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TIME Magazine Op-Ed: Too Many High School Seniors Are Turning Away from College Altogether

For many high school seniors and their families, May 1st is “National College Decision Day,” when millions of students make a personal decision about their academic future. It is also a decision with financial implications that will shape much of their lives. While headlines often cite the ultra-competitive landscape for highly selective schools, recent years have brought about a drop in overall college enrollment. Some of this reflects pandemic-related disruptions to college plans. But recent survey data suggests that we might be seeing a more persistent turn away from college: more than half of Americans don’t even think college is worth the investment. This is very worrisome, as completing college is as important as ever to bolstering both individual economic security and America’s economic competitiveness.

In April, a Wall Street Journal-NORC poll found that 56% of Americans think that a college degree is not worth the cost, the highest rate in the survey’s ten-year history. These attitudes are also reflected in the actions of our youngest generation, as fewer students opt to pursue a college degree. In February, the National College Clearinghouse reported the sixth straight year of declining enrollment in 2- or 4-year colleges. In 2021, there were 1.8 million fewer undergraduates enrolled in college than there were in 2017.

But the fact remains that overwhelmingly economic data show that a college degree confers meaningful economic advantages. Even in today’s tight labor market, college graduates find work much easier and tend to command significantly higher incomes. Today, the unemployment rate for those with a bachelor’s degree or greater is currently half that of those with a High School degree or GED.

Estimates from the Aspen Economic Strategy Group find that the economic return to competing college remains at an all-time high. In 2021, Bachelor’s Degree holders earned 88% more per year on average than a worker with a high school degree, and Associate’s Degree holders earned 19% more. In dollar terms, the typical full-time full-year worker with a BA earned about $85,801 in 2021, compared to $53,854 for a worker with an AA and just $45,426 for those with a high school degree.

Indeed, the fastest growth in this so-called “college wage premium” was in the 1980s and 1990s, when technological advances like the personal computer and the internet caused a sharp increase in the demand for skilled workers that outpaced the supply of such workers that was available. If the recent past is a guide, the rapid advances we are experiencing today in automation and artificial intelligence will further increase the need for a highly skilled workforce. College remains the surest path for acquiring advanced skills.

It is understandable why many students and families suspect that college is no longer “worth it.” The inflation-adjusted “sticker price” of college tuition has been rising for years, and many students fear being burdened with loans after graduation. But more transparency and more accountability in the higher education sector—coupled with more informed choices by individuals—will increase confidence among prospective students that if they make smart decisions about where to go to school and what to study, a college degree is worth the investment of time and money.

College pricing is notoriously opaque, and students from low and middle-income families too often don’t realize that they would pay much less than that ever-increasing sticker price. In fact, the net price of a four-year college—which is what students pay after financial aid—has been falling since 2018 and is now lower than it was in 2006. The higher education sector must become more transparent about pricing so students are not deterred by sticker shock.

Furthermore, stories about people who paid too much for a degree that didn’t pay off are, regrettably, common. But recent research shows that on average, students who took on additional debt when federal loan limits were raised were more likely to finish their degree and went on to earn more later in life. In other words, the investment paid off. Of course, not all schools and not all degrees yield similar outcomes for comparable students, and colleges must become more accountable for student outcomes. Chronically poor performing schools should not receive federal dollars, and institutions should have stronger incentives to ensure students do not leave with crippling debt.

At the same time, students and parents can make use of resources available today to make wise choices. Tools like the College Scorecard enable would-be college-goers to readily compare results like graduation rates and after-college earnings across schools. By considering average outcomes of students who attended a particular school and earned a particular degree, prospective students can gain a reasonable picture of what their future holds down each potential path.

Just as high school seniors reach the end of one road and the start of another, today should also be an opportunity for higher education leaders and policy makers to commit to building on the strengths of our country’s higher education system, while making course corrections that will allow students to more readily make smart choices. Each student’s college choice is an investment in their future, and we must support and strengthen those investments, both for these students’ own economic futures and for our shared prosperity.

*This essay was originally published in TIME Magazine. You can read the complete article here.

