Views & Estimates :: March 15, 1995

Democratic Views and Estimates on the Budget for Civilian Science and Technology Programs, Fiscal Year 1996

The majority of the Democratic Members of the Science Committee consider the Republicans' approach to R&D policy short-sighted, naive, and damaging for the country. In their views and estimates, the Republican Members of the Science Committee advocate an industrial policy built on tax breaks, tort reform, and regulatory relief. In our view, these steps by themselves are inadequate to guarantee an optimal level of R&D investment.

The Republican "Contract With America", if carried out to the letter, would require a 30 to 35 percent cut in Federal R&D spending to offset the costs of a socially inequitable and economically counter-productive $200 billion tax cut. The consequences of a national science and technology policy of benign neglect will be devastating. Technology innovation and scientific discovery in this country will decline, and every American will be denied the enormous economic and social benefits that come from new knowledge and new technologies. As the United States' preeminence in science and technology declines, so will our standing in the world as an economic power.

We advocate a balanced science and technology policy, consistent with that followed by both the current and past Administrations. Our approach promotes scientific discovery and technology innovation through a wide array of research programs and through partnership with industry to develop and demonstrate breakthrough technologies that offer substantial long-term economic and social benefits. We also support establishing a fair regulatory and tax environment that encourages private sector investment in R&D, but we do not view this as an adequate step by itself.

Although we are disappointed that the Administration's FY1996 budget request proposes a real decline in funding for civilian R&D programs, we nevertheless endorse the level and direction of the request. We are committed to the goal of deficit reduction, but we strongly oppose any package built around excessive tax cuts for the wealthiest Americans or unnecessary cuts in R&D, education and training, and infrastructure programs that provide greater long-term payoffs for the Nation. Specifically, we recommend:

• Sustaining Federal R&D investment at the level requested in the FY1996 budget submitted to Congress by the President;
• Giving highest priority to R&D investment that has the greatest potential for improving productivity, competitiveness, and living standards; and,
• Promoting the equitable distribution of the economic and social benefits of R&D to every taxpayer.

Figure 1 shows Federal funding for R&D as a percent of Gross Domestic Product (GDP) since 1950. Figure 1 also projects the level of Federal R&D investment inferred from the Republican Views and Estimates and from information coming out of the Budget Committee. Finally, Figure 1 demonstrates the impact of investments advocated in the Democratic Views and Estimates. The contrast between the two plans is striking. The Republican's plan proposes substantial Federal divestment in R&D. The plan presented by Democratic Members seeks better future economic performance and living standards by sustaining public support for R&D which offers high economic and social returns.

Economic and Social Benefits of R&D

Economic studies show that between 25 and 50 percent of economic growth is attributable to scientific discoveries and technological advancements resulting from R&D investment. Roughly half of the Nation's R&D effort is funded by taxpayers. Public support of R&D is required to realize the economic and social returns from R&D that, due to "appropriability" and other market failures, cannot be captured by a single firm and thus would be foregone.

Generic, breakthrough technologies can provide very high returns to the country - 30 to 60 percent according to most studies - because they benefit all firms and provide the foundation upon which new industries and new jobs are created. Those spill-over benefits, however, prevent any single firm from capturing all returns from its investment in high risk, path-breaking R&D. This well-documented appropriability problem can most efficiently be corrected with public R&D support. Basic research and research to achieve environmental quality, public health and safety, national security, and educational and social goals also require public support since they benefit all society rather than a single firm.

Despite such compelling benefits, public investment in R&D, education and training, and infrastructure has been declining for years. According to the President's FY1996 budget documents, and depicted in Figure 1, Federal R&D support relative to the overall size of our economy as measured by GDP has dropped by about 60 percent over the last 30 years. Government spending on physical capital, R&D, and education and training has fallen 54 percent since 1968. We believe this long neglect of public investment is a primary cause of the declining productivity which has characterized U.S. economic performance over the past 25 years. We must reverse these trends and increase real public investment if we are to restore our social fabric and improve our long-term economic performance.

