Taking On The Three Deficits

Three Deficits
BY MATT HOURIHAN, MATTHEW STEPP, VAL GIDDINGS, JESSE JENKINS AND DEVON SWEZEY
OCTOBER 2010
TABLE OF CONTENTS
Executive Summary ....................................................................................... 2
Introduction .................................................................................................. 5 Americas Three Deficits: Budget, Trade, and Investment .............................. 9 The Budget Deficit .................................................................................................. 9 The Trade Deficit.................................................................................................... 9 The Investment Deficit ......................................................................................... 10 Closing the Three Deficits: Spurring Economic Growth Through Targeted Public Investments ................................................................................................. 12 Putting the Current Budget Deficit Debate in Perspective ..................................... 12 Cutting Productive Public Investments: The Wrong Way to Close the Three Deficits .............................................................................................................................. 14 Investing in Innovation, Productivity and Competitiveness: The Right Way to Close the Three Deficits........................................................................................................ 17 Distinguishing Between Consumptive Spending and Productive Investments to Close the Three Deficits........................................................................................ 19 Oil and Gas Subsidies: Consumptive Spending ..................................................... 20 Advanced Research Projects Agency Energy (ARPA-E): Productive Investment ..... 21 Conclusion .................................................................................................. 23 Appendix A: Brief Summary of Three Deficits Estimation Methodology ....... 24 Appendix B: Investment or Spending? Illustrative Examples of Select Federal Programs ..................................................................................................... 26 The Research & Experimentation Tax Credit (R&D tax credit): Productive Investment .............................................................................................................................. 27 Economic Development Administrations Regional Innovation Clusters Program: Productive Investment ........................................................................................... 28 Integrative Graduate Education and Research Traineeship Program (IGERT): Productive Investment ............................................................................................................ 30
THE INFORMATION TECHNOLOG Y & INNOVATION FOUNDATION
MAY 2010
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Manufacturing Extension Partnership: Productive Investment............................... 31 Agricultural Research and Development: Productive Investment ........................... 32 Energy Frontier Research Centers (EFRCs): Productive Investment ...................... 33 USDA Rural Utilities Service: Productive Investment............................................ 34 Endnotes and Citations ............................................................................... 37 Acknowledgements ...................................................................................... 40
THE INFORMATION TECHNOLOG Y & INNOVATION FOUNDATION
MAY 2010
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EXECUTIVE SUMMARY
National policymakers are consumed by a debate over how to drastically reduce the nations debt, which some argue is critically important to the nations economic future. But Congresss myopic focus on the budget deficit has obscured the fact that America actually faces three deficitsthe budget deficit, the trade deficit, and the investment deficitthat if left unchecked could total $40 trillion in the next 10 years.
$45,000 $40,000 $35,000 $ (Billions) $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Three Deficits through 2011 Cumulative Investment Deficit Cumulative Budget Deficit
Figure 1: Estimate of America's three deficits in 2011 and 2021 projection
Three Deficits Estimated through 2021 Cumulative Trade Deficit
Americas Three Deficits America faces three cumulative deficits, each of which must be addressed to ensure continued economic prosperity: The Budget Deficit is the difference between federal revenues and spending. The budget deficit for FY2011 stands at over $1.2 trillion, and future budgets are expected to add approximately $10 trillion to the nations cumulative debt over the next 10 years. The Trade Deficit is the annual difference between U.S. exports and imports. For years, the United States has imported more than it exports, leading to large and persistent trade deficits. In 2010, the United States generated a $500 billion trade deficit. Since 1975, the United States has accumulated a total trade deficit of $8 trillion, and the cumulative trade deficit could grow to $18 trillion in 10 years.
THE INFORMATION TECHNOLOG Y & INNOVATION FOUNDATION AND THE BREAKTHROUGH INSTITUTE | OCTOBER 2011
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The Investment Deficit is the shortfall of investments in scientific research, infrastructure, and new technologies that are needed to maintain our current standard of living and ensure steady economic growth. Without an increase in public investments in these key foundations of economic strength, the investment deficit will grow to at least $7.5 trillion in the next decade. Overall, Americas three deficits total nearly $23 trillion and are projected to grow to $40 trillion in 10 years. The Right and Wrong Way to Close the Three Deficits
The Wrong Way
Most policymakers in the budget debate are ignoring the trade and investment deficits, and as a result risk making all three deficits worse. The predominant approach in Washington is to pursue across-the-board budget cuts to reduce the level of public spending. Such a strategy would actually be counterproductive, since it would simply transfer financial debt to investment or trade debt. Take, for instance, the impact of a 10 percent cut in funding for research and development spending over the next 10 years. This would nominally reduce the budget deficit by $150 billion over 10 years, but would increase the investment deficit by the same amount. Moreover, it would actually increase the trade deficit as well, by slowing the pace of innovation and making U.S. exporters less competitive. This in turn would reduce economic growth, ultimately leading to a higher budget deficit (see Figure 1 below).
$600,000 $500,000 $400,000 $ Millions $300,000 $200,000 $100,000 $0 -$100,000 -$200,000 -$150,000 10% R&D Budget Cut Investment Deficit Trade Deficit Net Change in Three Deficits Over 10 Years Budget Deficit $496,898
Figure 2: Estimate impact of a 10 percent cut (relative to 2010 government investment level) in R&D investments portioned equally over 10 years on the three deficits
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The Right Way
Instead of focusing solely on the budget deficit, Congress should instead take a more nuanced approach to budget cutting that controls the national debt while simultaneously reducing the investment and trade deficits. The only way to do this is to actually increase targeted investments that spur innovation, productivity, and competitiveness while cutting budgets elsewhere. Increasing these productive public investments will close the investment deficit, boost U.S. competitiveness and exports, and generate higher economic growth, which is the single best way to close the budget deficit. 1 The Congressional Budget Office estimates that an increase of just 0.1 percent in the GDP growth rate could reduce the budget deficit by as much as $310 billion cumulatively over the next decade. 2 Accelerated economic growth could halve the cumulative deficit over the coming decade, while gaining control over the nations debt without a return to growth may well prove impossible. Productive Investment vs. Consumptive Spending The challenge, then, is to identify those programs that spur innovation, productivity, and competitiveness, and therefore drive economic growth. In particular, policymakers should distinguish between productive investmentexpenditures that expand the productive capacity of the country, drive economic growth, and increase future incomesand consumptive spendinggovernment expenditure that finances present consumption of goods and services. Productive public investments will help reduce the three deficits and should be strengthened, while consumptive spending will likely add to the three deficits and could more justifiably be cut. Some consumptive spending programs may still be important, but each should be judged on their own merits. In general, targeted cuts to these programs could be made to reduce the budget deficit without exacerbating the other two deficits. To distinguish between investment and spending, policymakers should consider three criteria:
1.
2. 3.
Innovation. Does the program or policy help spur innovation to create new products, processes, technologies, or knowledge that in turn adds value or creates new industries? Productivity. Does the program or policy increase the productivity of organizations and the economy as a whole? Competitiveness. Does the program or policy help close the trade deficit by making U.S. firms more globally competitive, thereby increasing exports, or reducing imports?
By using these three metrics as a guide, policymakers can make better budget decisions that spur economic growth and simultaneously close all three deficits, even as they cut spending elsewhere in the budget. By increasing productive public investments to spur innovation, productivity, and competitiveness, America can begin closing its three deficits and once again become the most competitive and innovative nation in the world.
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INTRODUCTION
For the last year, Washington policymakers have been consumed by a debate over the nations debt. On July 31, 2011, in a last-minute deal to raise the debt ceilingthe amount of money that the Treasury Department is legally allowed to borrowCongressional Democrats and Republicans struck a deal to enact budget cuts of $917 billion over the next 10 years. The deal also creates a new Congressional Supercommittee to identify more than a trillion dollars in further deficit reduction by the end of November 2011 or face blunt, automatic spending cuts to discretionary and defense spending, a move aimed at forcing Congress to boldly act and solve Americas growing fiscal problems.
Politicians on both sides of the aisle are closely engaged in the issue of deficit reduction, and some see it as the issue that will define the United States economic future. As the Presidents National Commission on Fiscal Responsibility and Reform noted in its final report, America cannot be great if we go broke. Our economy will not grow and our country will not be able to compete without a plan to get this crushing debt burden off our back. 3 Yet the single-minded focus on the budget deficit has obscured the fact that America actually faces three deficits, all interrelated and each equally critical to the nations future economic prosperity. In addition to the worsening budget deficit, America faces a persistent and growing trade deficit. In the last three decades, the United States has run a negative and generally worsening balance of trade. The trade deficit hit a record $760 billion in 2006, and remained high at $500 billion in 2010 even after the global financial crisis put much of the world in a recession and sharply reduced imports. The trade deficit not only creates a drag on economic growth, it represents a hidden tax on future generations of Americans who will have to pay it off by running trade surpluses stemming from expanded exports and/or reduced consumption of goods and services. If we wish to close the trade deficit without sacrificing future living standards, we must focus on increasing the competitiveness of the traded sectors of the economy to boost exports and reduce imports. 4 The nation also faces a third deficit, an investment deficit that exacerbates each of the other deficit challenges and must be promptly addressed. The investment deficit refers to the shortfall in investment in the activities that spur the innovation and productivity that is needed to maintain or expand our standard of living. Not keeping up with investment needs is like a business not upgrading or keeping up with the maintenance of their facilities while neglecting investments in worker training and new product development. Public investment in areas like education, scientific research, new technologies, and productive infrastructure provide a critical foundation for long-term economic prosperity. 5 Decades of
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economic research demonstrate that these investments drive economic growth by accelerating innovation and boosting productivity, yielding positive returns on investment for the entire economy. Yet public investment in these building blocks of national prosperity has declined for decades even as international competition has intensified, leading to stagnating growth and a widening investment deficit. 6
$45,000 $40,000 $35,000 $ (Billions) $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Three Deficits through 2011 Cumulative Investment Deficit Cumulative Budget Deficit
Figure 3: Estimate of America's three deficits. Cumulative budget deficit through 2021 based on 2011 CBO update forecast. Trade deficit estimate assumes trade deficit linearly grows to 5 percent of GDP then remains 5 percent through 2021. Investment deficit includes infrastructure and R&D
Three Deficits Estimated through 2021
Cumulative Trade Deficit
Americas three cumulative deficitstrade, investment, and budgetcurrently total nearly $23 trillion or over 150 percent of current U.S. GDP. Based on forecasts by the Congressional Budget Office (CBO), and assuming the United States experiences the same trade deficit (as a share of GDP) and similar trends in public investment, the three deficits are expected to grow to $40 trillion in 10 years. (Figure 3) The budget deficit alone only makes up just over one third of the total combined deficit. Thus, addressing all three growing deficits is critically important to ensuring continued economic prosperity. (For a brief summary of the three deficits estimation methodology, see Appendix A.) Yet neither the trade nor the investment deficits will be well served by the current approach of federal budget cutting, in which policymakers have put everything on the table in an effort to appear bold in their approach to the national debt. Such a policy would actually be counterproductive, as it would simply transfer financial debt to investment and trade debt. 7 Congress should instead take a more strategic approach to budget cutting that closes the budget deficit while simultaneously reducing the investment and trade deficits.
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The only way to close all three deficits at once is to increase targeted investments (both budgeted and tax expenditures) that spur innovation, productivity, and competitiveness while cutting elsewhere. Increasing these productive investments will help close the investment deficit, boost U.S. competitiveness and exports, and generate higher economic growth, which also generates offsetting revenue that will help close the budget deficit. 8 The Congressional Budget Office estimates that an increase of just 0.1 percent in the GDP growth rate could reduce the budget deficit by as much as $310 billion cumulatively over the next decade. 9 So for example, an increase in the real rate of GDP growth from the CBO projection of 2.8 percent over the next decade to 4 percentthe U.S. growth rate from 19932000would, all else equal, cut the cumulative budget deficit in half or by $6.8 trillion, over the next decade. Indeed, failing to make necessary productive investments undermines the nations ability to close the budget deficit by exacerbating each of the other two deficits, stifling economic growth and reducing future federal revenues. Put simply, cutting the budget deficit on the back of the trade and investment deficits would be akin to taking one step forward but two steps back. To make smart budget decisions and address all three critical deficits, policymakers must be able to distinguish between consumption spending, which simply reallocates resources without increasing growth, and productive public investments that drive growth and expand the future asset base of the economy. This critical distinction is often lost on both sides of todays budget negotiations. Many on the left dont distinguish between the two, either because they are unconcerned about the budget deficit or because they believe spending and investment have the same economic impact. Many on the right paint all federal investments as spending that should be cut; even though investments like scientific research yield large returns for both society and the federal treasury that other spending, including subsidies to farmers and oil companies, do not. 10 There is a similar lack of clarity on tax policy, with some on the left opposed to more tax cuts for businesses and some on the right in favor of any and all tax cuts, regardless of merit. The truth is that some tax expenditures, like the ethanol tax credit, are wasteful and dont increase productivity or growth, while tax incentives, like the R&D tax credit, encourage activities that foster growth, innovation, and job creation. 11 The purpose of this paper is therefore twofold. First, it expands the current policy debate beyond a restrictive and dangerous focus on the budget deficit alone by quantifying all three of Americas key national deficits, their interrelatedness, and the potential economic consequences of ignoring any of the three. Second, the paper brings greater clarity to the budget debate by helping policymakers distinguish between public expenditures that are consumptive on the one hand and those that are productive investments on the other. The paper thus helps officials make budget decisions that foster economic growth and simultaneously close the budget, trade, and investment deficits.
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Specifically, when deciding whether a program or policy should be classified as an investment, policymakers should consider three criteria:
1.
2. 3.
Innovation. Does the program or policy help spur innovation to create new products, processes, technologies, or knowledge that in turn adds value or creates new industries? Productivity. Does the program or policy increase the productivity of organizations and the economy as a whole? Competitiveness. Does the program or policy help close the trade deficit by making U.S. firms more globally competitive, thereby increasing exports and reducing imports?
Attentiveness to these three criteria can help policymakers make high impact, growthoriented investments, even as they make budget cuts elsewhere. If policymakers do not differentiate between productive public investments and spending in their efforts to close the budget deficit, the United States can expect less innovation, lower productivity, and falling competitiveness. Over time this will lead to lower economic growth and therefore a higher budget deficitthe opposite of policymakers stated goals.
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AMERICAS THREE DEFICITS: BUDGET, TRADE, AND INVESTMENT