The Hill Op-Ed: How to fight poverty and boost work with an enhanced Child Tax Credit

The president’s 2024 budget, released today, calls for reinstating the 2021 expansion of the Child Tax Credit, which dramatically reduced child poverty.

The temporary effect of that one-year expansion on poverty rates was a remarkable feat — instead of what surely would have been an increase in child poverty while the economy was still weak, we saw a reduction in child poverty of more than a third. Those results made it clear that we could readily do better for our nation’s children on a permanent basis.

Yet, despite the celebrated reduction in child poverty, Congress let the expanded CTC expire last year over policy disagreements about specific elements of the CTC design.

The biggest sticking point in negotiations over making the 2021 CTC expansion permanent was whether to maintain the full refundability of the credit, meaning that even parents with no income would be eligible to receive the full credit amount of $3,000 for older children and $3,600 for children younger than six. The president’s call for reinstating full refundability is a non-starter for some congressional Republicans and centrist Democrats who worry that giving non-working parents large amounts of cash will discourage them from working.

In a new policy proposal released this week, we put forward a modified CTC design that addresses this and other concerns — it provides a bipartisan path forward. Our design maintains the overall anti-poverty effects of the 2021 expansion while encouraging the labor force participation of low-income parents. And it costs taxpayers less money.

Here’s how our modified design works: Like the 2021 CTC expansion, working parents with some (but still low) earnings would be eligible for a full credit amount of $3,000 for children between ages 6 and 17 and $3,600 for children under age 6. Families with no earnings — who receive no credit now — would be eligible for half the full amount: A still substantial $1,500 for children aged 6-17 and $1,800 per child under the age of 6. In our plan, phasing into the full credit happens much faster than under current law. For each additional $100 of taxable income, parents are eligible for an additional $30 in tax credit per child.

Our design addresses concerns about the negative effects on labor force participation of a permanent, fully refundable credit by significantly increasing the after-tax and transfer return on working additional hours for low-income parents. In addition, making only a partial credit available to non-earners mitigates concerns about sending amounts as high as $3,600 per child in unrestricted cash to out-of-work parents. But, crucially, by offering a partial credit rather than no credit to non-earning parents, our modified design delivers critical income assistance to children living in the most economically-disadvantaged households.

Another point of contention over maintaining the expanded CTC was the fiscal cost of the expanded credit. According to the Joint Committee on Taxation, the 2021 expansion added $109.5 billion in tax expenditures. Not all this extra tax spending was directed at low-income families. The 2021 expansion delivered increased amounts of credit income to high-income families.

Relative to current law, our design begins the phase-out of the full credit amount at a lower income threshold: $75,000 for single filers and $110,000 for married filers. These lower income thresholds keep the cost to the taxpayer down by not sending the full credit amount to very high-income families whose children are less likely to benefit from the additional income. But the credit amount phases out slowly (more slowly than current law), to avoid discouraging work among these higher-earning families, yielding a positive credit amount for families with one child up to $240,000 of taxable income for single filers and $440,000 for joint filers, as under current law.

Evidence-based estimates suggest that our compromise CTC would reduce child poverty by 34 percent, roughly equivalent to the reduction in poverty that would be achieved by a reinstatement of the 2021 CTC expansion. Furthermore, our CTC design is predicted to increase the number of parents in the labor force by 80,000; this contrasts with a predicted reduction of 540,000 workers under a permanent reinstatement of the 2021 expansion.

Our proposal would add $88 billion in tax expenditures, relative to the current CTC. An obvious way to reduce this fiscal cost would be to reduce the credit amount available to higher-income families. This might have some political cost, but it would be well justified on policy grounds. Shaving costs should not be achieved by reducing the credit amount available to low-income families; there is far too much evidence of the many benefits of alleviating child poverty for that.

The U.S. federal government should provide robust and predictable income assistance to economically vulnerable children who, by happenstance of their birth, are living in a household with limited income or out-of-work parents. Congress found a way to do that in 2021. It worked.

Let’s build on the success of that experiment with reasonable tweaks that offer a lasting, bipartisan way forward. Our proposal for an enhanced Child Tax Credit delivers substantial credit amounts to low- and moderate-income families and encourages parental labor force participation. It is an investment that will reap high returns.

