Trump’s Cuts to Federal Science Funding Will Mean Less Industry R&D, Not More

Adams Nager March 17, 2017
March 17, 2017

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President Trump’s FY 2018 budget proposal includes the steepest cuts for federal research and development (R&D) investment in U.S. history, including slashing National Institute of Health (NIH) research by 20 percent and Department of Energy programs by 44 percent. These cuts are all the more troubling given that federal funding was already at alarmingly low levels even before this proposal. In 2016, federal R&D funding as a share of GDP was at its lowest since the Russians launched Sputnik in 1957, and in 2014 and 2015, it was 40 percent below what it was in the second half of the 1980s.

Central to the administration’s argument that such deep cuts to science funding won’t harm economic growth and U.S. innovation is the simple assertion that public R&D “crowds out” private R&D and that any federal funding cuts will automatically be offset by industry increases. The Heritage Foundation agrees. The conservative think tank’s budget proposal—which seems to have been influential in guiding the president’s FY 2018 budget—states: “By attempting to force government-developed technologies into the market, the government diminishes the role of the entrepreneur and crowds out private-sector investment.” Heritage Analyst Katie Tubb expanded on the rational in the Washington Post yesterday, stating “I would question why is it the role of the federal government to be funding science across the board. The private sector plays a huge role in supporting science.”

So voila! Less government spending, but not less R&D. If only it were true.

What is most surprising about these statements is that not only are they offered with no evidence, but that the scholarly evidence on the relationship between federal support for R&D and business R&D directly contradicts them. Rather than crowding out business R&D, federal investment “crowds in,” leading to more business R&D than would otherwise be the case. One reason for this is that industry is able to build on the knowledge and understanding of discoveries from publicly supported research, making its own research more productive and effective. These “spillovers” provide firms with a common platform of basic knowledge, and thus precipitate even greater levels of innovation. So we can expect that the results of the Trump budget, if it were enacted, would not only be lower levels of federal R&D, but also less private sector R&D, fewer good jobs, and declining U.S. competitiveness.

The evidence is extensive. As one paper that set out to review the academic literature on the effects of public R&D expenditure put it: “There are … a number of econometric studies that, while imperfect and undoubtedly subject to improvement and revision, between them make a quite convincing case for a high rate of return to public science in [the life-sciences] industry. It is worth noting that there are, so far as we are aware, no systematic quantitative studies that have found a negative impact of public science!” Another study found that for every additional dollar of publicly funded research added to the stock of government R&D, it induced an additional twenty-seven 27 cents of private R&D investment. An Organization for Economic Cooperation and Development study found that “direct government funding of R&D performed by firms (either grants or procurement) has a positive effect on business financed R&D (one dollar given to firms results in 1.70 dollars of research on average).” Most other studies of the issue find similar results, with the effect differing from around 10 cents to 30 cents of additional R&D for every one dollar of government funding for university or government laboratory research.

For the life-sciences industry, a dollar of NIH support for research leads to an even greater increase in private medical research, roughly 32 cents. Other studies have found even larger effects. A 2012 report by the Milken Institute found that every dollar of NIH funding boosted the size of the bioscience industry by $1.70 and that the long-term impact may be as high as $3.20 for every dollar spent. Similarly, a 2013 report by Battelle found that, looking solely at federal support for the Human Genome Project between 1988 and 2012, every dollar of federal funding helped generate an additional $65 dollars in genetics-related private activity.

As studies have found, a 1 percent increase in the R&D stock (public or private) produces a 0.23 percent to 0.61 percent increase in productivity, which leads to economic growth. So if the Trump administration really wants to boost GDP growth to 4 percent as it has promised, it will need to find a way to get industry to do more R&D. Cutting federal spending on science is a sure way to slow, not advance growth.