The United States is the world leader in aeronautics, agriculture, computers and software, communications, biotechnology, and many other important industries. Each produce high-quality, high-wage jobs and are the source of significant exports. Each have made our lives better. Each resulted from broad-based research and development programs and technological breakthroughs developed with Federal funding. As in the past, R&D investments made today will determine the industries and job growth of tomorrow. Without adequate public support today for R&D, those future industries and jobs will be overseas and our world standing in high-growth industries will erode. These arguments are elaborated upon in the attached documents from the National Association of Manufacturers and the Coalition for Technology Partnerships in support of applied technology programs.

National Goals for R&D

National R&D goals must reflect new circumstances and new priorities. After World War II, national science and technology policy was reflected in strong public support for basic research and for mission-oriented technology development, particularly in defense, space, and medicine. This traditional approach is no longer appropriate. The Cold War threat has subsided with the economic and military transformation of the former Soviet Union. Domestic problems - rising crime and drug usage, deteriorating public health and environmental quality, and widening social strata - have become more severe. The spin-off benefits of mission-oriented R&D to economic performance and living standards have diminished. New national goals, threats, and priorities exist that require new approaches and goals for public R&D programs. Today, the most significant threats to America are not Soviet missiles, but foreign competition and a decaying society.

The increasingly competitive global marketplace has also fundamentally changed the level and focus of corporate R&D. Many firms, in response to the heavy capital demands of intensifying competition and shorter product cycles have frozen or reduced their R&D spending, and refocused it away from longer-term R&D toward short-term product development.

The reorientation of AT&T Bell Labs illustrates these changes. Once regarded as the world's foremost R&D organization and the source of some of the most significant technological advancements in history, like the transistor and fiber optics, AT&T Bell Labs has been reorganized to support product development for AT&T's twenty-odd operating divisions. It now performs a fraction of the long-term, path-breaking R&D it once conducted. As a consequence, it is doubtful that as many dramatic new technological breakthroughs leading to new industries will emerge from AT&T Bell Labs.

AT&T Bell Labs is not alone in this transformation. In the face of stiff competition and declining margins, many other U.S. corporations have refocused their R&D operations away from long-term activities to short-term product development. The critical R&D question now facing the Nation is, "Where will the technology innovations of tomorrow come from?"

The Clinton Administration, as well as previous Republican administrations, have responded to these changes by developing R&D policies and programs that establish new relationships with industry to develop breakthrough technologies that would not otherwise occur. Those arrangements are industry-led, cost-shared partnerships in which firms pay a share for the economic returns they receive, and the public pays a share for the economic and social benefits that accrue to all. After the Cold War, national R&D policy can no longer rely solely on spin-offs from mission-oriented R&D to support economic development and achieve social objectives. Specifically, Federal R&D policy and programs must:

• Promote development of a diversified portfolio of generic, breakthrough technologies through innovative government-industry partnerships;
• Involve industry and academia in shaping the Federal R&D effort;
• Maintain a strong basic and applied research effort and reinvest in our academic research infrastructure;
• Extend the benefits of the information revolution to all by promoting development of the National Information Infrastructure;
• Promote innovative technology solutions to auto pollution;
• Preserve a balanced space program that maintains science and technology investments;
• Maintain basic and applied energy R&D in high payoff areas; and,
• Transition DOE labs from weapons research to domestic needs.