Melissa S. Kearney is the director of the Aspen Economic Strategy Group and the Neil Moskowitz Professor of Economics at the University of Maryland; Wendy Edelberg is the director of The Hamilton Project and a senior fellow in Economic Studies at the Brookings Institution.

This article was originally published in The Hill.

IN BRIEF: The College Wage Premium Through the COVID-19 Pandemic

IN BRIEF
COVID-related disruptions coupled with a tight labor market have led to a historic decline in college enrollment of recent high school graduates over the past three years. This drop, however, comes as the earnings premium for a college degree remains substantial and near decades-long highs. As globalization and technological advances fuel business demands for highly-skilled workers, improving college enrollment and completion rates is key to improving the American workforce’s competitiveness and families’ economic security. 

WHAT TO KNOW

  • In the Fall of 2022, there were 1.23 million fewer undergraduate students enrolled in college than there were just before the pandemic, according to estimates released in February 2023 by the National Student Clearinghouse Research Center. Although enrollment had been declining modestly before the pandemic, this most recent figure represents an 8% drop since the Fall of 2019.
  • Research indicates that recent high school graduates have been delaying or foregoing college due to COVID-related disruptions to household finances and a strong labor market for workers without a college degree. Indeed, as shown in the figure below, the rate of recent high school graduates enrolling into college in the same year has declined from 66.1% in 2019 to 61.8% in 2022 – the lowest level since 2001. This decline in immediate enrollment was particularly large for men, reaching its lowest level (54.9%) since 1983. The enrollment report did find a 4.3% increase in the number of freshmen entering college, a sign that some students who delayed enrollment by a year or two are beginning to find their way back to college.

Figure 1. College Enrollment Rates of New High School Graduates

  • Despite those initial encouraging signs, the large drop in college enrollment seen over the past three years is troubling because the return to a college degree remains near historic highs. Figure 2 extends previous estimates of college wage premia – that is, the difference in log annual earnings between those who have received a bachelor’s degree (or associate’s degree) and those who have not – through 2021. The BA/high school wage premium stood at 88% in 2021 and the AA/high school wage premium at 19%.

Figure 2. College Wage Premia, 1980-2021

  • As argued in a recent AESG policy volume by Austan Goolsbee, Glenn Hubbard, Amy Ganz and Melissa Kearney, increasing educational attainment is key to both maintaining the competitiveness of the US economy and to improving households’ economic security. As globalization and advances in technology increase businesses’ demand for highly-skilled workers, adults with college degrees have an unemployment rate roughly half that of adults with a high school degree or less. Simulation exercises in Hershbein, Kearney, and Pardue (2020), find that a modest increase in educational attainment of 4 million BA holders and 4 million AA recipients would reduce the share of low income families by 15%.

THE BOTTOM LINE
Currently the earnings premium for workers with a BA stands at 90% and the premium for workers with an AA at 19%. Further increasing educational attainment will meet business demands for highly-skilled workers, fostering faster economic growth, while also reducing poverty. Yet, over the past three years, there has been a historic decline in college enrollment. Reversing this decline – and indeed increasing postsecondary enrollment and completion – will improve America’s long-term economic competitiveness and households’ economic security.

A Proposal for an Enhanced Partially Refundable Child Tax Credit

This proposal was produced in collaboration with The Hamilton Project. The proposal will be presented by Wendy Edelberg at a Hamilton Project event on March 1st and can be viewed here.

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INTRODUCTION

The economic case for expanded income assistance to low-income families with children in this country is exceptionally strong. We have ample evidence showing that increased income assistance to low-income families with children yields improvements in educational outcomes and earnings in adulthood.1 This is in addition to evidence showing that expansions in programs that provide low-income children with other forms of support such as food benefits, public health insurance, and early childhood education lead to improvement in immediate childhood outcomes as well as outcomes as adults.2

