Update on Automatic Budget Cuts to Federal R&D
Two reports describing significant damage that automatic cuts in federal spending would have on research and development have been released. A new letter to President Obama and congressional leaders urges agreement on a plan to avoid budget sequestration and to achieve “significant long-term deficit reduction.” Meanwhile, the Office of Management and Budget has instructed federal departments and agencies to “continue normal spending and operations” as uncertain efforts to prevent these cuts continue on Capitol Hill.
As discussed in FYI #121 , legislation was enacted last year requiring automatic cuts to almost all of this year’s discretionary program budgets if an agreement was not reached to reduce the federal deficit by $1.2 trillion between this fiscal year and 2021. No agreement was reached, setting in motion budget reductions of 8.2 percent (non-defense) and 9.4 percent (defense) to occur on January 2, 2013.
A recent action taken by the White House is the issuance of a September 28 Office of Management and Budget (OMB) bulletin to the heads of executive departments and establishments stating: “The Administration continues to urge Congress to pass a balanced package of deficit reduction that would replace the potential sequestration on January 2, 2013 . . . . If necessary, the Bulletin will be amended to address that sequestration. Unless and until the Bulletin is amended, however, agencies should continue normal spending and operations. . . . ”
This bulletin came two weeks after a legislatively-mandated OMB report (http://www.aip.org/fyi/2012/121.html ) that provided little detail about the impact of sequestration on department and agency’s budgets. Since then, two reports have been released providing greater insight on the impact of these reductions to R&D. On September 20, the Information Technology and Innovation Foundation (ITIF) issued a 34-page report entitled “Eroding our Foundation: Sequestration, R&D, Innovation and U.S. Economic Growth.” The foundation was established in 2006, and describes itself as “a non-partisan research and educational institute – a think tank – whose mission is to formulate and promote public policies to advance technological innovation and productivity internationally, in Washington, and in the states.”
The report, written by Justin Hicks and Robert Atkinson, characterizes the impacts of sequestration on R&D from a number of perspectives. ITIF predicts federally funded R&D will be reduced by 8.8 percent or $12.5 billion in this fiscal year (2013) as compared to FY 2011. This would be only the first year of such reductions; cuts of this magnitude would occur every year through 2021. In all, one ITIF calculation estimates a reduction of $95 billion in federal R&D would be made if sequestration is allowed to run its full course.
The foundation estimates the ripple effect of this reduction in research would result in a decline in the Gross Domestic Product of between $203 billion and $860 billion (depending on the baseline used) over nine years. The employment impacts are significant, ITIF stating “We estimate that sequestration of R&D would result in the U.S. economy having approximately 200,000 fewer jobs per year between 2013 and 2016. This would result in the U.S. unemployment rate being 0.2 percentage points higher than it otherwise would be.” Of note, the report explains: “We estimate that sequestration would result in U.S. scientific journal publications declining almost 8 percent and patents near 3 percent over the 9 year period, when compared to the Congressional Budget Office (CBO) baseline.”
ITIF concludes:
“Reducing the budget deficit is important, but it should not and does not have to come at the expense of growth-inducing investments in areas like federal support for R&D. In fact, undermining growth capability is disruptive to deficit control policy. While ensuring that the federal budget crisis comes under control is critical, everything should not be ‘on the table’ when doing this. Cutting federal support R&D, a key ‘fuel’ for the U.S. innovation economy engine, would not only lead to a relatively smaller U.S. economy and higher unemployment, it would reduce U.S. global competitiveness precisely at a time when the U.S. economy is struggling to stay in the race for global innovation advantage.”
The impact of these reductions over five years would be dramatic. The report explains that defense R&D “would be roughly equivalent to FY 2002 levels.” Regarding the National Science Foundation, NASA, the Department of Energy, the National Institutes of Health, and the Department of Agriculture, the report states “the budgets for many agencies would be at their lowest point in a decade or more.”
The AAAS report does not predict the impact of these reductions, explaining:
“while it is tempting to estimate additional impacts on university grants awarded, researchers employed, patents generated, or other such effects, there is significant uncertainty in such estimation, since the agencies will likely have a fair level of discretion in how they may adapt to specific funding reductions over time.”
“In some instances, the number of grants may be reduced proportionally. In others, agencies may choose to modify grant terms to reduce the value of individual grants but keep the number of awards higher than it would be otherwise, as NIH has done recently. Agencies may also reduce or terminate select programs, capital projects, or overhead, and each of these choices may have diverse effects on researchers or contractors depending on the nature of the project. As such, this level of prognostication is best left to others – especially the agencies themselves or OMB. In many ways, we won’t really know what the agencies will do until they do it, or at least make known their plans. What we do know, in any event, is that agencies will undoubtedly have less to spend on R&D – in some instances, much less.”
