Optimal Public Investment in Education, Health, and R&D: A Unified Framework for Innovation-Driven Growth

What policies can foster sustained long-run economic growth? To answer this question, we develop a tractable and unified framework that integrates five strands of research on: (i) the effects of public basic research and private profit-driven applied research on economic growth, (ii) the relationship between health and economic growth, (iii) the education-fertility trade-off and its effect on human capital accumulation, (iv) longevity-induced innovation, and (v) the optimal design of tax and subsidy policies to maximize welfare. We analytically characterize the long-run balanced growth path and employ numerical methods to analyze the transitional dynamics and to compute optimal tax and subsidy schemes. Our findings show that (i) government subsidies for education and health are particularly effective in promoting economic growth and welfare; (ii) current public spending on education, health, basic research, and applied research is typically suboptimal as it falls short of the welfare-maximizing levels; and (iii) endogenizing longevity dampens the growth effects of government subsidies.