Sequestration’s Effect on Federal R&D Will Reduce GDP by Hundreds of Billions

WASHINGTON (September 20, 2012) - If Congress and the Obama Administration cannot agree on a long-term debt reduction plan later this year, across-the-board spending cuts required by law will hit R&D especially hard, resulting in GDP being at least $203 billion smaller in 2021 than it otherwise would be; according to Eroding Our Foundation: Sequestration, R&D, Innovation and U.S. Economic Growth, a report released today by the Information Technology and Innovation Foundation. This is equivalent to taking away from U.S. consumers all the new motor vehicles purchased over six months, over two years of airline travel, or six years of attendance at professional sporting events.

Beginning in January 2013, the Budget Control Act requires automatic cuts in discretionary spending - known as sequestration - in order to achieve $1.2 trillion in savings by 2021. The sequester will result in a cut of $12.5 billion to federally funded R&D in 2013, with further cuts accumulating to $95 billion when compared to 2011 funding levels through 2021. More significantly, because of the role that federally funded R&D plays in boosting U.S. economic growth, these cuts will negatively affect the ability of the economy to grow and create jobs.

Because over a third of R&D and over 60 percent of basic R&D are funded through federal sources, the impact on the economy and industry will be significant. The impact will be felt across life-sciences, IT, defense and broader manufacturing. For example, over $80 billion in economic output per year would not exist in the IT sector alone if it were not for the initial discoveries made through public R&D, according to the report. "In the past, federally funded research provided the core technologies that enabled the creation of many of today's top companies including Cisco, Genentech, and Google, among many others," said ITIF Senior Economist Justin Hicks.

The report compares the sequestered levels of R&D to three benchmarks: 1) R&D expenditures at constant 2011 nominal levels through 2021; 2) R&D's share of GDP remaining constant; and 3) R&D's share of GDP increasing at the same rate as China's, a rate at which many believe the United States needs to invest in order to remain competitive. The report finds that under each scenario, cuts in R&D from sequestration will lead to lower productivity, GDP, international competitiveness, employment, and the knowledge base (trademarks and patents).

Compared to a scenario where R&D grows at the rate of GDP, cumulative GDP losses will be $565 billion. When compared to the "grow as fast as Chinese R&D" scenario, R&D sequestration leads to cumulative losses exceeding $860 billion. The impact on employment is also significant, with estimated job losses around 200,000 in 2013 using the first baseline scenario. In addition, U.S. scientific journal publications would decline by almost 8 percent and patents 3 percent over the decade-long period. These estimated effects are a result of the impacts of R&D on long-run economic growth, not due to simple cuts in government funding.

"A half century ago, the U.S. government alone invested more in science and R&D than the rest of the world combined," said ITIF President Rob Atkinson. "We now trail behind many another nations in R&D intensity. The sequester would exacerbate this self-defeating trend and slow U.S. economic recovery and long-term growth."

Read the report and executive summary.