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Overview of R&D Trends

The FY 2002 Congressional Budget Process The year 2001 witnessed several watershed events, each of which had significant implications for the FY 2002 budgetary process. First, on January 20, 2001, George W. Bush was sworn in as the 43rd president of the United States. The inauguration of President Bush returned the Republicans to the White House after an eight-year absence and foreshadowed important changes in presidential spending priorities. Moreover, it appeared that congressional obstacles to implementing these priorities would be negligible, given that the November 2000 elections had also given the Republicans control over both chambers of Congress. Republican control in the equally divided Senate, however, was made possible only by Vice President Cheney's constitutionally sanctioned ability to cast tie-breaking votes. And, when Senator Jim Jeffords of Vermont renounced his Republican affiliation in May, control of the Senate reverted to the Democrats and returned divided government to Washington after only a five-month hiatus. Second, March 2001 marked the end of the longest expansion of U.S. economic activity in the nation's history, an expansion that had begun exactly ten years earlier in March 1991. This, coupled with the Bush Administration's tax relief package signed into law by President Bush in June 2001, signaled an end to the era of budget surpluses that began in 1998. If not yet fully manifest in the FY 2002 budgetary process, this return to deficit spending will likely have a notable impact on discretionary spending over the next several years. Finally, above and beyond their enormous political and psychological effects, the terrorist attacks of September 11 had profound fiscal effects, not the least of which was a $40 billion emergency supplemental appropriations bill signed into law on September 18. Not only did this bill portend additional deficit spending, but it also prompted an entirely new inventory of spending priorities focused on anti-terrorism and national security. Thus, as President Bush concludes his first year in office, the economic and political climate of the country - and the world - is vastly different from that which prevailed when he took office. The budgetary priorities of the new Bush Administration began to emerge in late February when President Bush released a summary of the full budget request that he subsequently submitted in April. Wishing to signal a clean break from the Clinton era, President Bush titled his budget summary "A Blueprint for New Beginnings - A Responsible Budget for America's Priorities." In the document, President Bush asserted that his budget offered "a new vision for governing the Nation for a new generation," a "different approach for an era that expects a Federal Government that is both active to promote opportunity and limited to preserve freedom." The summary also resurrected the mantra of "compassionate conservatism" from the campaign trail to describe initiatives in the areas of education reform and faith-based delivery of social services as well as several programs important to senior citizens, such as Social Security, Medicare and prescription drug coverage. In addition, the President delineated plans to retire nearly $1 trillion in debt over the ensuing four years, provide tax relief to all those who pay income taxes and re-evaluate defense priorities in the face of newly perceived national security threats. Thus, at least in rhetoric, President Bush outlined a budgetary vision that sought to fuse the traditional Republican values of fiscal discipline and military strength with more recent Republican emphases on re-defining the federal role in education and raising the profile of religious organizations in the public square. In terms of absolute numbers, however, the full budget request that was submitted in April was not as much of a course change from the Clinton era as the budget summary might have suggested. The Bush Administration requested $661 billion in discretionary spending, up from $635 billion enacted during the last year of the Clinton Administration. Though an increase of some $26 billion, the Bush Administration did point out that this 4 percent increase stood in contrast to the pattern of 6 percent increases that characterized the last few years of the Clinton presidency. However, the basis for this claim collapsed in June when President Bush submitted a budget amendment to Congress that covered spending for the Department of Defense (DOD). This amendment proposed a 9 percent increase in DOD spending, placing the overall DOD budget at $328.9 billion. Largely as a result of this jump in DOD expenditures, discretionary spending would now rise to $679 billion. Rather than the 4 percent increase envisioned in the original budget summary, discretionary spending under this revised scenario was now slated to increase by nearly 7 percent. On the R&D side, increases in the Bush Administration's budget request were mostly confined to DOD and the Department of Health and Human Services - more specifically the National Institutes of Health. Each of these agencies was slated for increases in R&D funding of more than 10 percent. R&D funding for other federal agencies, however, was in comparatively short supply. Six of the eleven largest R&D funding agencies were slated for decreases in R&D activity in FY 2002. Under the request, the National Science Foundation, the Environmental Protection Agency and the Departments of Energy, Agriculture, Commerce and Interior would all have seen their R&D budgets decline. Thus, R&D largesse in the budget request was primarily limited to "missiles and medicine." For agency-specific analyses of R&D spending, see Chapter 3 of this publication. Being in control of both the House and the Senate, congressional Republicans moved quickly to translate President Bush's request into a budget resolution. In