Against this backdrop of evidence, our country recently experimented with providing more income assistance to families with children in the form of an expanded Child Tax Credit (CTC) that was in place for the 2021 tax year. The expanded CTC featured a full credit amount of $3,600 for children under age 6 and $3,000 for children ages 6 to 17, as compared to a full amount of $2,000 for all ages to age 16 in effect before the expansion. In addition, the 2021 CTC was fully refundable, meaning that even families with no earnings (and hence no income tax liability) were eligible to receive the full credit amount. That full refundability delivered the maximum credit to roughly 2 million children (ages 0 through 16) who would otherwise be ineligible for any credit on the basis of low or no parental earnings.3

Our nation’s experiment with an expanded CTC in 2021 revealed the possibilities, promises, and political pitfalls of expanded income assistance to low-income families delivered in the form of a tax credit. The 2021 CTC expansion increased the economic security of millions of children. There was a large decrease in child poverty and food insecurity, with some estimates suggesting that child poverty was reduced by one third as a result of the expansion.4 However, it was very costly, with the Joint Committee on Taxation estimating that the one-year expansion cost the federal government $109.5 billion, in addition to the extant cost of the existing credit (Joint Committee on Taxation, 2021). There have been many calls to build on the success of this policy experiment, but the failure of Congress to renew the 2021 expansions makes it clear that doing so requires political will and policy compromise.

In this essay, we propose a compromise enhanced CTC design that is distinct from both the 2021 expansion design and current law. In the absence of political constraints, we would propose a design that awards the full credit amount to those with no earnings to advance the goal of delivering income assistance to the most economically vulnerable families. However, the design we propose here, with a partial award to nonearners and a sharp phase-in, helps address the three main concerns that various policymakers and commentators have expressed about reintroducing the 2021 expansions. First, there is a concern about the labor supply reduction that would result from a fully refundable expanded tax credit—that is, one that would award $3,000 or $3,600 per child to parents with no earnings. Second, there is a concern that sending that much income to out-of-work parents could be counterproductive if out-of-work parents struggle with substance abuse and would not spend the additional cash in ways that are beneficial to children; this concern takes on heightened salience amidst the ongoing opioid crisis in the U.S.5 Finally, some find the fiscal cost associated with the 2021 expanded design unjustifiably high.

Our design recommends a full credit amount of $3,000 for children between the ages of 6 and 17 and $3,600 for children under 6, consistent with the 2021 CTC expansion. Other features of our proposed design differ from both the 2021 expansion and current law. Under our proposed design, families with no earnings are eligible for half the full credit amount for each child and there is a steep phase-in of the full credit. Those specifications help address concerns about the negative effects on labor force participation of a fully refundable credit and indeed significantly increase the after-tax and transfer return to working additional hours for low-income parents. The partial award to non-earners also mitigates concerns about sending amounts as high as $3,600 per child in unrestricted cash to out-of-work parents who might not use such substantial financial resources in ways that benefit children but still delivers critical income assistance to children living in economically-disadvantaged households.6 In addition, our design features a slow phase-out of the full credit beginning at $75,000 for single filers and $110,000 for married joint filers;7 these are lower threshold amounts than the 2021 CTC and current law, and thus lower the fiscal costs.

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1 See, for instance, studies documenting such effects from  expansions to the Earned Income Tax Credit and casino  dividend payouts to tribal families, including Akee et al. (2010),  Barr, Eggleston, and Smith (2022), Bastian and Michelmore  (2018), and Dahl and Lochner (2011).

2 See, for instance, Bailey et al. (2020), Brown, Kowalski, and  Lurie (2020), Hoynes et al. (2016), Miller and Wherry (2019),  and Thompson (2018).

3 Tax Policy Center (2022).

4 See Greenstein (2022a) for a review of this evidence.

5 See, e.g., Hammond (2022).

6 We note below that ideally a well-functioning, well-resourced  child welfare system could be relied upon to make sure that  children in vulnerable family settings benefit from government  benefits for which they might qualify.

7 Those thresholds and all dollar-level specifications would be  indexed to inflation going forward.

IN BRIEF: Entrepreneurship Since the COVID-19 Pandemic

Editor’s note: The Aspen Economic Strategy Group is pleased to welcome Luke Pardue, an economist at the payroll and HR platform Gusto, as an AESG Fellow. Luke obtained his PhD in economics from the University of Maryland and previously worked at the Federal Reserve Board and the US Census Bureau. As an AESG Fellow, Pardue will highlight trends shaping the US economy and discuss their relevance to economic policy in a monthly series called IN BRIEF.