In this section, we detail each of the three deficitsbudget, trade, and investmentand explain why each is a significant drag on long-run economic performance. Then, we explain how the three deficits are interrelated and describe the wrong and right ways to approach the challenge of closing all three deficits.
The Budget Deficit In the last ten years, the United States budget situation has shifted from surpluses in the late 1990s to sizable deficits throughout the last decade. In 2001, the nonpartisan Congressional Budget Office (CBO) projected that the government would erase overall debt by 2006 and that it would see a cumulative surplus of $2.3 trillion by 2011. Instead, the United States total outstanding debt is projected to reach $10.4 trillion this yeara negative shift of $12.7 trillion from expectations at the start of the decade and the largest debt as a percentage of GDP since 1950. 12 Americas national debt and its projected growth in the coming decades put future economic expansion at risk. The debt will have to be paid back to creditors with increasingly large interest payments. Large deficits today will also require large tax increases or dramatic spending cuts in the future, reducing future consumption as well as the resources needed to make growth-enhancing investments. Persistent budget deficits can generate a strong feedback effect that can be destructive to the economy. As the national debt increases, the governments ability and willingness to make productive public investments decreases, reducing economic growth and thus tax revenues. This, in turn, further exacerbates our budget deficit. Such a negative cycle can also erode business confidence in the economy, reducing domestic private sector investment. 13 Over time, a large and persistent budget deficit will lead to economic disarray. The Trade Deficit U.S. trade performancethe balance between imports and exportshas fared no better than the budget deficit in recent years. During the prior decade, the United States added $5.5 trillion to the deficit in traded goods and services, bringing the cumulative deficit since the nation last recorded a trade surplus in 1975 to $9 trillion. The accumulated trade deficit is worsening considerably year-in and year-out. In 2006, the annual current account deficit reached a record $760 billion, or more than five percent of GDP. 14 After falling during the economic downturn, the trade deficit has recently returned to near pre-recession levels. Petroleum imports continue to account for roughly half of the trade imbalance, while the traditional U.S. trade surplus in agricultural products is nearing zero. The deficit in manufactured goods has become a key component of Americas trade imbalance in recent years: in seven of the past ten years, the United States deficit in manufactured goods exceeded $400 billion. The United States even records a trade deficit in advanced
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technology products, widely assumed to be Americas comparative advantage, and ran a record $81 billion deficit in the category in 2010. 15 This deficit is a result of a hollowing out of the domestic economy, as reduced capital investment and faltering international competitiveness has weakened our domestic manufacturing base. 16 The United States does maintain a trade surplus in services, but it is equal to only 17 percent of the trade deficit in goods and is thus not nearly large enough to reduce the overall trade deficit without a corresponding expansion of exports in manufacturing sectors as well. Why are large trade deficits undesirable? The United States has borrowed massive amounts of overseas capital to finance its persistent trade deficitan amount equivalent to $49,000 for every American household. 17 But this borrowing cannot continue forever and in fact represents a hidden tax on future generations of Americans who will have to pay off the trade deficit with a future increase in the production of goods and services or a reduction in consumption and living standards. 18 To put it another way, Americans currently consume on average 5 percent more than they produce (the trade deficit averaged 5 percent of GDP before the recession). So in the future, Americans may need to consume 5 percent less than they produce if actions arent taken now to boost US competitiveness in traded sectors and address the growing trade deficit. If such large trade deficits persist, the value of the U.S. dollar will eventually fall relative to foreign currencies as investors sell dollars in favor of other traded currencies, particularly if the growth of emerging economies continues at a quick pace. A declining dollar makes it more expensive for U.S. consumers to purchase imported goods and services, which can easily lead to reduced consumption and falling living standards. Of course, the flip side of the declining dollar is that it will make U.S. producers more competitive internationally and will help boost exports, something that ultimately helps rebalance the global economy. But a declining dollar should not be relied on to completely reverse the trade deficit. To close the trade deficit without reducing consumption and living standards, the United States must invest in manufacturing, research, technology, and infrastructure. These investments are critical to increase productivity, make domestic firms more competitive, and support economic leadership in new technology industriessomething other nations are doing with significantly positive results. If we fail to make investments that strengthen our domestic manufacturing and technology base, we will miss out on the economic opportunity presented by high-value export industries, even as we face more expensive imports from abroad. That would be a recipe for long-term economic decline. The Investment Deficit The decline in U.S. investments in innovation, education, and productive infrastructure also presents a mounting challenge to American economic prosperity. From the early 1990s through the Great Recession, the United States total investment in R&Da central driver of innovationdeclined as a share of GDP and has only increased in the last two years due to stimulus investments that will soon expire. 19 Growth in federal R&D investment was nearly 6 percent per year from 1953-1987, but only 2 percent per year from 19872008. (Figure 4) If R&D growth rates had continued on their earlier trajectory, these investments would be approaching $350 billion annually today, rather than current levels of roughly
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$150 billion. With respect to infrastructure the American Society of Civil Engineers estimates that $2.2 trillion in investment over the next five years is needed to simply bring the nations infrastructure, including highways, water, and energy, up to good condition. 20 These trends are part of the reason the United States is now ranked second to last out of 44 countries and regions in making progress on innovation and competitiveness. 21
7% Compound Annual Growth Rate 6% 5% 4% 3% 2% 1% 0% 1953 to 1987 1987 to 2008
Figure 4: Comparison of the compound annual growth rate of government R&D investments between 1953 and 1987 and 1987 and 2008
And as our investment deficit worsens, so does our economic performance. Investment in R&D, for example, is an important driver of productivity, which spurs economic growth. Economy-wide studies of the impacts of increased R&D on productivity yield diverse results depending on the character of the economy. Credible estimates of the impact a one percent increase in the R&D stock (the total, cumulative investments in R&D) range from a 0.23 percent to 0.61 percent corresponding increase in economic productivity. 22 Using either the low or high end impact, a one-time, one percent increase in the national R&D stock, or an increase of roughly $35 billion, could yield significant long-term productivity gains, economic growth, and increased federal revenues. (See Figure 5 below) In fact, the federal government breaks even on their initial investment within a few years regardless of which estimate is used (see Appendix A for a brief summary of the methodology for these calculations.) Thus, in the long-run, federal investment in R&D could significantly reduce the budget deficit in addition to generating significant wealth and job creation. 23
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$700,000 $600,000 $500,000 $ Millions $400,000 $300,000 $200,000 $100,000 $0
Cumulative Change in GDP Low Productivity Impact Cumulative Tax Revenue Added - Low Productivity Impact Cumulative Change in GDP High Productivity Impact Cumulative Tax Revenue Added - High Productivity Impact
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Figure 5: Estimates of cumulative GDP and tax revenue growth as a result of a 1 percent increase (one-time investment) in U.S. R&D stock ($35 billion). Red lines represent a high productivity impact case (elasticity = 0.61%). Blue lines represent a low productivity impact case (elasticity = 0.23%)
CLOSING THE THREE DEFICITS: SPURRING ECONOMIC GROWTH THROUGH TARGETED PUBLIC INVESTMENTS
The fact that America faces three deficits makes the budget debate more complicated than the simple math of revenues and expenditures would suggest. The budget, trade, and investment deficits are all interrelated, and decisions aimed at closing any particular deficit often have an impact on the other two. For instance, the decision to cut federal spending will close the budget deficit in the short-term, but could either increase or decrease the trade and investment deficits, depending on what type of spending Congress decides to cut. To simultaneously close all three deficits, policymakers need to take a more nuanced approach to the budget debate that reflects this reality. If they dont, their decisions will at best have a negligible impact on the three deficits. At worst, they will harm the future prosperity of the economy. Putting the Current Budget Deficit Debate in Perspective Federal policymakers profess to be focused on Americas chief economic challenges, but the fact is that most have been focused on just one of themthe budget deficit. Not only has much of the debate largely ignored Americas two other deficits, it has narrowly focused on cutting a small slice of the federal budget that contains the vast majority of the programs vital to sustained economic growth and competitiveness. Specifically, much attention has been paid to the need to reduce non-defense discretionary spending. But entitlements like Social Security, Medicare and Medicaid, all of which fall outside the discretionary budget, are by far the largest drivers of government outlays and thus the budget deficit. (Figure 6) Defense spending also plays a large role, accounting for half of all discretionary spending. In FY2010, these four spending areas made up 61.5
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percent of the $3.5 trillion federal budget. By contrast, non-defense discretionary spending accounted for just 18.8 percent of the budget. Yet the most recent budget deal passed into law would cut this small share of the budget by over $900 billion over 10 years, while leaving larger portions of the budget initially untouched (the Supercommittee must come up with an additional $1.2 trillion in cuts of its choosing, less harsh cuts to the defense budget would occur).
2.5%
7.8%
Medicaid Medicare
19.7%
12.8%
Income Security Social Security
12.8%
Net Interest Non-defense Discretionary Defense Discretionary Other
18.8% 20.0% 5.6%
Figure 6: Share of 2010 federal budget by major budget category. Other spending category includes veterans support, government employee retirement plans, and the children's healthcare 24 program
Unfortunately, the discretionary budget includes most of Americas key investments in innovation, productivity, and competitiveness. The American Association for the Advancement Science (AAAS) has estimated that non-defense R&D, a key source of innovation investment, accounts for 9 percent of the discretionary budget and slightly less than 2 percent of the total budget. Education and worker training likewise take up less than 4 percent of the total FY2010 budget. And infrastructureincluding both transportation and water infrastructurehas historically accounted for similarly small budgetary levelsabout 4 percent of the FY2010 budgetwith some programs supported by dedicated revenue streams such as the gas tax. Within this framework, agencies and programs with some connection to productive investments and innovation collectively take up a relatively small portion of the budget picturelikely less than 10 percent of all expenditures. (Figure 7) Thus, while many policymakers rail against excess discretionary spending, the fact is that the discretionary budget, and in particular the key productive investments within the discretionary budget, make up a relatively small part of the budget deficit challenge. This
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has three important implications for the budget debate and crafting effective strategies to close the three deficits. First, focusing on cuts to these investments alone will make little headway in reducing the budget deficit. At only 18.8 percent of the federal budget, even if all discretionary programs were eliminated, the United States would still need to do much more to address the budget deficit. Second, the small size of productive investments indicates just how significant the investment deficit really is. As described above, the investment deficit is over $4 trillion through 2011 and projected to nearly double in the next 10 years. Deep, across-the-board cuts to the discretionary budget will only add to the investment deficit challenge. And third, notwithstanding their relatively small size, many of the productive public investment programs that fall within the federal discretionary budget are vital to economic growth and competitiveness and are therefore inextricably tied to all three deficits. Slashing these key investments now will only send America backwards.
8.9% 4.0% 3.8% 2.1% Total Mandatory Total Defense Non-Defense R&D 19.7% Education and Training Infrastructure 61.5% Other Discretionary
Figure 7: 2010 Federal budget organized by select major outlay type
25
National policymakers must recognize that America faces three interrelated deficits, not just one, and acknowledge that a focus on blanket, across the board budget cutting only exacerbates Americas three deficits and negatively impacts the United States economic future. The current approach by policymakers not only fails to improve the three deficits, but potentially makes all three, and the economy in general, worse. Cutting Productive Public Investments: The Wrong Way to Close the Three Deficits The predominant budget strategy in Washington, as described above, simply transfers fiscal debt to greater investment or trade debt, by cutting productive investments that would otherwise help boost exports or grow the economy (while doing little to reduce the budget deficit). As a result, the debt passed onto our children is not actually reduced.
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This dynamic can perhaps best be understood through the following analogy: Lets imagine the United States is a private firm. This firm is, like the United States, challenged by excessive debt commitments, owing money all over town, and is losing money due to reduced sales. However, this firm also owns an R&D lab that is one of the best in the world. It faces two choices. First, it could sell the lab, giving it extra short-term cash flow that allows it to pay off some of its debts. But this decision comes with a price: by selling its lab, it loses its capacity for innovation. As a result, it is no longer capable of creating the next smart phone or transformative energy technology. This would cost the company dearly in the form of future revenues and would reduce the companys ability to re-invest back into its business and compete in the global economy. The United States faces a similar situation with respect to its budget deficit. While an across the board reduction in federal spending will reduce the budget deficit in the shortterm, it would increase the investment and trade deficits, reduce economic growth, and therefore actually increase the budget deficit in the medium to long-term. As discussed above, investments in research programs would boost tax revenue (thus reduce the budget deficit all else equal) and boost economic growth by 0.2 to 0.6 percent for every 1 percent increase in R&D stock. Thus, from an economic growth perspective, R&D is one of the most cost-effective activities government can invest in, both directly through labs and grants and indirectly through tax incentives for private industry. So cutting R&D investment in order to reduce the budget deficit not only stifles productivity and growth, but also is a counterproductive strategy to tame the national debt itself. Heres an example: what would happen if policymakers cut cumulative R&D budgets over the next ten years by 10 percent? In the short-term, this would amount to a budget cut of roughly $15 billion in the first year compared to 2010 total public R&D investments and $150 billion reduction in budgets over ten years. But assuming even a low impact change in productivity, policymakers can expect reduced productivity and economic output to add to the cumulative budget deficit by nearly double the amount cut from the R&D budget. (Figure 8) The same holds for cutting public investments in infrastructure, such as reliable transportation, electricity, and communications systems, that are central to economic productivity and growth. One definitive study, estimates that increasing traditional infrastructure investments in projects such as roads, transmission lines, and bridges by 1 percent increases productivity by 0.23 percent. 26 Other econometrics literature is mixed on the productivity impact of investment in infrastructure, but the literature does suggest that specific infrastructure investments have high rates of return and should be targeted. 27 For instance, greater access to better telecommunications infrastructure leads to more efficient means of communication for businesses and consumers, lowering transaction costs, improving productivity, and thus spurring economic growth. 28 And greater access to smarter electricity and transportation infrastructure compared to traditional transmission lines and roads could significantly boost productivity. 29 Thus cutting investments, especially in next generation infrastructure, in an effort to reduce the budget deficit not only stifles future growth, but also makes the United States less competitive.
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$500,000 $400,000 $300,000 $ Millions $200,000 $100,000 $0 -$100,000 -$200,000 -$150,000
$445,804
$295,804
10% R&D Budget Cut 10 Year Cumulative over 10 Years Impact on Budget Deficit
Net Impact of 10% R&D Cut
Figure 8: Analysis of a 10 year, 10 percent cut in government R&D investment and its net impact on the budget deficit. Assumes that for every 1 percent change in R&D stock, productivity changes by 0.23 percent