mid-May, Congress adopted a budget resolution that was fully consistent with the President's requested level of discretionary spending and his campaign promise of providing tax relief for the nation's taxpayers. This then set the stage for the Economic Growth and Tax Relief Reconciliation Act of 2001, which President Bush signed into law on June 7. At the time, unified budget surpluses were still projected to endure for several years into the future. This being the case, President Bush saw the legislation as a means of acting upon his belief that the surplus was "the people's money" and, therefore, should be returned to its rightful owners. Many congressional Democrats, on the other hand, claimed that President Bush's tax relief package was too large in light of deteriorating economic conditions and too skewed toward the wealthy. If enacted, and if projected budget surpluses failed to materialize, its opponents maintained, the legislation would force elected officials to dip into Medicare and Social Security trust funds in coming years just as Baby Boomers begin to retire. The implications of the tax relief package for mandatory spending notwithstanding, the enactment of the legislation had important consequences for discretionary spending. Absent a return to the bull-market conditions of the 1990s or a renewed tolerance of deficit spending, the legislation's price tag of $1.35 trillion over ten years will inevitably reduce the space afforded discretionary spending programs in the years to come. If the tax relief package was the first major victory of the Bush Administration, it was a Pyrrhic victory at that. In the negotiations leading up to the passage and enactment of the package, Senator Jim Jeffords of Vermont had grown increasingly frustrated with the policy directions that the Bush Administration and his fellow congressional Republicans were taking. On May 24, Senator Jeffords announced his decision to leave the Republican Party, citing major differences in the areas of fiscal policy, environmental policy, education and missile defense, among others. This ended the concurrent Republican control of the House, Senate and White House that had been won in the November 2000 elections - a situation that had last prevailed during the first term of the Eisenhower Administration. Though declaring himself an Independent, Senator Jeffords stated that he would caucus with the Democrats for organizational purposes. The announcement sent shock waves throughout Washington, as it returned the Senate to Democratic hands, including the chairmanships of all Senate committees. Just as the rebate checks authorized by the tax relief package began to enter the postal system in late July, increasingly dire news about the state of the national economy was being released. On the last Friday of the month, the Bureau of Economic Analysis - a research arm of the Department of Commerce - announced that the gross domestic product (GDP) had increased at an annual rate of only 0.7 percent in the second quarter of 2001. This compared with GDP growth rates of 1.9 percent in the fourth quarter of 2000 and 1.3 percent in the first quarter of 2001. Thus, the economy continued its downward trajectory. This news confirmed the worst suspicions of the Federal Reserve Board, whose Federal Open Market Committee (FOMC) had in January begun an aggressive campaign to stimulate the economy through a series of interest rate cuts. From January to June, the FOMC cut the federal funds rate six times in an effort to decrease the cost of money and provide the economy with a much-needed infusion of capital. The FOMC would go on to cut the federal funds rate an additional five times in 2001. At the beginning of the year the federal funds rate stood at 6.50 percent; by year's end the rate had been reduced to 1.75 percent. Unable to ignore this new economic reality, the Bush Administration produced revised budget projections in August. The White House's Office of Management and Budget (OMB) estimated that because of the tax cut and the slowing economy, the unified FY 2001 surplus projection had dropped from $281 billion to $158 billion. Additionally, the non-Social Security surplus for both FY 2001 and FY 2002 had narrowed to a projected $1 billion. The projections were heavily criticized, however, because the small remaining surpluses relied on some questionable accounting. Moreover, figures issued just one week later by the Congressional Budget Office (CBO) projected that the non-Social Security surplus in FY 2001 would actually disappear and go into deficit. Whether one chose to believe OMB's numbers or those put out by CBO, it was clear that the era of budget surpluses that had begun in 1998 was coming to an end, and talk of recession became increasingly prominent in the discourse over the nation's economic health. Though certainly secondary to the human suffering brought about by their occurrence, the events of September 11 drove this point home even further. Over the course of a few short hours, the attacks on the World Trade Center and the Pentagon transformed the policy priorities of the nation. Gone (for the time being) were the partisan squabbles over the wisdom of reducing or eliminating budget surpluses through tax cuts. Front and center were bipartisan sentiments to make any effort and undertake any sacrifice to resurrect the nation from the terrorist attacks and prevent any such attacks from happening again. To this end, Congress moved quickly to fashion the Emergency Supplemental Appropriations Act for Recovery from and Response to Terrorist Attacks on the United States, which President Bush signed into law on September 18. With a price tag of $40 billion, the legislation appropriated funds for federal, state and local preparedness for mitigating and responding to the attacks; efforts to counter, investigate and prosecute domestic and international terrorism; increased transportation security; and the