Update on Automatic Budget Cuts to Federal R&D

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Publication date: 
5 October 2012

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.”

Additional  perspective on the impacts of sequestration on R&D was provided by the  American Association for the Advancement of Science (AAAS) in a 20-page report issued  on September 27.  “Brief: Federal R&D  and Sequestration in the First Five Years” was authored by Matt Hourihan.  He  calculated that spending on federal R&D would decline by 8.4 percent or $57.5  billion in fiscal years 2013 through 2017.   Both reports predict that federal R&D spending would be reduced by  more than $12 billion in this budget year if sequestration occurs. 

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.”

The  report continues: 

“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.”

The  AAAS report has one-page descriptions providing important perspectives on the  budget reductions for the Department of Defense, National Institutes of Health,  Department of Energy, National Science Foundation, NASA, and the Department of  Agriculture.  It also contains a section  entitled “Impacts on Federal Funding by State.”   The top five states/districts which would see the greatest reductions in  federal R&D are California, Maryland, Virginia, Massachusetts, and the  District of Columbia.

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.”

The  report continues:

“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.”

Recognizing  the impacts that sequestration would have on federal R&D spending, the Task  Force on American Innovation, to which the American Institute of Physics and  two of its Member Societies – the American Astronomical Society and the  American Physical Society -  belong, sent  a letter to the President and congressional leaders.  This October 2 letter, which was also signed  by corporate and university leaders, states:

“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.”

A  copy of this letter and its signatories can be viewed at the Association of  American Universities’ website  in its “What’s  New” column.

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.

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