Similarly, across-the-board attempts to close the budget deficit could also harm the trade deficit. For instance, Congress could close the budget deficit by axing funding for the International Trade Administration (ITA), which provides export assistance, business promotion, and trade agreement enforcement services. Yet cutting this funding would clearly put domestic firms at a disadvantage compared to their global competitors. Congress could also reduce the budget deficit by cutting programs like the Manufacturing Extension Partnership at NIST, which helps boost domestic manufacturers competitiveness by helping them adopt cutting-edge technologies. This, too, would reduce the competitiveness of U.S. manufacturing firms. And cuts to R&D and infrastructure put U.S. businesses and domestic industries at a significant disadvantage in terms of innovation capacity. National governments that invest at the frontier of technological innovation and new technology industries often gain first-mover advantages, and therefore export advantage for their domestic firms. Most economic analyses fail to distinguish between spending and investment when evaluating the impact of fiscal decisions on the trade deficit. For example, a recent International Monetary Fund (IMF) report finds that a 1 percent decrease in a countrys federal budget as a share of GDP decreases the overall trade deficit by 0.4 percent to 0.6 percent as a share of GDP, by reducing domestic consumption and imports. 30 But the IMFs model assumes that cutting government consumption produces the same mid-term economic effect as cutting government investment and ignores the fact that not all budget cuts are created equal. It is true that reducing federal spending can reduce the trade deficit to the extent it decreases imports. But if those cuts are concentrated on export assistance programs or investments in innovation in emerging traded sectors, for example, the resulting decrease in U.S. competitiveness would more than offset this temporary reduction in the trade deficit over the long-term.
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In reality, cutting programs that support productivity, competiveness, and innovation capacity, particularly in traded advanced manufacturing sectors, clearly puts U.S. industries at a competitive disadvantage in the global market. Conversely, the econometrics literature robustly calculates that a 1 percent decrease in export coststhrough productivity increases or currency devaluationincreases exports by an average of 1.31 percent. 31 Cutting productivity-enhancing government programs will therefore reduce the opportunity to expand exports and enhance American competitiveness, exacerbating the national trade deficit. Lets return again to the example where we cut cumulative R&D investments over the next 10 years by 10 percent or $150 billion over 10 years. Such a strategy would make the United States less competitive by reducing exports by over $50 billion, leading to a potential 10 percent increase in the current trade deficit (a short description of the analysis methodology can be found in Appendix A). In addition, cutting R&D investment would increase the investment and budget deficits. Overall, a 10 percent cut in government investment in R&D over the next decade would actually increase Americas three deficits by almost $500 billion, or over three times the amount of the original budget cut. (Figure 9) Clearly, there is the potential for significantly more negative impacts to the trade deficit depending on the type of budget cuts than typically discussed in policy circles. It is clear that everything should not be on the table in the budget debate. If Congress cuts productive investments in areas like research and innovation, education, and infrastructure, it will increase the already large investment deficit, and actually reduce economic growth relative to where it would be otherwise. Cutting programs that promote exports or enhance the technological capabilities of our entrepreneurial manufacturing firms will lead to a reduction in exports, also harming economic growth. Closing the budget deficit on the backs of the investment and trade deficits is simply poor economic policy and will do little to solve the three deficits challenge. Fortunately, there is a better way forward. Investing in Innovation, Productivity and Competitiveness: The Right Way to Close the Three Deficits Lets return to the analogy of our private firm: Instead of selling its R&D lab, the company could reduce costs by cutting costs elsewhere that dont put future growth at risk, such as cutting dividend payments to shareholders or reducing 401(k) matches to employees. By maintaining and strengthening its capacity for innovation, it would be able to develop a series of new products that allow it to capture market share from its competitors, increase its export capacity abroad, and significantly increase sales revenues. Increased revenues would help the firm pay off its debts, boost dividends, and increase employee benefits in the long-term, all as a result of the high returns to investment in innovation. But how would this more strategic approach look from a three deficits perspective? In short, this would include Congress taking a more positive sum approach and do what a competitive company would do: cut the fat and make investments to boost future competitiveness and growth.
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Take the following example: over 10 years, Congress eliminates $2 trillion in nonproductive or counterproductive federal spending while boosting targeted investments in innovation and research by $200 billion and infrastructure by $1 trillion. In simple terms, this equals $800 billion in net budget cuts over 10 years.
$600,000 $500,000 $400,000 $ Millions $300,000 $200,000 $100,000 $0 -$100,000 -$200,000 -$150,000 10% R&D Budget Cut Investment Deficit Trade Deficit Net Change in Three Deficits Over 10 Years Budget Deficit $496,898
Figure 9: Estimate impact of a 10 percent cut (relative to 2010 government investment level) in R&D investments portioned equally over 10 years on the three deficits
The benefits of this strategy are far greater than the immediate budget deficit impacts alone however. Because Congress took care to increase investments in programs that boost innovation, growth, and global competitiveness while making deep cuts elsewhere, $1.2 trillion in targeted investments and $2 trillion in targeted cuts would reduce Americas three deficits by nearly $5 trillion, or over 10 percent, in 10 years. (Figure 10) The impact of these investments on the three deficits could be even larger if they target key issues exacerbating the United States trade deficit as well. For instance, if Congress boosts targeted investments in developing breakthrough clean energy technologies, such as advanced, cheap, and energy dense batteries for electrified vehicles, further reductions in the trade deficit could be achieved by reducing U.S. oil imports. In 2010, oil imports accounted for 50 percent of the trade deficit. So, innovation investments in clean technology development that results in a 50 percent reduction in oil imports could reduce the three deficits by an additional 12 percent relative to the same investment example without clean technology development. In other words, if coupled with targeted investments in innovation, productivity, and competitiveness, a net $800 billion budget cut, or just 2 percent of the estimated cumulative three deficits in 10 years, the ultimate impact on Americas three deficits would be multiplied five-foldresulting in at least a $5 trillion reduction in the combined deficits, or 10 percent of the total.
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The point should be clear: a more strategic approach to budget cutting could have a much larger impact on Americas three deficits than across-the-board budget cuts discussed in current policy debates.
$45,000 $40,000 $35,000 $30,000 Billions $ $25,000 $20,000 $15,000 $10,000 $5,000 $0 Cumulative Three Deficits (through 2021) Investment Deficit Debt Reduction Experiment (from 2021 Forecast) Trade Deficit Debt Reduction Example + 50% Reduction in Oil Imports National Debt
Figure 10: The net impact of theoretical, targeted investments and spending cuts on the cumulative three deficits. The debt reduction experiment includes $2 trillion in targeted cuts to unproductive or counterproductive spending and $1.2 trillion in investments in R&D and next generation infrastructure. Investments and cuts are equally spread out over 10 years
We should also be clear, however, that reducing Americas budget deficit to near-zero cannot be accomplished through discretionary budget cuts or targeted investments alone. The above example would represent a good first step. Reducing the cumulative budget deficit further requires attending to the lion share of government spending, such as the growth of entitlement spending. But spurring economic growth through targeted investments, as well as ensuring that we do not exacerbate the budget deficit through cuts in government investments, makes closing the budget deficit easierand is absolutely vitalwhile helping secure long-term U.S. competiveness and economic.
DISTINGUISHING BETWEEN CONSUMPTIVE SPENDING AND PRODUCTIVE INVESTMENTS TO CLOSE THE THREE DEFICITS
Productive public investments are a key policy tool necessary to close the three deficits plaguing America. The challenge, then, is to identify those programs and policies that spur innovation, productivity, competitiveness, and therefore economic growth, and those that do not.
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In particular, productive investment includes expenditures that expand the productive capacity of the country, drive economic growth and increase incomes, consumption and economic opportunities in the future. In the words of Nobel Prize-winning economist Michael Spence, investment is an expenditure whose purpose is to increase the tangible and intangible asset base of the economy. Those expanded assets increase the output of the economy and the productivity of labor. 32 Consumptive spending, by contrast, can be thought of as government expenditures on goods and services that finance present consumption, as opposed to longer-term investment. This category would include things like non-R&D defense spending, funding for judicial and administrative systems, or subsidies to mature industries. Some consumptive spending takes the form of transfer payments, which shift resources from one group to another, either in the short-term or long-term. These spending programs include entitlement programs like Social Security and Medicare, which pool payroll tax revenues from the population at large and fund present and future retirees and elderly medical costs. To be clear, the distinction between productive investment and consumptive spending does not mean that the latter is not important or useful. Indeed, programs like unemployment insurance (a transfer payment) can be critical to safeguarding citizens livelihoods, particularly in a deep economic recession like the one weve just experienced. Yet these programs do not directly expand the countrys asset base or otherwise drive innovation, productivity, and competitiveness, and thus should not be in the same category as those programs that do. Consumptive spending programs should be evaluated on their own terms. This section provides a framework for policymakers to evaluate programs based on whether each are productive public investments that should be safeguarded and even expanded because of their impact on economic growth. In particular, to differentiate between consumptive spending and productive investments, policymakers should use three criteria:
1.
2. 3.
Innovation. Does the program or policy help spur innovation to create new products, processes, technologies, or knowledge that in turn adds value or creates new industries? Productivity. Does the program or policy increase the productivity of organizations and the economy as a whole? Competitiveness. Does the program or policy help close the trade deficit by making U.S. firms more globally competitive, thereby increasing exports, or reducing imports?
Two illustrative program examples are given below, one each for productive investment and consumptive spending. Additional program examples can be found in Appendix B. Oil and Gas Subsidies: Consumptive Spending Several provisions in the tax code are intended to promote oil and gas exploration and production and investment in related capital goods. For example, oil and gas firms may expense or amortize expenditures for wages, supplies, and services associated with drilling
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and may claim a deduction on capital investments due to resource depletion. Firms may also claim a 6 percent income tax deduction for oil and gas production. These and other expenditures can add up to several billion dollars per year. 33
1.
Does the program help spur innovation that leads to something new that adds value?
No. Subsidies for the extractive oil and gas industries are inherently meant to promote activities that have been undertaken for, literally, over a century, and have little direct bearing on innovation to create new technologies or products. Oil and gas firms may benefit from other more general tax expenditures like the research and experimentation tax credit, which applies across the entire economy, but subsidies targeted specifically at these extractive industries are not intended to drive innovation.
2.
Does the program increase the productivity of private firms or the economy as a whole?
No. These subsidies are allocated based on the quantity of energy resources produced or the quantity of investment, and have no explicit preference for investments that enhance the productive capacity of extractive firms over an earlier baseline. In fact, its possible that tax expenditures, by providing a buffer to shield private firms from the pressures of competition, can actually reduce the incentive to boost productivity. For instance, the depletion allowance allows firms to claim a deduction based on the depletion of the resources they have tapped, to recover their capital investment costs. Shielding firms from the need to recover full capital costs means dampens the incentive for firms to reduce those initial capital investments and extract resources more efficiently through better methods or new technologies, which would boost productivity.
3.
Does the program help close the trade deficit by making U.S. firms more globally competitive, increase exports, or reduce imports?
Yes, oil and gas subsidies may help reduce exports by reducing the cost of domestic production relative to imports. As mentioned above, oil imports are one of the major drivers of the deficit in traded goods and services. By providing incentives for marginal oil and gas production, these tax expenditures can help to reduce the trade deficit, though cannot provide sufficient incentive for domestic production to close it entirely. Advanced Research Projects Agency-Energy (ARPA-E): Productive Investment ARPA-E is an energy technology program within the Department of Energy that funds small groups of researchers, engineers, and entrepreneurs focused on breakthroughs in clean energy technology. It is modeled after the Defense Advanced Research Projects Agency (DARPA), which is responsible for many breakthrough innovations including stealthfighter technology and the Internet.
4.
Yes, ARPA-E plays a critical role in clean energy innovation by expanding knowledge about clean energy technologies as well as targeting risky-technologies that would add significant social value. It does this in at least three different ways.
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First, ARPA-E projects seek to create new paradigms of energy technologies by investing in targeted, high-risk research projects aimed at technology barriers key to developing nextgeneration clean energy. For example, the Electrofuels program seeks unique methods for utilizing metabolic engineering and synthetic biological approaches for the efficient conversion of carbon dioxide to liquid transportation fuels. Any one of its programs, if successful, would lead to new technologies with high social value. Second, ARPA-E fills weaknesses in the innovation ecosystem by bridging the gap between basic research and the demonstration of new technologies. Energy sector investments in early stage projects are limited, as most investors view these types of projects as too risky and prefer to target later stage, mature technologies. ARPA-E fills the resulting technological valley-of-death by investing in early stage R&D projects that also bring basic and applied research together under the same roof. Third, ARPA-E enhances the innovation capabilities of the energy sector by facilitating collaboration and coordination among universities, businesses, and government labs. ARPA-E program managers hold workshops with leading public and private sector thinkers on particular clean energy technology issues to hone in on those that would spur the greatest technological innovation. Research teams are also collaborative and often include federal labs, universities, and businesses working together.
5.
Yes, ARPA-E increases economic productivity both directly and indirectly. Directly, ARPA-E invests in innovative technologies that would drive energy efficiency for utilities, consumers, and industry. For example, ARPA-E is investing in power electronics and smart-grid technologies that would revolutionize electricity delivery and provide more reliable energy to consumers and businesses. It would also enable consumers more control over their energy use through smarter electronics and appliances, boosting energy efficiency across the grid. Indirectly, ARPA-E boosts productivity through investments in projects that could potentially have significant spillovers. For instance, its Electrofuels program aims to create new biotechnologies and microorganisms that can convert sunlight into energy ten times the efficiency as photosynthesis. If successful, not only would the breakthroughs impact the biofuel industry, but it would also provide benefits to farmers by making their farmland more productive.
3.
Yes, ARPA-E helps close the trade deficit by helping create new businesses that offer innovative and affordable clean energy technologies. These new businesses would have firstmover advantages in the global clean energy economy, boosting U.S. exports. Some of the breakthrough technologies funded by ARPA-E could also reduce the consumption of foreign oil, which reduces imports as well.
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CONCLUSION
For the last year, Washington policymakers have been rightfully engaged in a debate over the budget deficit. But the often myopic focus on the budget deficit alone has obscured the fact that America actually faces three deficitsbudget, investment, and tradeall interrelated, and each critical to the nations future economic prosperity. To make economic matters worse, the current budget deficit debate threatens to exacerbate all three deficits by indiscriminately slashing federal programs vital to innovation, growth, and competitiveness. Put simply, cutting the budget deficit on the back of the trade and investment deficits would be akin to taking one step forward, but two steps back. Such indiscriminate policy would be a route to both fiscal and economic ruin. As this report demonstrates, in some cases, blunt and deep budget cuts can actually increase Americas three deficits by at least three times the level of the initial cuts. This fact demands a more nuanced debate over budget priorities, and shows the economic folly of blind, across-theboard budget cuts. This paper aims to generate a more informed discussion about how the United States can put itself on a more sustainable fiscal path while reducing its large and persistent trade and investment deficits. To simultaneously reduce all three deficits, the government must make targeted, growth-enhancing investments to spur innovation, productivity, and competitiveness, even as it cuts spending elsewhere. In service of this goal, we provide a straightforward rubric to help policymakers differentiate between productive government investment and consumptive (and often counterproductive) government spending. As this paper demonstrates, by increasing productive public investments while making targeted cuts to consumptive spending, America can close its three deficits and once again become the most competitive and innovative country in the world.
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APPENDIX A: BRIEF SUMMARY OF THREE DEFICITS ESTIMATION METHODOLOGY

