grants + 28.8 mil Special Grants + 28.8 mil

(+52.9 mil)(+52.9 mil) Source: CSREES, “Research and Education Activities: Appropriation History”Source: CSREES, “Research and Education Activities: Appropriation History”

C. SAES gets all of the Hatch Act federal formula funds butC. SAES gets all of the Hatch Act federal formula funds but not all of the other CSRRES appropriated funds not all of the other CSRRES appropriated funds

IV. Guidance from Public FinanceIV. Guidance from Public FinanceA. Agr research in public sector produces discoveries, which are aA. Agr research in public sector produces discoveries, which are a

type of public good—“ideas” are not used up by the R&D type of public good—“ideas” are not used up by the R&D processprocess

B. Principle of Fiscal Equivalence: A theory of matching the B. Principle of Fiscal Equivalence: A theory of matching the jurisdictional authority with the geographic range of benefitsjurisdictional authority with the geographic range of benefits

If nutrition research benefits all citizens, than federal If nutrition research benefits all citizens, than federal government should channel resources to this government should channel resources to this

researchresearch If a pest affects crops in the Midwest, than an organization of If a pest affects crops in the Midwest, than an organization of

the the Midwestern states should channel resources to this Midwestern states should channel resources to this researchresearch

If soils of a particular state affect crops uniquely, then thisIf soils of a particular state affect crops uniquely, then this state’s government should channels resources to researchstate’s government should channels resources to research

Therefore:Therefore:

A system of possibly overlapping jurisdictions for agr A system of possibly overlapping jurisdictions for agr research research provision would be more efficient that the current provision would be more efficient that the current federal/state federal/state system system

C. Model of State Demand for Agr Research, an Impure Public GoodC. Model of State Demand for Agr Research, an Impure Public Good

1. Conceptual Framework1. Conceptual Framework

Each input of research resources produces a different mix of Each input of research resources produces a different mix of public and public and private goods at state level private goods at state level

Plus in-kind transfers from other states of the public good and Plus in-kind transfers from other states of the public good and fromfrom local private agr research of the private good local private agr research of the private good

State autocrat maximizes utility from the public and private State autocrat maximizes utility from the public and private goods goods produced from research subject to budget constraint produced from research subject to budget constraint

Complete demand system for four research types: Complete demand system for four research types: (1) federal grant and contract funds, (1) federal grant and contract funds, (2) federal formula funds, (2) federal formula funds, (3) state funds, and (3) state funds, and (4) private contract and grant funds (4) private contract and grant funds with spillin public agr research from other states and local with spillin public agr research from other states and local

private agr private agr research research

2. Empirical results: share equations fitted to panel of 48 states, 1970-19992. Empirical results: share equations fitted to panel of 48 states, 1970-1999

An increase in real SAES budget increases the share for federal and An increase in real SAES budget increases the share for federal and private grants and contracts, unchanged share for state resources, private grants and contracts, unchanged share for state resources,

and and decline in share for federal formula resourcesdecline in share for federal formula resources

If land grant university increases its NRC ranking of graduate faculty in If land grant university increases its NRC ranking of graduate faculty in basic basic sciences OR SAES capacity for basic biological science research, this sciences OR SAES capacity for basic biological science research, this

increases the demand for federal grants and contractsincreases the demand for federal grants and contracts

Demand for state resources is increased by a higher Gourman ranking of Demand for state resources is increased by a higher Gourman ranking of gradate faculty in agricultural sciencesgradate faculty in agricultural sciences

Spillins of interstate public agr research and of local private agr research Spillins of interstate public agr research and of local private agr research substitute for federal formula resourcessubstitute for federal formula resources

When a state has a larger share of its population on farms, it increases When a state has a larger share of its population on farms, it increases the the demand for state resources and federal formula research resources— demand for state resources and federal formula research resources—

implying they serve farmers’ interests wellimplying they serve farmers’ interests well

