Government R&D Spending Drives 25% to 40% Annual Return on Investment

Government-funded research and development (R&D) has long been a contentious issue, with critics arguing that it may displace private-sector investment and lack accountability. However, a closer examination of the results reveals a different story. A 2015 study of NIH grants found that virtually every new drug approved by the FDA between 2010 and 2016 benefited either directly or indirectly from NIH support. Furthermore, every $10 million of NIH funding resulted in a net increase of two to three private-sector patents. This indicates that government R&D spending not only supports innovation but also drives economic growth.

The economic benefits of government R&D spending are substantial. A congressional committee report estimated that the government earns an annual rate of return of 25% to 40% on the money it spends on NIH grants, due to the reduction in the economic cost of illness in the US. Additionally, a study published by the Dallas Fed found that non-defense government R&D spending has accounted for at least one-fifth of business-sector productivity growth since 1945. Productivity is a key driver of long-term economic growth, making this a significant return on investment. Another Fed study found that the R&D increases authorized under the CHIPS Act, if fully appropriated, would raise US productivity by as much as 0.4%.

Innovation policy expert Heidi Williams cites studies estimating that the return on government R&D spending, in terms of economic growth, is 20 times greater than the return on infrastructure spending. Williams' own study found that R&D is likely the most impactful policy the government has to raise both innovation and productivity in the US economy. Despite the clear benefits, there is still resistance to government R&D spending, with some arguing that it contributes to the deficit problem or that the benefits are not worth the cost.

However, government research grants have played a crucial role in developing technologies that have had a significant impact on society. For example, cryptocurrency, including Bitcoin, built on decades of academic work in cryptography and distributed systems, much of which was funded by the US government. Foundational technologies like public-key cryptography, cryptographic hash trees, and tamper-proof time-stamping were developed at university research labs with funding from government agencies. This highlights the importance of government R&D in driving technological innovation.

Looking ahead, the National Institute of Standards and Technology (NIST) is leading a multi-agency effort to encourage the development of quantum-resistant algorithms to protect Bitcoin and other technologies from quantum-enabled hackers. While the immediate risk is low, experts estimate a 10% chance that quantum computers will be powerful enough to threaten Bitcoin within five years, rising to a 27% chance within 10 years and an 85% chance within 30. The NIST's efforts are crucial in ensuring the security of Bitcoin and the global financial system. Unfortunately, the NIST is facing a $325 million cut to its annual budget, which could jeopardize these efforts. It is essential to recognize the value of government R&D and support continued investment in this area to drive innovation and economic growth.