The figures and data provided in this report are simple estimates of the cumulative investment, trade, and budget deficits and key interactions among all three. Relevant economics and policy literature is used to approximate each of the three deficits, their interactive feedbacks, and the impact each has on economic growth. To be clear, this analysis is not an econometrics model. It does not estimate total economic effects, but instead aims to compare broadly the relative magnitude of policy changes on the three deficits. Also it does not calculate all economic impacts. For example, it does not calculate the impact policy changes would have on net interest payments on the national debt. With that said, the following methodologies were used to calculate each deficit: The Cumulative Budget Deficit The most recently available Congressional Budget Office (CBO) analysis of the United States economy is used to estimate the cumulative budget deficit in 2011 and 2021. 34 The Cumulative Trade Deficit Without a robust econometrics model, forecasting the future trade account balance is difficult. Therefore, we estimate the trade deficit using Census Bureau historical data as a share of GDP. 35 Using the Bureau of Economic Analysis historical GDP data, we calculated the share of the economy the United States balance of trade has represented over time. For 2011 through 2021, the most recent CBO GDP estimates were used. Before the recession, the trade deficit grew to over 5 percent of GDP, so all else equal we assume that the trade deficit will account for at least the same share of GDP through 2021. Further, we calculate the cumulative trade deficit as the sum of the deficit since 1975, as this was the first year the United States ran a negative trade account balance. The Cumulative Investment Deficit A growing economics literature points to investments in education, R&D, and infrastructure as the building blocks of innovation, thus productivity and economic growth. Yet estimating the investment deficits in each is difficult. In particular, its not clear how to estimate the overall shortfall in public education investments due to multiple levels of funding support from city, state, federal, non-profit, and private sector. Thus education was not included in our analysis, so our investment deficit estimate can be considered lower than to be expected. The cumulative infrastructure deficit is assumed to be $2.2 trillion, or the amount the American Society for Civil Engineers estimates is needed to upgrade our entire infrastructure system. 36 And from 1953 through 1987, public R&D investments grew at 5.8 percent annually on average, but began a general decline thereafter. Thus the cumulative investment deficit is estimated as the sum of the difference between expected R&D investments if government expenditures continued to grow at 5.8 percent and actual government expenditures. 37
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Feedback Effects among Three Deficits There is a well discussed literature on the impacts of increasing or decreasing investments in infrastructure and R&D on productivity, which was summarized in previously. Thus we can reasonably estimate the economic and three deficit impacts of different federal budget policy decisions through the use of established elasticitys. First, we assume that increasing R&D and infrastructure investments boosts productivity. In both cases we use conservative estimates. Based on Coe and Helpman, we estimate that for every 1 percent increase in the stock of R&D, productivity increases by 0.23 percent and vice versa. We estimated the United States R&D stock based on Coe and Helpmans findings that the GDP/R&D stock ratio is 4.39 and the annual depreciation rate for R&D is 5 percent. In addition, we assume a more conservative estimates than that found in the literature, particularly from Aschauer, and estimate that for every 1 percent increase in the stock of infrastructure, productivity increases by 0.1 percent. We estimated the United States infrastructure stock based on Bureau of Economic Analysis data reporting that public infrastructure stock is roughly $9.5 trillion and its annual depreciation rate is 1.52 percent. In both cases, we calculated the annual change in productivity and compound growth in GDP due to the investment. Based on a federal revenues/GDP ratio of 18.6 percent, we calculate the change in tax revenues based on the change in GDP. In other words, in net present value, a change in investments in R&D and infrastructure results in a subsequent change in productivity, thus GDP and over time federal revenue. A change in federal revenue due to public investment decisions directly impacts the cumulative budget deficit. Broad estimates of the impact of budget policy decisions on the trade deficit were made. The economics literature produces a wide range of elasticitys describing the change in exports resulting from a change in export costs caused by numerous external policies and forces including currency devaluation and productivity change. Hooper and Marquez found that the median impact of export cost on actual exports is 1.31 percent change in exports for every 1 percent change in export costs. Considering the range of elasticitys, we chose a more conservative 1 percent change in exports for every 1 percent change in export costs. In other words, we assume that for every 1 percent change in productivity, tradable businesses reduce costs by 1 percent, thus exports increase by 1 percent. So a change in public investments directly impacts the cumulative trade deficit.
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APPENDIX B: INVESTMENT OR SPENDING? ILLUSTRATIVE EXAMPLES OF SELECT FEDERAL PROGRAMS