The President's FY1996 R&D Budget Request

The President's FY1996 R&D budget request, shown in Table 1, represents a real decline of 3 percent in budget authority for total Federal R&D programs, although the request of $73 billion is essentially flat in nominal terms compared to FY1995. The civilian component would increase 3 percent to $35 billion while the defense component would decline 2 percent to $38 billion. Of that amount, $28 billion would be for programs under the jurisdiction of the Science Committee. Basic research would get a nearly 4 percent boost. Academic R&D and merit-reviewed research would get increases of 1 percent and 3 percent, respectively. The National Science Foundation, the Departments of Commerce, Energy, and Transportation, and the Environmental Protection Agency would get greater than inflationary increases. Virtually all other agencies, including the National Aeronautics and Space Administration, would see their budgets reduced in real terms. The request gives high priority to:

• Maintaining world leadership in basic research;
• Promoting development of breakthrough technologies through cost-shared, industry-led partnerships;
• Sustaining space and aeronautics research;
• Advancing development of high performance computing and communications technology;
• Strengthening investment in health research;
• Protecting the environment;
• Enhancing national security; and,
• Promoting international cooperation in science and technology.

There are elements of the President's R&D budget that are laudable, such as the continued progress toward a 50:50 split between civilian and military R&D and the emphasis given to basic research and innovative partnerships with industry. But in the big picture, the Administration continues to allow short-term political objectives to override critical investments in science and technology that promise real long-term payoffs for the Nation and to undermine credible efforts to reduce the deficit. As Figure 1 shows, the overall R&D budget request continues a 30-year trend of real declines in R&D investment. Proposed FY1996 R&D spending would fall below one percent of GDP, its lowest level since 1958.

We believe continued underinvestment in R&D is not in the best interest of the country. The President abandoned efforts to reduce the deficit by controlling entitlement spending. Instead, the President proposed spending increases for defense and a $56 billion tax cut in response to even more massive tax cuts and defense spending proposed by Republicans in Congress. The effect of these politically motivated initiatives will be a tighter budget for R&D that produces far fewer returns for the nation.

Democratic Recommendations for the FY1996 R&D Budget

The President's FY1996 budget request underfunds civilian R&D. While considerably better than the Republican alternatives, it could be improved further by eliminating proposed tax cuts and defense increases, making a stronger effort to produce entitlement savings through major reforms, and devoting more savings to deficit reduction. We endorse the funding levels requested by the President and the priorities they reflect. We strongly oppose any effort to cut the request since we already consider it inadequate to meet national R&D goals.

Table 2 presents our views and estimates for each budget function and each agency and program under the jurisdiction of our committee. Figure 1 shows how those views and estimates compare with those submitted to the Budget Committee by the Majority.

Response to the Republican Views and Estimates

In the almost forty years of this Committee's work on science, space, and technology issues, we have generally enjoyed broad bipartisan support for the programs under our jurisdiction. We are pleased that there is still a broad area of shared, bipartisan support for many of these programs even as we acknowledge that there are real and perhaps growing differences on other programs. However, the highly partisan, ideologically driven Views and Estimates report submitted by the Committee's Republican Membership provides no insight into these areas of broad agreement, focusing instead on the areas of divergence. We are disappointed that there was no effort to produce a more balanced document that highlighted our common ground even as it mapped out contentious terrain. In this sense, it is a misleading document and does a disservice to the Budget Committee, Democratic Science Committee Members, and the broader audience for this report.

The Republican's "Views and Estimates" are long on views and short on estimates. The views themselves are rhetorical devices designed to drive from the field a "Government of Oz" strawman that stands for a "command and control" approach to government that no Member of this Committee has advocated. Further, the Republican position is filled with inconsistencies.

The Republican majority propose to throw tens of billions of dollars at corporations and investors through reduced capital gains taxes so that, just maybe, there could be an increase in the currently dismal rate of private R&D investment. They all but decree that the only good research is basic research but then announce that one of their six principles is to support demonstration projects. They castigate the Minority for choosing winners and losers through technology programs and then endorse Federal dollars for the hydrogen energy industry and manned space programs. They decry applied research and development as a demonic "industrial policy" but then wax eloquent about the need to give industry tax breaks and regulatory relief. In short, the rhetoric of the Majority's Views and Estimates brings to mind the looking glass world of Lewis Carroll where you walk away from your destination to reach it and words mean just what the Chairman says they mean, nothing more and nothing less.