IN BRIEF
For nearly four decades, the US economy has experienced a decline in business dynamism, as measured by business startup rates, closure rates, and the movement of workers between firms. In the early stages of the COVID-19 pandemic, however, there was a sharp uptick in new business formation. This measure of entrepreneurial activity remains elevated today, suggesting that pandemic-induced disruptions have sparked a longer-lasting surge in business dynamism. Such a reversal of decades-long trends could lead to increased innovation, faster growth, and a more resilient economy.

WHAT TO KNOW

  • In 2020, there were 4.4 million applications for new businesses in the United States, nearly one million more than the 3.5 million applications in 2019. The pace of entrepreneurship accelerated further in 2021, when 5.4 million new businesses were formed, and remained elevated last year, with 5.0 million business applications, according to data released by the US Census Bureau this week.
  • This jump has occurred not only among businesses without employees (“Sole Proprietorships”), but also among firms with a high propensity to hire additional employees (“Likely Employers”). The growth in applications among likely employers represents a shift in economic activity away from older, larger firms towards younger, smaller businesses – reversing a decades-long decline in the prevalence of such startups.

  • New employer businesses have been forming most quickly in industries severely disrupted by the COVID-19 pandemic. Looking at the five fastest-growing industries compared to their February 2020 levels, applications have risen most quickly in Accommodations and Food Services (+41% in that time), Retail Trade (+30%), Transportation & Warehousing (+24%), Health Care and Social Assistance (+28%), and Construction (+17%). The growth in these industries indicates that entrepreneurs are responding to these disruptions with new innovations — meeting consumers’ needs while creating additional jobs at the same time.

  • There are also early signs that this sharp rise in entrepreneurship will continue beyond the short term. In 2020, 35% of new business owners started a firm because they were laid off from their job; in 2021, the top reason shifted to these owners were seizing new pandemic-related opportunities. This change represents a movement from what scholars call “subsistence entrepreneurship” to the much more sustainable, longer-lasting “transformational entrepreneurship.”
  • This surge in new business formation has long-term implications for the US economy. As Ufuk Ackigit and Sina T. Ates point out in their chapter of AESG’s latest policy volume, the long-term decline in the prevalence of younger, smaller firms in the US has been accompanied by reduced innovation and slower economic growth. This return of dynamism we are seeing in the growth of startups could signal the return of a more competitive economy, leading to greater innovation, higher productivity, and faster economic growth.

THE BOTTOM LINE
Prior to the pandemic, entrepreneurship had been on the decline in the US for decades, and the economy was increasingly dominated by older, larger firms. Today, levels of new business creation remain nearly 50% above their pre-pandemic levels, as entrepreneurs respond to COVID-induced disruptions. Creating an economic environment that continues to foster entrepreneurship well after the pandemic is key to building a more competitive, faster-growing economy.

 

 

Seven Recent Developments in US Science Funding

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Over the past century, scientific research and development (R&D) has fueled US economic and military might and propelled the country’s status as a global superpower. These investments have helped to launch not only the technologies that define modern life, including the internet, mobile and personal computing, and artificial intelligence, but also the healthcare advances that have extended US life expectancy by nearly 20 years, including vaccines, diagnostic technologies, and novel drug therapies. As Ben Jones described in a 2021 AESG paper, the returns on publicly funded scientific investment are substantial: “effectively, the science and innovation system is akin to having a machine where society can put in $1 and get back $5 or more.”

Vannevar Bush’s influential 1945 report Science: The Endless Frontier laid the original groundwork for a national science strategy premised on the idea of a triangular partnership among government, academia, and the private sector—rather than a strategy that concentrates research activity within the federal government (Isaacson, 2019). That informal partnership largely remains intact today and is reflected in the billions of dollars the National Institutes of Health (NIH) grants each year to academic institutions for medical research; in organizations such as the Defense Advanced Research Projects Agency (DARPA), which produces breakthrough technologies in partnership with industry and academia; and in the National Science Foundation (NSF), which funds roughly a quarter of the basic research conducted at US colleges and universities. But much about the national strategy has also changed—as have its results.