AAAS concludes:
“As regular appropriations for R&D funding have either remained flat or declined for most of the past decade, federal R&D as a share of the economy has also declined – partly because the economy has simply grown faster, but more recently due to the decline of actual dollars. As a share of the economy, federal R&D is 16.7 percent smaller than it was a decade ago, and 29.7 percent smaller than it was in the 1970s. Massive growth of the NIH budget in the late 1990s and early 2000s helped to slow this decline. At the same time, private sector R&D has grown significantly, in large part supplanting public R&D.
“In one sense, we should consider private-sector R&D growth a good thing: an innovative economy requires the dynamic creation and application of knowledge, and R&D investment is one of the primary contributors to that function, wherever it may originate. As such, private R&D is a vital component of the national innovation ecosystem. But at the same time, it is important to remember that three-quarters of private R&D is focused on latter-stage product development oriented towards nearer-term rewards, whereas public R&D – especially nondefense R&D – is far more focused on basic and applied research, which necessarily requires longer-term investments and higher tolerance for risk and uncertainty, and a willingness to accept knowledge spillovers.”
“Federal funding is a central lifeline for fundamental research at the cutting edge of every key knowledge area. Reduced public R&D means fewer investments in the pursuit of fundamental knowledge and ways to apply it. Such a move would run counter to the advice of major experts and bodies as diverse as the National Academies and the Bowles-Simpson deficit reduction commission.
“Further, such declines in public research spending would come at a time in which other nations are looking to ramp up their own investments in innovation. A common measure for comparing International competitiveness is research intensity, or research investment as a percentage of GDP. In recent years, Asian tigers like South Korea, Taiwan, and China, along with select European economies like Sweden and Finland, have managed to increase their research intensities substantially – and at a far faster pace than the United States, albeit from a less research intensive base. In 2010, as part of the Europe 2020 strategy, the EU set a goal of attaining an EU-wide R&D intensity of 3 percent by 2020; President Obama has set the same target in the U.S. As of 2009, U.S. R&D intensity stood at 2.9 percent. Enacting near-term reductions of 8.4 percent does not have quite the same impact on total R&D intensity as it once did, given the rise in industrial R&D, but public R&D remains a quarter of the national total, and such cuts would undoubtedly set the nation against the trends seen elsewhere.”
“The Task Force on American Innovation, representing a broad and diverse cross section of companies, universities, and professional societies, is deeply concerned about the impact of the upcoming budget sequestration on federally funded basic scientific research, both defense and nondefense. We strongly urge you to reach an agreement on measures that not only enable you to prevent the sequestration from occurring but also achieve significant long-term deficit reduction.
“Long-term deficit reduction, with the resulting stabilization of the national debt, is essential to our nation’s economic security. The current trajectory of deficits and debt is unsustainable.
“We know that it is easier to state the problem than it is to solve it. However, as you consider potential measures for reducing deficits, we urge you to keep our nation on an innovation path that makes it possible for our economy to grow and our citizens to prosper. Ultimately, the point of fiscal responsibility is to provide a better life for all Americans, especially future generations. And while reducing deficits is necessary for achieving long-term prosperity, it is equally necessary that we continue to prioritize spending on science and technology. For more than half a century, breakthrough scientific and engineering research has provided the foundation for innovation and economic growth.
“We believe that all parts of the federal budget should be on the table for deficit reduction. Thus far, however, nearly all deficit reduction measures have focused on discretionary spending, which is where both defense and nondefense research funding is based.
“Research drives innovation, productivity, job creation, and economic growth. Technological advances such as the laser, the Internet and the Web, GPS, and the large-scale integrated circuit all had their origins in long-term research. These advances were the consequence of federal policies that directly funded long-term research, provided incentives for private investment in technology development, and stressed the importance of science and engineering education. Indeed, economic analyses generally attribute more than half of all economic growth in the United States since the end of World War II to technological advances.
“Today, however, a good part of the world is catching up with our scientific competence, and in some areas has surpassed it. Nations such as China and India are pouring resources into developing their research capacities and their human capital in STEM (science, technology, engineering, and mathematics) fields, helping them over the long term to challenge our economic as well as our military leadership. If we do not continue to advance our research capacity as well as remedy our nation’s deficiencies in STEM education, we run the risk of falling behind our competitors.
“We urge you to take actions that prevent the upcoming budget sequestration and enable this generation to leave future generations a legacy not of excessive debt and limited prospects but of renewed technological leadership and economic opportunity.”
There are conflicting reports about movement on Capitol Hill to avoid the sequester. Reports indicate that eight Republican and Democratic senators who have been quietly meeting in the last few months plan to meet next week. There is much speculation whether any agreement can be struck that would form the basis for legislation that would be enacted by Congress and signed by the President before January 2, 2013. More likely would be agreement to delay the implementation date into a later part of next year to allow Congress to find a solution to what has been an exceedingly difficult problem.