Program Oil and Gas Subsidies No. Targeted oil and gas subsidies inherently promote already mature industries. Spur Innovation? Increase Productivity? No. The subsidies are allocated based on quantity and not productive capacity. May actually remove competitive pressures and reduce incentive to boost productivity. Yes. Program investments can both increase energy efficiency, which could boost productivity as well as produce basic breakthrough technologies that could spill over into other sectors of the economy. Yes. Its intended to directly increase productivity through R&D which can lead to new products and services that boost productivity. Indirectly. Its not intended to directly increase productivity, but clusters can lead to new products and services that boost productivity. Also clusters increase access to skilled labor, which boosts industry productivity. Strengthen Competitiveness? Yes. The subsidies could help reduce oil imports, but are limited to accessible domestic supply. Also, oil and gas alone could not reduce trade deficit.
ARPA-E
Yes. ARPA-E programs expand knowledge and support risky technology categories with high social value.
Yes. New businesses and industries could potentially be created through ARPA-E investments that could be very competitive in the global market.
R&D Tax Credit
Yes. The tax credit spurs private industry to invest in more R&D, thus it boosts potential innovation. It is limited in its support for collaborative R&D.
Yes. The tax credit can only be taken for R&D performed in the United States, so new products and services potentially could increase export opportunities. Indirectly. Clusters provide the groundwork for new businesses and industries to deploy new technologies domestically. Additionally, as part of the EDA program, targeted international trade missions showcase cluster opportunities worldwide, boosting export opportunities.
EDA Regional Innovation Clusters
Yes. Clusters link together vital components of the innovation ecosystem, enhancing the development and commercialization of new technologies.
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Program NSF Integrative Graduate Education and Research Traineeship Program
Spur Innovation? Yes. IGERT targets emerging science and engineering fields and supports professional development and research at the graduate level, thus boosting R&D and education. Yes. MEP aids businesses in adopting new products and processes by connecting businesses with innovative, new technologies. Yes. Agriculture research as consistently produced high rates of return by produce new technologies in food processing, products, and techniques.
Increase Productivity? Yes. The program builds a pool of well trained professionals for emerging industries to have an immediate impact without additional training. Yes. MEP connects experts with businesses who go to shop floors and directly support ways of boosting productivity. Yes. The benefits of innovative new ag technologies are shared throughout the economy in the form of lower food prices and higher quality foods.
Strengthen Competitiveness? Indirectly. By training a next generation of professionals in emerging industries, it provides the US a competitive advantage that may increase the likelihood of greater domestic private sector investment. Yes. MEP directly supports businesses in tradable sectors by increasing their use of innovative technologies and boosting their productivity thus directly boosting exports. Yes. Ag research has played a significant role in continuing the United States surplus in agriculture exports through higher productivity and innovation.
Manufacturing Extension Partnership
Agriculture Research
Table 1: Illustrative Examples of Select Federal Programs Regarding Investment or Spending
The Research & Experimentation Tax Credit (R&D tax credit): Productive Investment The Research & Experimentation Tax Credit was established in 1981 to incentivize firms to increase their research activities. The credit, which has been extended several times but never made permanent, is made up of four provisions: 1) a standard 20 percent credit for increasing investments in R&D; 2) an alternative simplified credit of 14 percent for all R&D investments above 50 percent of the average of the three previous years; 3) a 20 percent credit for basic research payments made to qualified institutions for precommercial R&D; 4) a 20 percent flat credit for businesses collaborating in energy research consortium.
1.
Yes, the R&D tax credit plays a critical role in spurring innovation by boosting private sector investment in R&D. R&D is the principle way industry creates knowledge that can be commercialized into economically valuable products and services and the R&D tax credit is the principle way the federal government incentivizes private-sector R&D
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activities. Nearly all scholarly studies conducted in the last twenty years have found that the credit is an effective tool for spurring increased business R&D by an additional $1 to $2 for every $1 in forgone tax revenue. But while the R&D tax credit does significantly boost private sector R&D investment, it is still limited compared to its potential impact. Businesses investing in R&D in collaboration with a university receive only 65 percent of eligible tax credit if the research is commercially oriented. Thus the R&D credit incentivizes more early stage R&D and has a limited impact on research that supports bridging the gap between new ideas in the lab and demonstrating new technologies. The R&D credit also provides a lower rate for research conducted between a business and non-energy related research consortia therefore acting as a disincentive for collaborative researchan increasingly important characteristics of research in the new economy. 38
2.
The R&D tax credit is not intended to directly increase productivity, but instead increase productivity through R&D. Research performed by the private sector can lead to new products and services that directly impact business productivity in the future.
3.
Does the program help close the trade deficit by making US firms more globally competitive, increase exports, or reduce imports?
The R&D tax credit does not directly facilitate increased exports, but it does enable the private sector to deploy innovative products and services in the United States which could impact the trade deficit. Only R&D performed in the United States is eligible for the R&D tax credit, so new products and services created through this research is developed domestically. Therefore this domestic research results in increased export opportunities for industries and businesses with domestic supply chains. Economic Development Administrations Regional Innovation Clusters Program: Productive Investment The role of the Economic Development Administrations s cluster program is to identify and support existing regional innovation clusters (RICs) (not create new ones), convene relevant stakeholders, create a cluster support frameworks, disseminate information, and provide targeted capital investments to spur cluster growth. 39 RICs are geographic concentrations of firms and industries that do business with each other and have common needs for talent, technology, and infrastructure. A RIC includes an active network of public, private, and non-profit organizations that leverage a regions unique competitive strengths and capabilities to create jobs and broad economic prosperity.
1.
RICs play a central role in spurring innovation by creating an open environment of knowledge creation and exchange. By linking and aligning regional assets, institutions, and services, RICs help expand the knowledge base of the region as a whole. The RIC program accelerates innovation by providing information and connecting institutions and actors to
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needed resources that can help drive entrepreneurship and growth. For example, the EDARIC is developing a national research and information center to geographically map clusters across the country to more efficiently facilitate business linkages to these networks. The RIC supported Regional Innovation Acceleration Network (RIAN) connects organizations across the country to share best practices aimed at business creation, business support, technology commercialization, and financial investments. In addition, other activities include cluster initiative planning, asset mapping, transformative technology development (such as through the i6 Challenge program) and implementation feasibility studies, all of which help businesses gain access to new knowledge, technologies, and financing. These program activities are in comparison to more traditional infrastructure building typically done through EDA. So in this sense, the RIC program transcend more traditionaland some may say less productiveinvestments in economic development by supporting more advanced, contemporary regional economic development efforts. As a result, RICs have been identified by the scholarly literature as a promising way the public and private sectors can overcome challenges to technology commercialization. Clusters create cost and innovation advantages for participants by giving them access to high-caliber human capital and R&D collaboration. One of the criterions for selection for competitive grants under the RIC program is an applicants ability to demonstrate a focus on advancing commercialization of federal and private research. By bringing public and private entities together to focus on commercialization and growth, the RIC helps regions acquire the resources necessary to get over the commercialization valley of death and create new products and services.
2.
RICs do not necessarily directly increase productivity, but instead aim to accelerate innovation in general which can indirectly boost productivity. By increasing access to skilled workers and technical expertise, RICs enable businesses to more rapidly spur the adoption of new innovations. And because RICs make available specialized infrastructure, skills, and scientific knowledgesuch as through federal labs and universitiesthat businesses may not normally have access to, the barriers to new technology development are reduced. As such, by accelerating the innovation process, productivity increasing technology becomes more readily available.
3.
Does the program help close the trade deficit by making US firms more globally competitive, increase exports, or reduce imports?
Similar to boosting productivity, RICs do not directly close the trade deficit, but instead provide the groundwork for new businesses and industries to deploy new technologies to market that increase exports. Because the RICs program is within EDA, it does receive support from the Trade and Investment Program, which promotes U.S. exports. For instance, the program supported a Cleantech Trade and Investment Mission in 2010 that showcased US clean energy technologies, clusters, and businesses at international events. As a result, the program facilitated hundreds of linkages between clean energy businesses and potential foreign investors and customers that are the first step in building international business relationships and potential export partners. 40
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Integrative Graduate Education and Research Traineeship Program (IGERT): Productive Investment The National Science Foundations (NSF) IGERT program provides grants for universities to create new, interdisciplinary STEM graduate-level programs. These unique programs develop new curriculum and courses, emphasize expertise in more than one discipline, and insist on internships, co-ops, out-of-university research, and collaborative studies. Since its inception, NSF has made IGERT its flagship education and training program and countries like Canada and Germany have implemented similar initiatives. 41
1.
Yes, IGERT spurs innovation by supporting education/training and researchtwo important building blocks of innovation. IGERT programs focus on emerging science and engineering fieldslike nanotechnology and clean energyto prepare a new wave of professionals proficient in those disciplines. In total, IGERT has directly funded nearly 6,000 doctorate-level students. This includes funding their research, tuition and the development of the multidisciplinary curriculum. In addition, a central characteristic of IGERT programs is the vital basic research it conducts. The programs bring together numerous departments, academics, students, and disciplines to address cross-cutting problems. For example, Cornell University brought together biology and engineering faculty and students to study and create new, sustainable materials of the future. Project researchers created fibers that can generate electricity when stressed or put into motion, opening up the possibility of new intelligent materials that can be used for energy harvesting and medical monitoring sensors. 42 The successes of these cross-cutting research projects potentially enable the development of innovative new technologies.
2.
Yes, IGERT boosts productivity by increasing the education of graduate students across a number of disciplines as well as training students in subjects important to emerging science and technology sectors. This education provides a pool of well-skilled workers for growing industries. Specifically, IGERT has invested in numerous programs in high-impact disciplines like genomics, nanotechnology, materials science, and biotechnology.
3.
IGERT doesnt directly close the trade deficit, but it does help boost U.S. competitiveness by creating a more educated workforce. In particular, IGERT often funds disciplines at the forefront of emerging industries that could be the next wave of innovation, similar to the IT sector since the 1990s. By training scientists and engineers in emerging sectors, the United States will have a competitive advantage over other countries, increasing the likelihood of attracting greater private sector investment in new industries. Furthermore,
