Federal R&D Funding & Economic Productivity | Cuts are Risky

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Government R&D Cuts Threaten U.S. Innovation and Economic Growth

Subheadline:  Slashing federal funding for scientific research could significantly slow the pace of innovation and harm long-term productivity, according to new research.

By Andrew J. Fieldhouse

Economist at Texas A&M University

Large cuts to government-funded research and advancement can endanger American innovation - and the vital productivity gains it supports.  Recent proposals to slash federal funding for scientific and health research raise concerns about the future of U.S.economic growth.

The Trump management has already canceled at least US$1.8 billion in research grants previously awarded by the National Institutes of Health.Its preliminary budget request for the 2026 fiscal year proposed cutting the NIH budget by another $18 billion - nearly a 40% reduction. The National Science Foundation, which funds much of the basic scientific research conducted at universities, would see its budget slashed by $5 billion - cutting it by more than half.

As research shows, if the government were to abandon its long-standing practice of investing in R&D, it would significantly slow the pace of U.S. innovation and economic growth.

"Government R&D spending consistently accounted for more than 20% of all U.S.productivity growth since World War II," according to a Dallas Fed working paper.

Government R&D spending encompasses all innovative work the government directly pays for, regardless of who does it. private companies and universities conduct a lot of this work, as do national labs and federal agencies like the NIH.

In a Dallas Fed working paper released in November 2024,a strong causal link between government R&D spending and U.S. productivity growth was identified.It was estimated that government R&D spending consistently accounted for more than 20% of all U.S. productivity growth as World War II. And a decline in that spending after the 1960s can account for nearly one-fourth of the deceleration in productivity as then.

these critically important productivity gains came from R&D investments by federal agencies that are not focused on national defense. Examples include the NIH's support for biomedical research, the Department of Energy's funding for physics and energy research, and NASA's spending on aeronautics and space exploration technologies.

Government R&D investment is more effective than private R&D spending at driving productivity, likely as the private sector tends to spend much more on the development side of R&D, while the public sector tends to emphasize research.

Economists beleive the private sector will naturally underinvest in more fundamental research as it is indeed harder to patent and profit from this work. The higher estimated returns on nondefense R&D reflect greater productivity benefits from fundamental research, which generates more widely shared knowledge than from private sector spending on development.

Pull Quote: “Government R&D spending consistently accounted for more than 20% of all U.S. productivity growth since World War II.”

The high returns on nondefense R&D suggest that Congress has historically underinvested in these areas. For instance, the productivity gains from nondefense R&D are at least 10 times higher than those from government investments in highways, bridges and other kinds of physical infrastructure. The government has also invested far more in physical infrastructure than R&D over the past 75 years. Increasing R&D investment would take advantage of these higher returns and gradually reduce them as of diminishing marginal returns to additional investment.

One argument sometimes heard against federal R&D spending is that it displaces, or “crowds out,” R&D spending the private sector would otherwise undertake. for instance, the administration’s budget request proposed reducing or eliminating NASA space technology programs it deemed “better suited to private sector research and development.”

However, research has found that government spending on R&D complements private investment. An additional dollar of government nondefense R&D spending causes the private sector to increase its R&D spending by an additional 20 cents. Budget cuts to the NIH, NSF and NASA would actually reduce R&D spending by companies, which is also bad for economic growth.

Federal R&D spending is also often on the chopping block whenever Congress focuses on deficit reduction. In part, that likely reflects the gradual nature of the economic benefits from government-funded R&D, which are at odds with the country’s four-year electoral cycles.

“Even if the benefits of government R&D are slow to materialize or are harder to see than those from other government programs, our research suggests that the U.S. economy will be less innovative and productive – and Americans will be worse off for it – if Congress agrees to deep cuts to science and research funding,” Fieldhouse concludes.

Similarly, the benefits from NIH spending on biomedical research are usually less visible than government spending on Medicare or Medicaid, which are health insurance programs for those 65 years and older and those with low incomes or disabilities. But Medicare or Medicaid help Americans buy prescription drugs and medical devices that were invented with the help of NIH-funded research.

Even if the benefits of government R&D are slow to materialize or are harder to see than those from other government programs, research suggests that the U.S. economy will be less innovative and productive – and americans will be worse off for it – if Congress agrees to deep cuts to science and research funding.

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