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Eroding Our Foundation: Sequestration, R&D, Innovation and U.S. Economic Growth

September 20, 2012

The Budget Control Act would be a hard hit to vital U.S. industries, competitiveness, and economic recovery.

Because of the Budget Control Act, budget enforcement procedures known as sequestration will commence January, 2013 unless Congress and the Obama Administration act otherwise. The sequester requires cuts in discretionary spending to achieve $1.2 trillion in savings from 2013- 2021. When compared to 2011 spending levels, this will lead to a cut of 8.8 percent (or $12.5 billion) of federally-funded research and development (R&D) in 2013. Because of the key role federal R&D plays in driving U.S. innovation, productivity, and economic growth; we estimate that the projected decline in R&D will reduce GDP by between $203 billion and $860 billion over the nine year period, depending on the baseline used. At $203 billion, the loss is equivalent to taking away from U.S. consumers all the new motor vehicles purchase over six months, over two years of airline travel, or six years of attendance at professional sporting events.

These R&D cuts will also result in job losses of approximately 200,000 in 2013. 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 of a deficit control policy.

The report first explains how sequestration will impact R&D expenditures and the U.S. innovation system. Next, the report presents the conceptual model and previous research explaining how R&D funding impacts the economy at large. Subsequently, based on the latest academic research, we estimate the effects of the R&D expenditure cuts on: productivity and GDP, the knowledge base (patents and publications), the U.S. standings in the global innovation system, and finally employment. 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.

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