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IGERT program curriculums aim to continue past their initial NSF funding. So IGERT helps create a long-term academic network to continue educating students in vital areas of study. Manufacturing Extension Partnership: Productive Investment The Manufacturing Extension Partnership (MEP) works with small and medium sized manufacturers to help them increase productivity, boost sales, and create and retain jobs. MEPs technical experts work one-on-one in hands-on, direct engagements with U.S. SME manufacturers to help them innovate, improve operational efficiency, and implement lean, green, and sustainable manufacturing methods. In 2010 alone MEP served 34,299 manufacturers. It has completed over 430,000 engagements in its lifespan. 43 MEP generates high returns from federal investment, with each dollar invested generating $32 in returns; this translates into $3.6 billion in new sales annually for Americas SME manufacturers. 44 With 1,400 technical experts located in every state, the MEP is well positioned to get on SME shop floors and help them in improving their organizations.
1.
Yes, one of the five focus areas of MEP is Technology Acceleration which has the goal of leveraging new technology to allow SMEs to adopt new products and processes. In this capacity MEP acts as the connecter between SMEs and their unmet technology needs, searching outside normal channels to find innovative solutions. Specifically the technology scouting program allows MEP to search for new technologies to bring directly to SMEs to help them create new products and enter new markets. For example, the MEP helped Lehighton Electronics identify a new market to enter, and connected them with technology suppliers to help them realize their goal of market entry. 45
2.
Does the program increase productivity of private firms or the economy as a whole?
Yes, MEP technical experts help SMEs implement lean operations, by going directly to shop floors around the country. One of MEPs five focus areas is Continuous Improvement with the stated intention of increasing productivity, and freeing up capacity for growth. Specifically, MEP offers the Lean Product Development program to SMEs to help them reduce time to market, use fewer resources, and cut waste out of the process. 46 The primary goal of this program is to apply the waste elimination philosophy of lean operations into product development. Firms utilizing this program have reported up to a 50 percent reduction in launch schedule, improvements in gross margin, and enhanced customer satisfaction. 47
3.
Yes, as part of its duties MEP works with exporting SMEs. By empowering them to become more productive, less wasteful, and by increasing their technological capacity MEP helps SMEs to become more effective exporters. In addition to its general duties, MEP has implemented an ExporTech program which aids SMEs in entering global markets. SMEs working with the ExporTech program develop an export strategy in small workshops.
PAGE 31
These strategies are then vetted by technical experts who then help the SME connect with organizations that help them implement their strategy. This program works with other organizations such as the ExIm Bank and the U.S. Export Assistance Centers to provide a strong network of support for exporting SMEs. 48 For example after completing the ExportTech course Wilco Machine & Fab, an energy industry equipment manufacturer in Oklahoma, expanded their export business from 8 percent of revenues in 2008 to 51 percent of revenues in mid 2009. 49 Agricultural Research and Development: Productive Investment Three of ten people on the planet today rely on others to grow their food and 900 million remain chronically food insecure. By 2050 the global demand for agricultural production is expected to double. Half of the global population will live in cities and need to be fed through market channels. In the next 50 years we will need to produce more food than we have in the last 10,000 years. 50 Meeting these demands will require substantial increases in agricultural productivity. This is all the more important as the future is likely to bring additional pressures on food supply from climate change and environmental limits on cultivated land. Governments across the world have been slow to adopt policies that adequately reflect the climbing pressure on global food supply. Public investments in agricultural research and development have, at best, been flat and more often dropping decade after decade, leading to dangerous gaps in the innovation necessary to enhance crop yields. Without renewed investment in agricultural innovation the widespread food insecurity the original Green Revolution helped reduce may return, and the food riots and price spikes of 2007 and 2008 may become more commonplace. To address these deficiencies, Nobel Peace Prize winner and longtime agricultural researcher Dr. Norman E. Borlaug (and many others) have called for a Second Green Revolution. 51 Innovations in agriculture span a wide range of technologies: new techniques for weed control that help reduce topsoil loss (contour plowing), improved planting/harvesting equipment, irrigation techniques, new approaches to pest and disease control, and seed/variety improvement.
1.
Yes. Numerous studies document that few investments have more consistently and reliably produced returns as high as those in agricultural research. 52 While the benchmark return on U.S. Government securities has historically been 34 percent, the median return from investments in agricultural research in the U.S. has been 45 percent. 53 This means that for every dollar spent on ag research, the returns to society were worth ten dollars. These have come in the form of new seeds that produce higher yields on the same or fewer inputs, new farming equipment that enables precision applications of fertilizer, and quality, productivity and efficiency gains in food processing, and other concrete products and techniques. These have had widespread ripple effects throughout the food value chain and society at large.
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2.
Yesboth. Returns from agricultural research benefit farms large and small, companies all along the food chain from field to fork, and the communities in which these activities are located. Benefits are shared widely throughout the food industry, in all its various manifestations, consumers who benefit from lower food prices and higher quality foods, companies who ship commodities and processed foods around the world, and all their customers. Few sectors have impacts that are farther reaching.
3.
Yes. U.S. agricultural exports have been one of the few reliable sources of trade surplus over the past several decades. 54 The U.S. is widely seen to enjoy a competitive advantage vis-avis most of the rest of the world due to the agricultural productivity superiority directly resulting from a strong research base. In recent decades, however, public sector research funding has not kept pace, leading to innovation deficits particularly with crops that are not major commodities, the most attractive targets for private sector R&D. The historical record provides few, if any examples of higher return on investment than achieved through expenditures on agricultural research. Energy Frontier Research Centers (EFRCs): Productive Investment Energy Frontier Research Centers bring together small groups of researchers focused on breakthroughs in science that can unlock game changing new energy innovations. EFRCs are mainly led by university teams but can also involve national labs or private industry. The purpose is to conduct fundamental research on one or several energy-related grand challenges identified by the scientific community, and where such research would benefit from a dedicated and concerted research effort beyond the scale of supporting one or two principal investigators. EFRCs are defined by their multidisciplinary composition and collaborative nature, which sparks new approaches to scientific problems and improves opportunities for breakthrough discovery.
1.
Yes, innovation for new products and processes is the EFRC programs primary goal. The centers pursue use-inspired basic research to expand fundamental knowledge in key energyrelevant fields, which in turn will accelerate the creation of new energy technologies. With 46 individual centers based at labs and universities in 35 states tackling a wide range of technical challenges, research areas are literally all over the map, and could yield dividends for several clean technologies down the road. For example, some centers are pursuing advances in molecular science and nanotechnology to improve solar cell efficiency; others are developing advanced materials to more effectively remove CO2 from smokestacks and advancing knowledge of geologic formations at the molecular level for improved carbon sequestration.
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The importance of basic research to innovation that drives new products and industries should not be underestimated. Economist Edwin Mansfield has found that academic research has been a major contributing factor to 23 percent of new products and 18 percent of new processes introduced over the past few decades. 55 Mansfield has also found the social rate of return of academic research to be at least 40 percent. 56 In the energy realm, scientific advancements have formed the basis for new technologies since the days of Edison. Its also important to note that, with some exceptions, basic research of the kind performed by the EFRCs is generally unattractive to modern industry in most fields, especially in energy. The rewards for research are often unclear, and not quickly or easily captured even if theyre realized. As a result, private firms tend to focus more on applied research if at all, with faster returns and less uncertainty of success. This leaves a hole that public agencies can fill. For example, the federal government accounted for huge portions of funding for academic computer science research in the early decades of the fields development. 57 Similarly, EFRCs are pursuing work that the private sector wont do at a large enough scale to meet our energy challenges.
2.
The EFRCs do not produce work intended to directly increase firm productivity in the near-term as other programs might. The EFRC programs science work can lead to new products or processes that firms will be able to adopt down the road and thus increase their productivity, but the EFRC role essentially stops after the initial knowledge gains are made.
3.
The EFRCs contribute to an improved trade balance in one very important way: by laying the groundwork for reducing or eliminating oil imports. In 2010, the United States ran a deficit of traded goods and services of almost exactly $500 billion. Of this, net imports of petroleum accounted for $265 billion. The idea that domestic production can make up for this imbalance is largely a myth, and the only real solution is to develop viable alternatives to petroleum-based fuel, including biofuels and electric vehicles. Several EFRCs are contributing to this effort in several ways. Some research teams are developing novel catalysts that convert biomass to fuel more efficiently, while others are developing methods that can improve catalysis in general. Still others are pursuing science to increase the efficiency of photosynthesis and thus make plants more energy-rich. On the storage front, EFRCs are seeking improved understanding of charge transfer characteristics of materials at the nanoscale to drive improvements in battery technology, and one center is developing a breakthrough fuel cell system. USDA Rural Utilities Service: Productive Investment The Rural Utilities Service (RUS), part of the USDAs Rural Development Bureau, addresses shortfalls in rural infrastructure investment through public-private partnerships, providing loans and assistance in water, energy, and communications infrastructure. In
PAGE 34
addition to assisting with infrastructure build out and financing, it also has initiatives dealing with broadband-related technical training, distance learning, and telemedicine.
1.
The RUS is more of an enabler of innovation by others than a driver of innovation itself, by expanding access to digital technologies and training local personnel with how to use them, and by marginally expanding the market for clean energy technologies. It does not perform high-risk research or other functions typically associated with driving innovation directly.
2.
The program undoubtedly helps to boost domestic productivity, particularly through its efforts to provide rural digital telecommunications access. ICT, of which broadband Internet is a central component, added a full 1.18 percent to gross domestic product (GDP) growth and accounted for two-thirds of the growth in total factor productivity during the second half of the 1990s. 58 Further, broadband-enabled Internet business solutions are expected to add a total of 0.43 percentage points to U.S. productivity growth through 2011. 59 Many of these gains are most obvious in urban areas, but rural businesses also benefit, from expanded market opportunities through e-commerce, and from improved access to business-to-business transactions. And farmers can also benefit from broadband access, as an information resource for markets, prices and improved methods, and as a way to reduce input costs by finding suppliers beyond their traditional local areas. 60 Broadband is thus central to productivity gains and job growth, and expanding rural broadband access is central to the RUSs mission. Through Recovery Act funding of the Broadband Initiatives Program, the RUS provided grants and loans for over 300 rural projects, mostly last-mile projects, connecting 7 million Americans and 360,000 businesses with broadband Internet or satellite access. 61 Beyond access to broadband Internet, RUS also helps to boost productivity in other ways. A trained workforce is a key component for boosting worker and thus firm productivity, as multiple studies have shown. 62 One European study found that a 1 percent increase in training days boosts worker productivity by 3 percent. 63For the RUSs part, it provides training assistance to local organizations in the areas of water and broadband infrastructure, and provides grants to clinics, hospitals, and other entities for distant learning in telemedicine, which offers the potential to allow health care professionals to provide highquality treatment in sparsely populated areas more efficiently and effectively.
3.
Most of the RUSs work deals in non-traded sectors like water infrastructure and local health care provision, which have little impact in imports and exports. However, connecting agricultural communities with broadband access may have an impact on agricultural exports. Generally, broadband access boosts productivity, which in turn boosts
PAGE 35