repair of public facilities and transportation systems damaged in the attacks. Thus, it was in this context that Congress returned its attention to completion of the thirteen appropriations bills that form the backbone of the appropriations process. At the time that President Bush signed the emergency supplemental into law on September 18, however, only six of the appropriations bills had even been reported to conference. With the beginning of FY 2002 coming in just two weeks, it became clear that Congress would miss the deadline and resuscitate its annual ritual of passing continuing resolutions until its work was done. Undoubtedly, Democratic control of the Senate agenda - the new counterweight to the Republican-controlled House and White House - and continually evolving spending needs brought about by the September 11 terrorist attacks slowed this process even more. And, to add insult to injury, the work of Congress was further delayed by the receipt of anthrax-tainted letters on Capitol Hill in October, most notably in the offices of Senate Majority Leader Thomas Daschle (D-SD). These letters eventually forced the closure of the Senate Hart Office Building for environmental remediation that lasted well into January 2002. From October until the time of the holiday recess that began in late December, Congress continued work on those appropriations bills that remained outstanding. This was done against the backdrop of waning bipartisanship and a continuing deterioration of economic conditions. The palpable bipartisan spirit that resulted from the terrorist attacks of September 11 faded as congressional Democrats and Republicans bickered over the design of an economic stimulus package that would right the economy and provide relief to the thousands of workers adversely affected by the September 11 attacks. On October 24, the Republican-controlled House narrowly passed (216-214) its version of an economic stimulus package, which centered on tax relief (to both individuals and corporations) and unemployment benefits. The plan would cost $100 billion in FY 2002 and $159 billion over ten years. Democrats criticized the bill for being top-heavy with tax breaks to large corporations and inattentive to the needs of low-income workers, particularly those laid off after September 11. For their part, Senate Democrats introduced a $70 billion stimulus bill, giving roughly equal attention to tax cuts and aid to the unemployed. However, this bill languished in the Senate after it failed to attract the requisite sixty votes necessary to overcome procedural hurdles. From this point on, the dialogue deteriorated into a blame game in which the White House and congressional Republicans accused Senate Democrats of failing to move on any stimulus bill and, therefore, failing to act for the benefit of the nation. In response, Democrats argued that Republicans remained overly fixated on corporate tax relief and that the Republican plan would do little to put money in the hands of consumers whose spending would stimulate the demand necessary to wrest the economy from the doldrums. As the year ended, President Bush was still waiting to sign an economic stimulus bill that he claimed the country so desperately needed. The end of the year also witnessed a continuing tide of negative reports regarding the state of the nation's economy. At a November 28 speech at the National Press Club, OMB Director Mitch Daniels stated that because of the flagging economy and the new spending brought about by the September 11 attacks, federal budget deficits had not only arrived but were unlikely to end until 2005 at the earliest. On December 13, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) issued a release stating that the economy had in fact entered into recession back in March. This NBER committee is the commonly accepted arbiter in timing expansions and contractions of the U.S. economy. The presence of recession was reinforced later in December by another release from the Bureau of Economic Analysis, which showed that GDP had actually decreased at an annual rate of 1.3 percent in the third quarter of 2001. Thus, as 2001 drew to a close, the federal budget and the national economy entered into territory not seen for many years. Despite the country's economic woes, however, the federal budget process lurched forward. Congress completed its work on the last appropriations bills on December 20. In the end, total funding level for FY 2002 appropriations was $686 billion, far more than the original $661 billion Bush request from April. In comparison with FY 2001, this represented an 8 percent increase in discretionary spending. In addition, Congress and the President agreed on $40 billion in additional emergency funds for war, terrorism, and relief-related costs; the President allocated half of these funds, while Congress allocated the other half as part of the Defense bill. These results of the FY 2002 appropriations process hold obvious consequences for fiscal policy in the short term. The return to deficit spending and the policy priorities that emerged from September 11 will undoubtedly shrink the pool of resources available for discretionary spending unrelated to defense and the war on terrorism. Neither the Democrats nor the Republicans are likely to tolerate a return to excessive deficit spending, given the general consensus in the nation for fiscal conservatism. Additionally, if the FY 2002 budget request of the Bush Administration is any indication, future increases in discretionary spending are likely to be confined to defense programs, biomedical research and, now, efforts to combat terrorism. Complicating all of this, of course, are the looming November 2002 mid-term elections. If the past can be trusted as prelude, the specter of mid-term elections will mean that politics will prevail over policy and the bipartisanship that was realized in the wake of September 11 will flow in increasingly short supply.