As for estimates, Committee Republicans offer up no details whatsoever that could usefully contribute to the Budget Committee's work. The only numbers included are the current year's appropriation figures and the President's requests for FY1996. The sole clarification from the Republican side is that they intend to move agency authorization bills at a level below the FY1995 appropriation. How much below the FY1995 appropriation and whether there will be across-the-board cuts or some other decisional rule goes unstated. The report is silent on this issue, leaving the Budget Committee to guess at the Science Committee's intentions. Our own analysis, presented in Table 3, suggests that civilian R&D funding would have to decline 30 to 35 percent over the next five years to satisfy the terms of the Republican Contract.

This is a disappointing departure from the Committee's traditional practice of offering clear and specific programmatic guidance to the Budget Committee. Perhaps it reflects the impact of a smaller majority staff with greater jurisdiction working under the time constraints of the Contract. Perhaps the Chairman has numbers in mind, but believes that his position as Vice Chair of the Budget Committee will allow him to say there what his full views and estimates are. In short, either Committee Republicans have not had a chance to do the work to arrive at numbers, or they know what their numbers are, but do not want to share them with other Science Committee Members. The lack of estimates is yet another indication of the confused and often secretive processes that have dominated Congressional activities during the magical "100 days".

Even beyond these fundamental failings, the Republican Views and Estimates reveals fundamental misunderstandings about science, about its relationship to innovation and commercialization and about economics in both theory and practice.

The Republicans cling to an archaic linear view of basic science leading to insights that inventors and entrepreneurs pick up and turn into products. They see a black and white world of basic research, applied research, development and demonstration with clear lines of demarcation between each step and a pipeline of innovation - from science to technology to commercial application. In their world, the government should invest in science or basic research - shovelling resources into the mouth of the pipeline - and then rely on the magic of market processes to let companies pick up the most commercially promising ideas and move them into products that pop out at the far end of the pipeline. Underlying this elementary, but discredited, model of innovation lies an assumption that basic research (to the degree that term has a meaning) is important because it lays the foundation for innovations that contribute to future material well-being.

We agree with the Majority that research lays the foundation for future economic growth. However, we do not accept the strict delineation between basic research and other forms of research or development. Those who carefully study the process of innovation have demonstrated that technological breakthroughs that revolutionize an industry or an entire economy can precede basic research just as easily as stem from it. Alexander Graham Bell did not need breakthroughs in materials or acoustical physics to develop the telephone's carbon microphone. By the same token, breakthroughs in science - the biological revolution stemming from genetic research or high energy and materials physics, for example - have contributed to the creation of revolutionary new industries such as biotechnology and computers. Additionally, there are times when technology can stimulate basic science; innovations in optics and the creation of the microscope had to precede breakthroughs in our understanding of cell biology.

Sometimes you start with science and move towards a product; sometimes, for instance if you are Louis Pasteur, you start with a product and move towards science; sometimes you start somewhere in the clouded middle and move in whatever direction your inclination takes you; that is creativity. There is no room for this complex reality in the Republican report.

A consequence of the integration of the inventions of Bell with those associated with the rise of the computer is that distance has become irrelevant in the chase to find the newest scientific discoveries. While communications guarantee the simultaneous transmission of new scientific ideas around the world, there are no guarantees that the incorporation of those ideas into commercial products will be as universally smooth. Many observers feel the industrial successes of the Japanese have been built, at least in part, on a superior ability to take basic insights, tease out the commercial implications and move new or improved products or processes to market quicker than others.

There is nothing in the Republican report that suggests any awareness of these trends nor any effort to look for ways to assist American firms to be first to market with products that can be improved or created due to the "basic research" funded by the American taxpayer. Republicans are content to use taxpayer dollars to invest in basic research but are blind to the prospect that the research may not improve the productivity of U.S. firms, or may improve the productivity of firms in other nations.