The landscape for scientific funding has evolved since its early days and now comprises a complicated array of government agencies, private ventures, and partnerships between the two. This report casts light on the current state of US science funding and the institutions that support that funding, highlighting seven ways in which the size, composition and structure of US scientific research and development have developed since Vannevar Bush’s seminal report. What emerges is a portrait of the complicated arrangements that extend across the federal government, the business sector, higher education, and nonprofits.

 

1.   The United States leads the world in gross R&D domestic investment, but China is quickly narrowing that gap.

US national R&D investment is the highest in the world. At over $700 billion in 2020, US R&D expenditures exceed those of Japan, Germany, South Korea, France, India, the United Kingdom, and Russia, combined. But China is closing the gap. As demonstrated in Figure 1A, which charts gross domestic expenditures on R&D by country in billions of PPP dollars (left axis) and as a share of GDP (right axis), total Chinese annual R&D investment exceeded $500 billion as of 2019—the latest year for which comparable data are available. China’s R&D investment has accelerated over the past decade, growing at an average annual rate of 10.6 percent, roughly twice that of the United States over the same period (see Figure 1B). Meanwhile, South Korea and Taiwan, both small, technologically advanced countries, lead the world in R&D investment when measured as a share of GDP.

Figure 1a. Gross Expenditures on R&D (GERD) and R&D Intensity,
Top 17 Countries, 2019 or Most Recent Data Year

Source: National Science Board, National Science Foundation (2022).

Figure 1b. Gross Domestic Expenditures on R&D by Selected Country, 1990–2019

Source: National Center for Science and Engineering Statistics (2022).

 

2. Over the past 30 years, business R&D investment has accelerated while federal investment has plateaued.

Seventy-three percent of American R&D investment is funded by the business sector, which receives tax benefits designed to incentivize such investments. As demonstrated in Figure 2, business investment in R&D accelerated between 2010 and 2020, growing at a pace of roughly 5.8 percent per year, and reached $517 billion (current dollars) in 2020, nearly four times the amount of federal R&D funding, which has remained relatively flat over the past decade. As a result, federal R&D funding has not kept pace with economic growth and stands near a 60-year low when measured as a share of the overall economy (see Ganz and Vincent, 2021). These trends are noteworthy since business-funded investment tends to favor later-stage R&D while federal investment is more likely to support early-stage, exploratory research. However, direct federal expenditures represent only a portion of total federal support for R&D. Tax subsidies for research expenditures, most notably the R&D tax credit, are expected to total more than $80 billion over 2020-2024 (Joint Committee on Taxation, 2020). The non-profit and higher education sectors meanwhile fund a relatively small share of total R&D expenditures, accounting for $53 billion (current dollars) in 2020.

Figure 2. US R&D Expenditures by Funding Source, 1990–2020

Source: National Center for Science and Engineering Statistics (2022).

 

3. The federal government is the largest source of funding for basic science R&D, but the business sector is the largest source for applied R&D.

Figure 3. R&D Funding by Type of Funding and Sector, 2019

Source: National Center for Science and Engineering Statistics (2022); authors’ calculations.

Figure 3 disaggregates R&D by type of research—applied, basic, or experimental development. Each type of research entails a different risk profile in search of different goals. While applied research is directed toward a specific objective or application, basic research is more flexible: results are not committed toward any particular application. Experimental development meanwhile applies existing research, knowledge, and experience to new products, processes, or improvements (NCSES, 2022).

Figure 3 also disaggregates R&D by sector—business, the federal government, higher education, and nonprofits—and demonstrates that the three types of research draw their funding from the various sectors in significantly different proportions. For instance, the federal government is the largest source of funding for basic research (41 percent of the total), followed by the business sector (33 percent), while higher education and nonprofits each contribute around 13 percent of the total. In contrast, business funds the majority of applied research (55 percent), followed by the federal government (32 percent), with the remaining share (13 percent) coming from higher education and nonprofits combined. Finally, the business sector funds 87 percent of all experimental development while the government funds just 11 percent of the total.

