The Importance of Government Research
Government-funded research has driven U.S. innovation and economic growth for decades, but funding cuts now threaten the country's leadership in science, technology, and long-term prosperity.
By Harral Burris
Since the Second World War, the U.S. government has driven technology leadership by investing in university research. Donald Trump sees the public sector as a real estate development writ large. He is wrong; it is not all about short-term profit and budget cuts for “efficiency.”
Government-funded research has played a critical role in shaping the postwar world. After WWII, the government dramatically expanded its funding of basic scientific research and development. The Cold War, the race to the moon, and economic growth from an exploding population were all results of federal investment in technology, medicine, and defense.
The Manhattan Project demonstrated the power of government-funded research, and the Cold War made that research permanent. The project's success led to the creation of the National Science Foundation in 1950, which funded university research, supported STEM education, and worked closely with the Pentagon on military technology. The launch of Sputnik in 1957 shocked the US, accelerating science and technology research projects and eventually sending men to the moon. The creation of NASA in 1958 included massive federal funding for rocket research, satellites, and space exploration.
Government funding supports basic research that has no immediate commercial application but is crucial for scientific breakthroughs. It enables discoveries in physics, medicine, space exploration, and AI before the new technologies become profitable. The Internet, GPS, and mRNA technology – which rapidly produced an effective COVID-19 vaccine – all began in government-funded university research. Those technologies have birthed new industries, created millions of jobs, and are the foundation of American technology leadership. Research in cybersecurity, military technology, and biosecurity is vital to national defense, and it also enhances food security through agricultural research and biotechnology.
Since the 1980s, the United States has emerged as the dominant consumer economy in the world. Americans buy more stuff, financed by growing trade and budget deficits. Foreign investment of revenues from trade in the United States underwrites private spending by American businesses and consumers. The US economy is growing at a healthy pace because foreigners are loaning us the money to keep the party going. Until perhaps this month, they have seen the United States as the best place to invest, and Americans have benefited.
The tax cuts promoted by President Ronald Reagan in the 1980s had the long-term effect of increasing American borrowing to cover federal budget deficits, which in turn limited research funding. Reagan prioritized reducing government spending (except for defense) and cutting taxes. As a result, non-defense spending, including for scientific and medical research, did not continue to grow as it had in prior decades.
Corporations are good at innovation, but they cannot afford the long odds that come with risky new inventions. Innovation improves a basic idea, and corporations are good at that. Inventiveness, on the other hand, consists of thousands of failures in pursuit of an elusive, uncertain breakthrough. That's not profitable, and it's where the government has traditionally stepped in. It took the basic research of Michael Faraday and others to discover that sending electrical current through metal could make it glow. Thomas Edison improved on that with the light bulb. The first is inventiveness, the second innovation.
Tax cuts under Reagan and subsequent presidents pushed annual public sector deficits to 6% on average. Private sector investments (consumer and business) only fund half of that amount. This mismatch leaves the US with an ongoing deficit with the rest of the world. We must borrow from other nations to compensate for that shortfall, and persistent trade deficits provide those funds – for both research and consumption.
A trade deficit occurs when a country spends more money on imports than it makes on exports. This outflow of capital must be replaced by borrowing from foreign entities or permitting foreign investment in US assets. Without significant foreign purchases of U.S. treasury bonds, financial conditions would rapidly deteriorate. Germany, Japan, and China all have public sectors with surplus assets from trade imbalances with the United States that they largely invest back in the United States. That is a very beneficial and stable arrangement for all parties.
Foreign investment is not necessarily bad; it is a vote of confidence in the US economy and a source of long-term growth. For most of the 19th century, foreign money poured into railroads and other public infrastructure, helping the new nation develop economically. Now, European and Asian auto manufacturers have factories all over the South, employing American workers to build their BMWs and Toyotas.
President Donald Trump wants to end trade surpluses with no clue how to make up the difference between the nation's budgetary needs and reduced tax revenues. He sees persistent budget deficits as evidence of out-of-control government spending and a transfer of wealth to other countries. Viewing government deficits as the public sector's contribution to faster US growth and technological progress is more accurate. If running persistent trade surpluses were a path to wealth and economic development, Germany and Japan, rather than the United States, would be the world's fastest-growing economies. They are not.
Meanwhile, the Trump administration has fired thousands of employees who administer research grants and suspended funding for new research in most government agencies, including the Department of Defense. The president is turning off invention to finance tax cuts for billionaires, stunting the country’s future growth. The damage will be generational.
In a matter of weeks, the United States is transitioning from a leading research country to a middling one, at best. This is not the way to compete with China. It's just plain self-destructive.
Investments in research are the life-blood of national strength and prosperity. They do not have to be financed through trade deficits, but until an alternative funding source is available, the current system should continue. It has served the United States very well for almost a century, and we must remind our elected leaders of that.
Hal is a retired investment professional with 40 years of experience in money management. The interface between geopolitics and global investments has always been his area of specialization. History has always been one of his interests and passions, in fact, that’s how Hal and Jeremi became friends in Madison, Wisconsin.