As noted above, the underlying rationale for government support of research is that individuals and firms would not invest in R&D at a rate that would be socially optimal if this activity simply responded to market signals. We understand that market failure stifles innovation, leaving it at a lower level than is desirable. Our Republican colleagues seem to understand this situation when it comes to what they choose to call basic research, but that is where their understanding of market processes ends.

When our Republican colleagues look beyond basic research, they believe that markets are perfect instruments of destiny that should be left to mete out a pre-ordained social fate. It is clear from their language that they hold to this view with a passionate intensity. Republicans deeply believe the government should take a hands-off attitude towards technology programs - unless they happen to be fans of a particular technology. When the Chairman believes in a technology - such as hydrogen energy or manned space programs - he and his colleagues are more than happy to provide whatever direct support they deem the effort to deserve. The justification they offer up is that the "risk" (market failure) of such investments is too great to rely on markets. In short, if Republicans like a technology, then it is by decree deemed to be "basic research," it is risky and the government should act in the face of market failure. If they don't like a technology or they know nothing about it, they turn a blind eye to risk and cry that the market must decide. Those who would chastise bureaucrats in technology support programs for picking "winners and losers" would engage in that forbidden effort themselves.

In light of the nature of creativity and innovation and the presence of market failure, we believe that a balanced mix of Federal investment is justified. Relying solely on Federal expenditures for basic research is likely to produce a socially suboptimal level of innovation. The answer offered by the Majority is that their Contract will fill in the gaps through changes in product liability, capital gains taxes, and regulation combined with the Chairman's proposed permanent R&D tax credit (not a part of the Contract). There is virtually no evidence that these steps would take the place of intelligently targeted Federal programs nor is there any guarantee that the provisions of the Contract (much less the R&D tax credit) will be implemented.

We believe that a good market model (so popular in Republican rhetoric) to guide our choices among programs for funding can be found in advice offered by leading investment advisors. To spread your risk (and enhance your chances of picking strong performers) you should diversify your portfolio. Putting all of our eggs in the basket of basic research, especially with no guarantees that American firms or workers would be poised to benefit from those investments, is unnecessarily risky and irresponsible.

The Republican Views and Estimates chastises the Administration for failing to set priorities among R&D programs. The truth is that the President's budget shows a clear set of priorities, but it includes priorities with which the new Majority disagrees. Implicit in the Republican criticism is a notion that the President's R&D funding request is simply too high and will add to our deficit. For reasons made clear above, we believe that R&D funding is among the most defensible and essential Federal functions because of its payoff for the health of the American economy now and in the future. Many of the programs funded by the Federal Government represent pure consumption; R&D expenditures represent a true investment that will lead to incalculable benefits for our children and grandchildren.

While we are sure that savings and efficiencies can be found in our science and technology programs, we adamantly oppose blindly slashing those investments. A prime reason that the Republicans need to make significant cuts in civilian research and development programs is because of the $200 billion in tax cuts promised in the Contract. With at least half of those benefits going to individuals making $100,000 a year, the Republicans would have us lower our investment in socially useful research programs to marginally enhance the consumption of the wealthy. This is a perfect roadmap of where the new Majority would take this country.

Despite these differences, we stand ready to work with our Republican colleagues to help set priorities that are fiscally responsible and keep trust with the American people that their tax dollars are being wisely invested. While we will work together where we can, we will fight when we believe the Republicans are breaking faith with the American people. Lest the Republicans invoke some holy mandate for their science and technology agenda stemming from the November election - a particularly tenuous claim given the paucity of discussion of science and technology programs in the contract - we remind them that we had a mandate to create innovative programs for much of the last decade (including under two Republican administrations). We agree that it is a new era, but we believe it is an era that requires Federal support for research of all kinds based on a clear-eyed understanding of the magic of innovation as well as the power of competition.