Federal Investment in R&D Accelerates Economic Productivity: The Risks of Drastic Budget Cuts

Large reductions in government-funded research and development (R&D) pose a significant threat to the United States' economic growth and innovation capacity. Recent fiscal policies highlight the dangers of constraining such vital investments. For instance, under the Trump administration, at least $1.8 billion in research grants from the National Institutes of Health (NIH) were canceled, and the preliminary budget proposal for 2026 recommended slashing federal funding for scientific initiatives—cutting the NIH budget by nearly 40% and reducing the National Science Foundation (NSF) budget by over half, to $5 billion. These cuts threaten to undermine the pipeline of biomedical, energy, aeronautics, and space research that fuels technological advancement.

Research by economists, including those at Texas A&M University and the Federal Reserve Bank of Dallas, underscores the critical role that government R&D spending plays in stimulating innovation, productivity, and economic growth over the past 75 years. Historical data and recent analyses indicate that government investments in nondefense research—such as biomedical advances, physics, and space technology—have been directly linked to a substantial share of U.S. productivity gains. Since World War II, over 20% of productivity growth can be attributed to federal R&D efforts, with declines in this spending correlating to slower economic progress.

Productivity improvements driven by technological advances depend on research that primarily originates from government and academic sources. While the private sector tends to focus on development, fundamental research—often underfunded by private firms—paves the way for knowledge spillovers and widespread innovations. Historically, efforts like NASA’s space exploration, NIH-funded biomedical research, and Department of Energy projects have produced broad economic benefits.

Despite these benefits, federal R&D investments remain relatively low compared to their potential returns. For example, the productivity gains from nondefense R&D are estimated to be at least ten times higher than those from investments in infrastructure, yet government spending on physical infrastructure continues to dwarf R&D budgets. Economists argue that increased R&D funding, particularly in fundamental science, would enhance productivity and living standards, but political cycles and the focus on short-term fiscal adjustments often limit such investments.

Moreover, research reveals that government R&D spending complements rather than crowds out private sector investments. An additional dollar invested by the government typically results in a 20-cent increase in private sector R&D. Therefore, large-scale budget cuts could inadvertently deter private R&D initiatives, hampering long-term innovation and economic growth.

The challenge lies in demonstrating the value of R&D investments, which often manifest benefits gradually and are less immediately visible than expenditures on healthcare or infrastructure. Nonetheless, the evidence suggests that underfunding R&D deprives the U.S. economy of critical innovations, hindering future growth and competitiveness. To sustain technological progress and economic prosperity, policymakers should recognize the high returns and societal benefits associated with federal R&D funding.