The Economic Consequences of Reduced R&D

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Sequestration's impact on R&D, Innovation and U.S. Economic Growth

If Congress and the President cannot agree on a long-term debt reduction plan later this year, across-the-board spending cuts required by law will deal a devastating blow to the innovation ecosystem that fuels the economy.  The sequester will result in a cut of more than $12 billion to federally funded research and development (R&D) in 2013 compared to 2011 funding levels and a $95 billion cut over the nine-year sequestration period.  However, because of the role that federally funded R&D – and particularly basic research – plays in boosting U.S. economic growth, these cuts will have an exponential and very negative impact on the ability of the economy to grow and create jobs.

According to a by the Information Technology and Innovation Foundation (ITIF), cuts to federal funding for R&D over the nine-year course of the sequester will reduce GDP by at least $203 billion between now and 2021.  It also will result in approximately 200,000 fewer jobs per year between 2013 and 2016 – a 0.2 percent impact on the U.S. unemployment rate.

These are the implications of sequestration on innovation and the economy if one looks just at what would be lost compared to an FY2011 spending rate.  However, there are other relevant and compelling benchmarks to consider.  For instance, R&D spending that remains steady as a share of gross domestic product (GDP).  In order to increase federal R&D expenditures at a rate that simply keeps pace with the rest of the economy, the United States would need to invest $330 billion more than the sequester allows over the 2013-2021 period.  By this standard, lowering R&D spending to the sequester level would reduce GDP by $565 billion over the period.

Another way to view the economic damage of a sequester is to compare U.S. R&D expenditures to expected expenditures by China, which is pouring substantial new resources into research. By this standard, sequestration will leave the United States $511 billion behind where it needs to be to keep pace with China. If the United States did keep up with China, GDP would be $860 billion higher over this period than it will be following a sequester.

Regardless of the measure, it is clear the sequester will jeopardize America’s position in the global innovation landscape, cost some 800,000 jobs over the next four years, and decrease our ability to compete in industries on the innovation frontier – where significant potential GDP gains are generated.