Implied Income elasticity of demand for agr research resources:Implied Income elasticity of demand for agr research resources: federal grants and contracts and private contracts and grants (federal grants and contracts and private contracts and grants (~~1.5),1.5), state funds (state funds (~1.0), and federal formula funds (~0.5)~1.0), and federal formula funds (~0.5)

V. Impacts of Public Agricultural Research on State Agr TFP GrowthV. Impacts of Public Agricultural Research on State Agr TFP Growth

A. The Record of U.S. Agr Technical Change and TFP Growth has been A. The Record of U.S. Agr Technical Change and TFP Growth has been ExceptionalExceptional

1. Dramatic long term change in farm level technology1. Dramatic long term change in farm level technology

2. Figure 1. U.S. Farm Sector TFP, 1950-992. Figure 1. U.S. Farm Sector TFP, 1950-99

90

110

130

150

170

190

210

230

250

270

1940 1950 1960 1970 1980 1990 2000

Output

Input

Productivity

B. Statistical Decomposition Analysis of TFP at State B. Statistical Decomposition Analysis of TFP at State LevelLevel

Variables: Variables: Dependent variable: ln TFPDependent variable: ln TFPRegressors include:Regressors include: Stock of local public agr researchStock of local public agr research

Stock of spillin public agr researchStock of spillin public agr research Stock of local private agr researchStock of local private agr research

Stock of agricultural extensionStock of agricultural extension Composition of SAES fundingComposition of SAES funding — —share of SAES funds from federal grants share of SAES funds from federal grants

and of and of programmatic funds programmatic funds (federal formula and (federal formula and state funds) state funds) interacted with stock of local public interacted with stock of local public agr agr researchresearch

Model fitted to panel of 48 states, 1970 - 1999Model fitted to panel of 48 states, 1970 - 1999

Results:Results:

Stock of public agr research—within state and spillin--have Stock of public agr research—within state and spillin--have significant significant positive impact on TFPpositive impact on TFP

At sample mean of data, the implied internal rate of return At sample mean of data, the implied internal rate of return on publicon public

fund investment is agr research is about 50 % (inflation fund investment is agr research is about 50 % (inflation adjusted)adjusted)

Composition of SAES research resources significantly affects impact Composition of SAES research resources significantly affects impact of of public agr research stock on TFP public agr research stock on TFP

Marginal transfer of federal formula funds to federal Marginal transfer of federal formula funds to federal competitive competitive grant funds would lower state agricultural grant funds would lower state agricultural TFPTFP

Simulated likely long-run outcome of a non-marginal 10 Simulated likely long-run outcome of a non-marginal 10 percentage percentage point reallocation of federal formula to point reallocation of federal formula to SAES competitive grant SAES competitive grant funding on the percentage funding on the percentage change in state agr TFPchange in state agr TFP

TX

CA

MT

AZ

ID

NV

NM

CO

OR

ILUT

KS

WYIANE

SDMN

FL

ND

OK

MO

WI

AL

WA

GA

MI

AR

LA

NY

IN

PA

NCTN

VAKY

OH

ME

SC

NH

MD

NJ

RI

MS

MACT

VT

NJ

WVDE

Change in Farm Factor ProductivityIncreaseSmall DecreaseLarge Decrease

Figure 2. Simulated Impact of Science Policy Change onPercentage Change in Farm Total Factor Productivity

VI. ConclusionsThe funding environment for the state agricultural experiment station

system has changed recently -More funds have become available through CSREES with Hatch Act funds, the SAES system obtains (or bears) all of

any change with an increases in competitive grant funds (e.g., NRI), the

SAES system obtains a fraction significantly less than one

-Fewer funds are now available from state governmentsFederal formula and state agr research funds are demanded by farmersFederal formula and state government funding of public agr research have relatively large impacts on agr TFP at the margin

- About a 50 % real rate of return on investment - A long-run reallocation of formula to competitive grant funds

would reduce TFP growth in almost all states and by more than 4 percent in 60 % of the states

Strong arguments can be made for traditional federal sources of SAES funding

The principle of fiscal equivalence can be used to rationalize federal support for public agricultural research and as a tool to create new jurisdictional authorities for channeling resources to agr research