international competitiveness. Given the business gains available to farmers mentioned above, its possible that improved broadband access could provide some farms with opportunities for positive marginal productivity gains.
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ENDNOTES
1. 2. 3. David Leonhardt, One Way to Trim Deficit: Cultivate Growth, New York Times, November 16, 2010, http://www.nytimes.com/2010/11/17/business/economy/17leonhardt.html. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011-2021, January 2011, http://www.cbo.gov/doc.cfm?index=12039. The White House fiscal commissions co-chairs draft recommendations presentation can be found here: http://tpmdc.talkingpointsmemo.com/2010/11/deficit-commission-co-chairs-simpson-and-bowlesrelease-eye-popping-recommendations.php Stephen Ezell and Robert D. Atkinson, The Case for a National Manufacturing Strategy, (technical report, ITIF, Washington, D.C., April 2011), http://www.itif.org/files/2011-national-manufacturingstrategy.pdf. Michael Spence, The Next Convergence: The Future of Economic Growth in a Multi-Speed World (New York: Farrar, Straus and Giroux, 2011), 96. Robert D. Atkinson, The Past and Future of Americas Economy: Long Waves of Innovation that Power Cycles of Growth (Northampton, MA: Edward Elgar, 2004), 293. Ezra Klein, Congress is Cutting the Wrong Spending, Washington Post, July 28, 2011, http://www.washingtonpost.com/blogs/ezra-klein/post/congress-is-cutting-the-wrongspending/2011/07/11/gIQAyXIJfI_blog.html. David Leonhardt, One Way to Trim Deficit: Cultivate Growth. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011-2021, January 2011, http://www.cbo.gov/doc.cfm?index=12039. Robert D. Atkinson, Everything Should Not be on the Budget Cutting Table: The Case for Expanding Public Investment, Progressive Fix, July 16, 2010, http://progressivefix.com/everything-should-not-beon-the-budget-cutting-table-the-case-for-expanding-public-investment. Robert D. Atkinson, Create Jobs by Expanding the R&D Tax Credit, (technical report, ITIF, Washington, D.C., January 2010), http://www.itif.org/files/2010-01-26-RandD.pdf. Charitable Trusts, The Great Debt Shift: Drivers of Federal Debt Since 2001, April 2011, http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Fact_Sheets/Economic_Policy/drivers_federa l_debt_since_2001.pdf. Robert Rubin, Peter Orszag, and Allen Sinai, Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray, Presented at the AEA-NAEFA Joint Session, January 4, 2004, http://www.brookings.edu/~/media/Files/rc/papers/2004/0105budgetdeficit_orszag/20040105.pdf. Percent of GDP was calculated using a 2011 estimate of $15 trillion. For data, see Bureau of Economic Analysis, U.S. International Trade in Goods and Services: Exports, Imports, and Balances, http://www.bea.gov/international/index.htm#trade. Trade in Goods with Advanced Technology Products. U.S. Census Bureau. http://www.census.gov/foreign-trade/balance/c0007.html. Stephen Ezell and Robert D. Atkinson, The Case for a National Manufacturing Strategy. Assuming 113 million households as calculated by the most recent census reports. For further discussion of the economic consequences of the trade deficit, see Maurice Obstfeld and Kenneth Rogoff, The Unsustainable U.S. Current Account Position Revisited, NBER Chapters (National Bureau of Economic Research, Inc, 2007), 339-376, http://ideas.repec.org/h/nbr/nberch/0127.html. Organization for Economic Co-operation and Development, OECD S&T and Industry Outlook: Science and Innovation Country Notes, 2010. For United States data see http://www.oecd.org/dataoecd/40/27/46666029.pdf. American Society of Civil Engineers, "2009 Report Card for Americas Infrastructure," Accessed August 2011, http://www.infrastructurereportcard.org/report-cards. In addition, the United States is falling behind in education. For instance, the percent change in higher education attainment since 1999 ranks 25th out of 44 countries and regions as other countries implement and accelerate high-impact education policies. But because its difficult to calculate what the proper investment level in education is, we do not include education in the investment deficit. For more
4.
5. 6. 7.
8. 9. 10.
11. 12.
13.
14.
15. 16. 17. 18.
19.
20. 21.
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22.
23. 24. 25.
26. 27. 28.
29.
30. 31.
32. 33.
34. 35.
36. 37. 38.
information, see Robert D. Atkinson and Scott M. Andes, The Atlantic Century II: Benchmarking EU & U.S. Innovation and Competitiveness (Washington, D.C.: ITIF, July 2011), http://www.itif.org/publications/atlantic-century-ii-benchmarking-eu-us-innovation-andcompetitiveness. Congressional Budget Office, R&D and Productivity Growth, (June 2005): 22, http://www.cbo.gov/ftpdocs/64xx/doc6482/06-17-R-D.pdf. A more conservative estimate, from a study of G7 economies by David Coe and Elhanan Helpman finds a productivity impact of 0.23 percent. See: David T. Coe and Elhanan Helpman, International R&D spillovers, European Economic Review 39, no. 5 (May 1995): 859-887. Robert D. Atkinson, Create Jobs by Expanding the R&D Tax Credit. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021, (January 2011), http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf. The breakdown of non-defense, discretionary spending was calculated based on Office of Management and Budget data found at http://www.whitehouse.gov/omb/budget/Historicals. Non-defense R&D and basic science data can be found in Table 9.8 Composition of Outlays for the Conduct of Research and Development. Education and training data can be found in Table 9.9 Composition of Outlays for the Conduct of Education and Training. And physical capital investments can be found in Table 9.6 Composition of Outlays for Grants for Major Public Physical Capital Investments. David Alan Aschauer, Is Public Expenditure Productive? Journal of Monetary Economics 23 (1989): 177-200. Edward Gramlich, Infrastructure Investment: A Review Essay, Journal of Economic Literature 32, 3 (1994): 1176-1196. Lars-Hendrik Roller and Leonard Waverman, Telecommunications Infrastructure and Economic Development: A Simultaneous Approach, American Economic Review 91, no. 4 (September 2001): 909923. For discussions on the impact of smart electricity grid and smart transportation technologies, see Matt Hourihan and Matthew Stepp, Innovation for Control: Smart Technology to Empower Energy Producers and Users, (technical report, ITIF, Washington, D.C., July 2011), http://www.itif.org/files/2011-innovation-for-control.pdf; and Stephen Ezell, Explaining International IT Application Leadership: Intelligent Transportation Systems, (technical report, ITIF, Washington, D.C., January 2010), http://www.itif.org/files/2010-1-27-ITS_Leadership.pdf. Impact ranges from 0.2 percent to 3.75 percent). International Monetary Fund, World Economic Outlook: Slowing Growth, Risking Risks,( September 2011): 136. Peter Hooper and Jaime Marquez, Exchange Rates, Prices, and External Adjustment in the United States and Japan, Federal Reserve Discussion Paper (1993), http://www.federalreserve.gov/pubs/ifdp/1993/456/ifdp456.pdf. Michael Spence, The Next Convergence, 74. For a comprehensive study of fossil fuel subsidies, see: Adenike Adeyeye, James Barrett, Jordan Diamond, Lisa Goldman, John Pendergrass, and Daniel Schramm, Estimating U.S. Government Subsidies to Energy Sources: 2002-2008, Environmental Law Institute (2009), http://www.elistore.org/reports_detail.asp?ID=11358. The most recent CBO analysis of the United States economy in August 2011 is used to estimate the current and forecasted budget deficit and can be found here: http://www.cbo.gov/doc.cfm?index=12316. We used census bureau trade statistics to estimate the 2011 cumulative trade deficit and data can be found here: http://www.census.gov/foreign-trade/statistics/historical/gands.txt. To calculate the trade deficit as a share of the economy, GDP data from the Bureau of Economic Analysis and CBO was used and can be found here: http://www.cbo.gov/doc.cfm?index=12039. The American Society of Civil Engineers estimate that the U.S. infrastructure deficit can be found here: http://www.infrastructurereportcard.org/. According to the AAAS, R&D grew at 5.8 percent annually: http://www.aaas.org/spp/rd/histda09tb.pdf. Matthew Stepp and Robert D. Atkinson, Creating a Collaborative R&D Tax Credit, (technical report, ITIF, Washington, D.C., June 2011), http://www.itif.org/publications/creating-collaborative-rd-taxcredit.
PAGE 38
39. 40. 41.
42. 43.
44. 45. 46. 47. 48. 49. 50. 51. 52.
53. 54. 55. 56. 57.
58.
59. 60.
61. 62.
63.
Economic Development Administration, Regional Innovation Clusters Initiative Overview, (2010), http://www.eda.gov/AboutEDA/RIC/. For a list of EDA trade programs, see: http://www.eda.gov/tradeandinvestmentprograms/pastevents.xml. Robert Atkinson and Merrilea Mayo, Refueling the U.S. Innovation Economy: Fresh Approaches to Science, Technology, Engineering and Mathematics (STEM) Education, (Washington, D.C.: ITIF, 2010), 94, http://www.itif.org/files/2010-refueling-innovation-economy.pdf. Information on this particular project can be found at http://www.igert.org/spotlights/1799. Hollings Manufacturing Extension Partnership, The Manufacturing Extension Partnership: Partnering for Manufacturing Innovation and Growth, (NIST, January 2011), http://www.nist.gov/mep/upload/MEPPARTNERING-IMPACTS-FEB2011.pdf. Ibid. An overview of the MEP Technology Scouting program can be found at: http://www.nist.gov/mep/upload/Technology-Scouting-One-Pager_v3.pdf. Hollings Manufacturing Extension Partnership, Lean Product Development. Ibid. Information on MEPs ExporTech program can be found at: http://www.nist.gov/mep/exportech.cfm. Hollings Manufacturing Extension Partnership, MEP ExporTech: Supporting Manufacturing Growth Through Export, August 17, 2010, http://www.nist.gov/mep/export_081710.cfm. Norman E. Borlaug, Agricultural Productivity Strategies for the Future: Addressing U.S. and Global Challenges, (CAST Issue Paper 45, Council for Agricultural Science and Technology, 2010), 2. Gordon Conway, The Doubly Green Revolution (New York: Cornell University Press, 1997), 335 and L.T. Evans, Feeding the Ten Billion (Cambridge, U.K.: Cambridge University Press, 1998), 236. Wallace Huffman, George Norton, and Luther Tweeten, Investing in a Better Future Through Public Agricultural Research, (CAST Commentary QTA2011-1, March, 2011), http://www.castscience.org/publications/index.cfm/investing_in_a_better_future_through_public_agricultural_research?s how=product&productID=2963. K.O. Fuglie and P.W. Heisey, Economic Returns to Public Agricultural Research, (USDA/ERS Economimc Brief No. 10, September 2007). For USDA/ERS data see: http://151.121.3.140/cmp/outlook/2011/May-11/outlook-0511.asp. Edwin Mansfield, Academic Research and Industrial Innovation: An Update of Empirical Findings, (research policy 26, no. 7-8, 1998), 773-776. Edwin Mansfield, Academic research and industrial innovation: A further note, (research policy 21, no. 3, June 1992), 295-296. David C. Mowery and Richard N. Langlois, Spinning Off and Spinning On: the Federal Government Role in the Development of the US Computer Software Industry, (research policy 25, no. 6, September 1996): 947-966. Robert D. Atkinson, Daniel Castro, and Stephen Ezell, Digital Road to Recovery: A Stimulus Plan to Create Jobs, Boost Productivity and Revitalize America, (technical report, ITIF, Washington, D.C., January 2009), 5, http://www.itif.org/files/roadtorecovery.pdf. Ibid, 4. Peter Stenberg, Mitch Morehart, Stephen Vogel, John Cromartie, Vince Breneman, and Dennis Brown, Broadband Internets Value for Rural America, (economic research report err-78, Department of Agriculture Economic Research Service, August 2009), http://www.ers.usda.gov/publications/err78/. Department of Agriculture, Advancing Broadband: A Foundation for Strong Rural Communities, (January 2011), http://www.rurdev.usda.gov/Reports/RBBreportV5ForWeb.pdf. Some relevant studies include: Ann P. Bartell, Productivity Gains from the Implementation of Employee Training Programs, Industrial Relations: A Journal of Economy and Society 33, no. 4 (October 1, 1994) 411-425; Lorraine Dearden, Howard Reed, and John Van Reenen, The Impact of Training on Productivity and Wages: Evidence from British Panel Data*, Oxford Bulletin of Economics and Statistics 68, no. 4 (August 1, 2006): 397-421; Gabriella Conti, Training, productivity and wages in Italy, Labour Economics 12, no. 4 (August 2005): 557-576. International Labour Office, A Skilled Workforce for Strong, Sustainable and Balanced Growth: A G20 Training Strategy," (November 2010): 4, http://www.ilo.org/wcmsp5/groups/public/---ed_emp/--ifp_skills/documents/publication/wcms_151966.pdf.
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ACKNOWLEDGEMENTS
The authors wish to thank John Zoshak, Kathryn Angstadt, Steve Norton, Stephen Ezell, for providing expert input and feedback to this report. Any errors or omissions are the authors alone.
Robert Atkinson is the President of the Information Technology and Innovation Foundation. Matt Hourihan and Matthew Stepp are clean energy policy analysts at the Information Technology and Innovation Foundation. Val Giddings is a Senior Fellow at the Information Technology and Innovation Foundation. Jesse Jenkins is the Director of Climate and Energy Policy at the Breakthrough Institute. Devon Swezey is the Project Director at the Breakthrough Institute.
ABOUT THE AUTHORS
ABOUT ITIF
The Information Technology and Innovation Foundation (ITIF) is a Washington, D.C.-based think tank at the cutting edge of designing innovation strategies and technology policies to create economic opportunities and improve quality of life in the United States and around the world. Founded in 2006, ITIF is a 501(c) 3 nonprofit, non-partisan organization that documents the beneficial role technology plays in our lives and provides pragmatic ideas for improving technology-driven productivity, boosting competitiveness, and meeting todays global challenges through innovation. For more information about ITIF, please visit http://itif.org.
ABOUT BTI
Breakthrough institute (BTI) is a leading independent public policy research institute, based on Oakland, California. Since 2002, Breakthroughs energy and climate program has worked to advance key federal investments to make clean and low-carbon energy technologies cheap and abundant, strengthen American economic competitiveness and energy security, and slow global warming. For more information about the Breakthrough Institute, please visit http://thebreakthrough.org.
PAGE 40

