The Long- and Short-Term Budget Challenges
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In 2012, as federal deficits still hovered about the trillion dollar level, the political parties agreed to a process to cut federal spending known as “sequestration.” While Democrats protected entitlement spending from cuts and Republicans prevented any tax increases, both agreed to focus deficit reduction on federal discretionary spending, a secondary priority for both. Following an initial budget cut of one trillion dollars, sequestration cut domestic and defense discretionary spending by another $1.2 trillion, imposed over a decade, from 2013-2023. Since federal R&D is discretionary spending, R&D was cut as well. Congress subsequently modified the cuts in budget agreements covering fiscal years 2014-2017, and R&D spending has recovered to approach 2012 spending levels. The figure below (from AAAS) shows, for major science agencies, first, the budget stimulus during the Great Recession where R&D was a significant beneficiary, and, second, the budget cuts imposed by sequestration starting in 2013. The figure shows the extent to which the agencies have recovered from sequestration.
But just as R&D spending was recovering from sequestration – which remains in place until 2023 – the new budget for fiscal year 2018 submitted by the Trump administration proposes to deliver a more draconian blow. The President made major campaign pledges to increase defense and infrastructure spending as well as to cut taxes. In its budget “blueprint” of March 16, 2017, the administration is seeking a $54 billion increase in Defense programs (and $2 billion in Homeland Security), which it proposes to offset with corresponding cuts to domestic discretionary programs. Some R&D highlights are identified below:
These cuts come in a context of a proposed 10.2% reduction across domestic agencies, including a 21% cut at Agriculture and a 28% cut at State. Because the cut in domestic discretionary programs (domestic spending is cut from $516b under current law to $462b) is balanced by a corresponding increase in defense spending (which increases from $549b to $603b) there is no effect on the growing budget deficit. There is an irony here: only some 16% of the total federal budget is now in the domestic discretionary category; this category is now such a modest part of the total budget that even massive cuts in this category have limited effect on the deficit.
Although Candidate Trump pledged to both balance the budget and pay off the national debt of $19 trillion in eight years, he has been unwilling to address mandatory spending, which (plus interest on the debt) is over 60% of federal spending.
The March document is only a preliminary budget – a full budget will be submitted in May. The new budget will still have to clear Congress. While most had been assuming that the administration could use the Budget Resolution and follow-on Reconciliation process to pass it outside of the Senate filibuster process, the deficit increase required by the proposed defense spending may trigger a 60-vote requirement in the Senate, which means that both parties will have to consent to the changes, likely triggering complex procedural maneuvers that will determine whether these cuts will go into place.
To summarize, there are long-term budget pressures primarily due to the aging demographics in the U.S. and the corresponding cost of health care programs. Budget deficits, after declining in the recovery from the Great Recession, are rising again. This puts ever-growing pressure on federal discretionary spending, source of R&D spending. Meanwhile, in the short term, just as science agencies have been recovering from the sequestration cuts imposed in 2012, the President’s FY2018 budget proposal makes major and unprecedented cuts in R&D programs. A major legislative battle late this spring will determine whether and to what extent these R&D cuts will go into place.
Of course, R&D is not part of the problem; it is arguably part of the solution because of its potential to contribute to economic growth through technological innovation. Even a modest increase in growth helps offset the demographic effects of rising mandatory spending and the budget deficit. Although MIT’s Robert Solow led the development of innovation-based growth theory, so far neither political party has fully accepted this as core doctrine. In a way, the two political parties still seem locked into the two pillars of growth theory from classical economics that Solow’s work displaced: Republicans tend to embrace capital supply and Democrats labor supply theories. While both factors remain important, they are not the dominant causative growth factor Solow identified: technological and related innovation. Arguably, until this is better understood, R&D support will remain under long- and short-term budget pressures.
However, this foundational argument for R&D is getting harder to make. Economist David Autor and his colleagues tell us our society increasingly looks like a barbell, with a quite successful upper middle class on one bell, a thinned-out middle, and the other bell, a growing, lower pay, lower end services sector. This in a nation that has long prided itself on its social mobility and economic opportunity.
Instead, for example, median income for men without a high school diploma has declined by 20 points between 1990 and 2013, and those with a high school diploma or some college declined by 13 points.
We have a growing underclass that is increasingly our middle class. Labor economist Richard Freeman argues America’s growing income inequality is reaching developing world levels. Economic historian Peter Temin’s new book, The Vanishing Middle Class, documents just that. He shows, for example, the declining middle class share of national income from 60% to 40% between 1971 and 2014, and the stagnation of wages for manufacturing workers between1975 and 2014, despite significant productivity gains.
In this context of growing economic inequality, technological advance is not necessarily viewed as an unalloyed good; an increasing part of the working class sees it as a job threat. We face a growing problem of jobless innovation. Universities, with their rising costs, are too often viewed as elite bastions, not engines of mobility, despite arguments to the contrary. Challenges to our society are now at hand regarding quality job creation, manufacturing, the future of work, and education and training that can raise skills and economic opportunities. Can universities play a role in thinking through these problems? Can MIT? Arguably, universities need to be part of the solution, and seen to be part of the solution, to these problems. The university research model itself may have a stake in the outcome.
William B. Bonvillian served eleven years as director of MIT’s Washington Office until February, and is now a lecturer teaching a course in science and technology policy for STS and Political Science. These comments are drawn from a talk he gave to the MIT Faculty Meeting on February 15, 2017.
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