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Dwindling Federal Support for R&D Is a Recipe for Economic and Strategic Decline

Dwindling Federal Support for R&D Is a Recipe for Economic and Strategic Decline

December 14, 2018

The federal government invests approximately $121 billion per year funding research and development (R&D) in everything from agriculture to health, defense, energy, and a host of other areas. Unfortunately, as the figure below shows, federal support for R&D has experienced a long and steady decline as a share of GDP.

In 21 of the 27 years following 1990, federal R&D spending has made up a smaller share of GDP than the year before. It slid to just 0.62 percent of GDP in 2017, the lowest level since 1955, two years before the Soviets launched Sputnik. In other words, the U.S. government now invests less in R&D compared to the size of the economy than it has in more than 60 years. This has resulted in stagnant productivity growth, lagging competitiveness, and reduced innovation.

To understand just how far off the historical pace federal funding for research has fallen, the graph below shows how much 2017 R&D funding levels would need to increase in order to match past R&D-to-GDP ratios. For example, to match levels of the 1980s, last year’s funding would have needed to be about 80 percent higher.

Public expenditures in R&D are critical for increasing the total level of research being conducted, because R&D has spillover effects that firms cannot capture, which causes them to invest less than is societally optimal, and because government research incentivizes higher levels of private R&D. When companies invest in R&D to develop a product or a production process, they can almost never retain all the benefits of that research, even if they patent their discoveries. Competitors and others learn about the research and discoveries and can capitalize on them. In other cases, the benefits to society are much greater than the revenues firms are able to earn. These external benefits to producers or consumers are called spillovers. To maximize societal welfare, firms should continue to expand investments in R&D until the marginal total benefits (the benefits to the firms conducting research, to other firms, and to society at large) equal the cost of capital. But because firms rightly don’t take into account external benefits, they underinvest in R&D from a societal perspective.

Further, rather than crowding out private research, government R&D often “crowds in,” leading firms to invest more than they would otherwise when the government does the same. Unlike sectors where government action would undercut or drive out private firms, public investments in research make private investments more lucrative. Discoveries increase the public knowledge base, providing more lines of research that firms can turn into innovative products and allowing researchers to execute their own projects more efficiently. For example, the development of the Internet not only spawned countless commercial opportunities for businesses, it also allowed other research to be more productive by providing much greater access to academic databases and by facilitating greater collaboration.

Public R&D is also crucial for the United States’ position in the global economy, because many of the benefits of innovation are concentrated domestically. Federal R&D funding makes it more likely that U.S. firms are the first to leverage new discoveries, giving them advantages over international competitors. Thus, anemic government R&D spending is particularly concerning in the light of increases by other nations around the world, especially adversaries. Note that China increased public R&D by 56 percent between 2011 and 2016, and Russia increased its R&D by 13 percent, but U.S. investment in the same period fell by 12 percent in absolute terms. That is recipe for decline, economically and strategically.

To be sure, the United States is running a budget deficit. But continuing to cut federal R&D investment is like a family with car and house loans deciding to have a child drop out of college to help pay their loans faster—penny wise and pound foolish. To spur U.S. technological advancement and innovation, including in national security, it is time for both parties to step up to the plate and reverse decades of stagnating public R&D investment.

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