More and more economists accept the once-heretical notion that technological innovation is the essential ingredient in long-term prosperity. The economic success of a country seems to depend less on how much it saves, and more on how well it develops new ideas and turns them into real products. Indeed, studies show that the average return to society on investment in research and development can top 50% a year.

Yet in an era of tight budgets, it's unlikely that the federal nondefense research spending will be boosted very much more. Instead, Uncle Sam has to rethink the way it supports R&D. First, make better use of existing federal R&D dollars. For example: Ruthlessly trim some of the 700 federal labs (their total budget is more than $10 billion) whose research is no longer top-notch or relevant in the post-cold-war world. And refrain from trying to spread the wealth, as when the National Institutes of Health was asked to set up too many stroke-research centers at university neurology departments across the country.

Second, government agencies should do more to encourage companies to forge research alliances with universities and other businesses. Despite antitrust issues, such linkups will let companies fund more research than they could individually. Third, government agencies today tend to be risk-averse, sponsoring safe and well-understood research. But these projects are precisely the ones private companies could fund if they wanted. Instead, the government should focus its money on long-term, innovative research with high risks and high payoffs. This is where government can make a difference.

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