NOTE: This report has been updated.
Federal R&D investments are a major source of support for American science and technology, but the federal science budget can also be a complex topic. To help readers better understand the world of federal R&D spending, this new brief explores the data and identifies some of the major overarching trends in recent decades. The initial sections of the brief are published below. For more, download the full report.
Why Does Government Fund R&D?
Government has historically had a major hand in science and technology. There are a few simple rationales for this. The most immediate is the need for agencies to fulfill their public missions on national security, agriculture, environment, health, or infrastructure. To successfully fulfill these missions requires robust interaction with science and technology. But there is a broader rationale as well. Generally, the societal benefits of knowledge produced by R&D are greater than the private benefits, and spillovers make it difficult for the creators of new knowledge to reap all of its benefits. This creates an allocation problem. As economist Joseph Stiglitz writes, “Knowledge can be viewed as a public good, and the private provision of a public good is essentially never optimal.”[i] Additionally, many worthy research projects are risky, with uncertain prospects for success, and may require long-term commitments of resources and infrastructure. These qualities of the research enterprise can lead to underinvestment by private industry, which in general is more focused on lower-risk research and product development for shorter-term results. This is why industry spends about 80 cents of every R&D dollar on development, and only about 20 cents on basic and applied research. For federal nondefense agencies, the ratio is reversed.
As a result, wrote a 2014 National Academies panel on the American research enterprise, “Increasingly, government is called upon to fund high-risk, long-term research and some types of applied research, particularly proof-of-concept research, at least to the point where the risks of investment in such research are reduced to attract private-sector funding.”[ii] In this sense, the public research and technology enterprise lays a foundation of knowledge, tools, and a skilled workforce. At its best, it forms an ecosystem with universities and industry, contributing to progress in pharmaceuticals, semiconductors, food, aerospace, and other sectors through research output, human capital, and instrumentation.[iii] There is a track record of productive government interaction with outside actors, especially from within the defense system.[iv] With the globalization of science and the rise of R&D in East Asia, such public-private interaction will likely become more important over time from a competitiveness perspective.
Declining Discretionary Spending is Important Context for R&D
Virtually all federal R&D funding is part of what’s known as the discretionary budget. Discretionary spending is the part of the federal budget determined annually through the appropriations process. As seen in Figure 1 below, discretionary spending – especially that for defense – once occupied a more prominent place in the budget. Over time, however, the federal budget has come to be dominated by mandatory spending, which is made up mostly of the major entitlement programs – Social Security, Medicare, and Medicaid – as well as numerous other transfer payment programs. Mandatory spending is known as such because it is written directly into authorizing legislation, is not subject to annual changes by appropriators, and is mostly – but not entirely – on “autopilot.” Due to an aging population, rising healthcare costs, and other factors, mandatory spending has come to dominate the federal budget, accounting for nearly two-thirds of all outlays. At the same time, the discretionary portion of the budget has declined, especially on the defense side, as can be seen.
This matters for science spending because R&D doesn’t tend to change much as a share of the discretionary budget. At the height of the Space Race, R&D comprised 17.4 percent of discretionary spending, as seen in Figure 2. But since the late 1980s, R&D has tended to fluctuate between 11 and 13 percent of discretionary spending. It can be said that as the discretionary budget overall goes, so goes the R&D budget.
The centrality of the discretionary budget for science spending can be seen in recent agency-level trends, shown in Figure 3. Beginning in the 2011 fiscal year (FY), the base discretionary budget began coming down. The spending caps established by the Budget Control Act of 2011, including sequestration in FY 2013, further intensified the strain on the discretionary budget, though Congress has also regularly acted to partially undo the effects of these caps.[v] The impact of the caps on science agency discretionary budgets is plain in Figure 3, with major agencies
tending to decline and recover somewhat in unison. As of FY 2016, the discretionary budgets for most major science agencies were actually above or near their pre-sequestration funding levels, corresponding with Congressional increases to the overall caps.[vi] This suggests that the discretionary budget is the “center of gravity” around which R&D budgets tend to cluster.
In the long run, the Congressional Budget Office (CBO) predicts discretionary spending will continue to decline relative to the federal budget and the economy overall as mandatory spending continues its growth.[vii] This suggests federal R&D activities may also continue to decline relative to other economic activity, even as federal R&D dollars grow in absolute terms.
NOTE: This report has been updated.
[i] Joseph E. Stiglitz, “Leaders and Followers: Perspectives on the Nordic Model and the Economics of Innovation,” NBER Working Paper 20493, September 2014.
[ii] National Research Council Furthering America’s Research Enterprise. R.F. Celeste, A. Griswold, and M.L. Straf (Eds.), National Academies Press, 2014.
[iii] See Wesley M. Cohen, Richard R. Nelson, and John P. Walsh, “Links and Impacts: The Influence of Public Research on Industrial R&D.” Management Science, Vol 48, no. 1 (1-23), January 2002.
[iv] For case studies, see Vernon W. Ruttan, Is War Necessary for Economic Growth? Oxford University Press, 2006; Fred Block and Matthew R. Keller, Eds, State of Innovation: The U.S. Government’s Role in Technology Development, Paradigm Publishers, 2011; Mariana Mazzucato, The Entrepreneurial State, Anthem Press, 2013.
[v] For coverage of the Bipartisan Budget Act of 2015, the most recent deal to raise the spending caps at the time of this writing, see: http://www.aaas.org/news/two-year-budget-deal-means-room-rd-growth