Taking On The Three Deficits

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Three Deficits

THE INFORMATION TECHNOLOG Y & INNOVATION FOUNDATION

THE INFORMATION TECHNOLOG Y & INNOVATION FOUNDATION

Three Deficits Estimated through 2021 Cumulative Trade Deficit

The Right Way

Three Deficits Estimated through 2021

Cumulative Trade Deficit

AMERICAS THREE DEFICITS: BUDGET, TRADE, AND INVESTMENT

$700,000 $600,000 $500,000 $ Millions $400,000 $300,000 $200,000 $100,000 $0

Income Security Social Security

Net Interest Non-defense Discretionary Defense Discretionary Other

18.8% 20.0% 5.6%

Figure 7: 2010 Federal budget organized by select major outlay type

$500,000 $400,000 $300,000 $ Millions $200,000 $100,000 $0 -$100,000 -$200,000 -$150,000

Net Impact of 10% R&D Cut

APPENDIX A: BRIEF SUMMARY OF THREE DEFICITS ESTIMATION METHODOLOGY

APPENDIX B: INVESTMENT OR SPENDING? ILLUSTRATIVE EXAMPLES OF SELECT FEDERAL PROGRAMS

R&D Tax Credit

EDA Regional Innovation Clusters

Program NSF Integrative Graduate Education and Research Traineeship Program

Manufacturing Extension Partnership

Table 1: Illustrative Examples of Select Federal Programs Regarding Investment or Spending

15. 16. 17. 18.

23. 24. 25.

26. 27. 28.

36. 37. 38.

39. 40. 41.

44. 45. 46. 47. 48. 49. 50. 51. 52.

53. 54. 55. 56. 57.

ABOUT THE AUTHORS

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