The changing composition of the funding landscape in recent decades has shifted the composition of R&D being performed. Increases in the business sector’s contribution to total R&D funding over the past decade has led to a 76 percent increase in applied research, as compared against a 42 percent increase in basic research over the same period.

 

4. The higher education sector is the largest performer of basic science R&D in the United States.

Figure 4. R&D Performance by Type of Funding and Sector, 2019

Source: National Center for Science and Engineering Statistics (2022) and authors’ calculations.

R&D performance differs from R&D funding. In the triangular partnership between business, government, and higher education, the business sector performs three quarters of total R&D,[1] followed by higher education (12 percent) and the federal government (9 percent).

Among the total R&D performed by businesses in 2019, nearly 60 percent was spent on manufacturing, including pharmaceuticals, computers, and electronics. The information industry (22 percent) represented much of the remaining spending (Wolfe, 2021).[2] In contrast, the federal government spends most of its R&D funding on medicine and life sciences, space, defense, and energy.

The distribution of funding within each source is not consistent across research types. Higher education performs the greatest share of basic research (48 percent), followed by business (32 percent), the federal government (12 percent), and nonprofits (9 percent). Of the basic research performed by higher education, just over half is funded by the federal government.

The majority of R&D performed by the higher education sector is spent on life sciences (56 percent), followed by engineering (15 percent), physical science (6 percent), geosciences (4 percent), social science (3 percent), and computer science (3 percent) (Gibbons, 2021; NCSES, 2022).[3] Within the life sciences investment, health-related R&D comprised 56 percent of the total.

 

5. The Department of Defense accounts for the largest share of federal R&D investment, followed by the NIH, the Department of Energy, and the National Aeronautics and Space Administration.

Figure 5. Federal R&D Funding by Agency, 2022 ($millions)

Source: Congressional Research Service (2023).

Figure 5 depicts the distribution of federal R&D appropriations across federal agencies. Five agencies receive 95 percent of federal R&D funds.

The Department of Defense (DOD) maintains the largest R&D[4] budget at just under $120 billion,[5] constituting around 55 percent of total federal R&D funding. Fifty-five percent ($65.4 billion) of the DOD’s budget is allocated to experimental development activities, which includes larger-scale experimental hardware development, prototypes, and proof-of-concept designs. Non-experimental development, which supports system improvements in existing operational systems, receives 37 percent ($44.2 billion) of DOD R&D funding. DARPA, which is widely celebrated for its contributions to the creation of the internet, GPS, voice recognition, Moderna’s COVID-19 vaccine, among countless other breakthrough technologies, has an annual budget of $3.9 billion in 2022, which is less than 4 percent of the total spent on R&D by DOD.

The NIH receives just over 20 percent of all federal R&D funding, the most of any government agency. This appropriation is allocated across 24 different research institutes. The largest funding recipients within the NIH are the Institutes for Cancer ($6.9 billion), Allergy and Infectious Diseases ($6.3 billion), and Aging ($4.2 billion).

The Department of Energy (DOE) received $19.1 billion for fiscal year 2022, allocated across four offices and administrations and to four additional energy programs. Among those offices, the Office of Science, which funds physical sciences research, and the Office of Energy Efficiency and Renewable Energy (EERE), which focuses on renewable energy, low carbon transportation, manufacturing, and weatherization, received the bulk (71 percent) of DOE’s federal R&D funding. The CHIPS and Science Act appropriated approximately $30.5 billion in new funding to the DOE over the next five years for basic and applied energy research.

The National Aeronautics and Space Administration (NASA) received $12.5 billion for fiscal year 2022, 6 percent of the total federal R&D budget. Over 60 percent ($7.5 billion) is allocated toward “Science,” which includes funding for the recently employed James Webb Space Telescope. Another 23 percent ($2.9 billion) is allocated toward deep space exploration and operation programs.

Of the $7 billion allocated to the NSF, the overwhelming majority (81 percent) is used to fund “Research and Related Activities” (R&RA), which includes early-stage research across all areas of science technology and engineering and mathematics (STEM) (NSF, 2021). The CHIPS and Science Act allocates substantial new resources ($20 billion over baseline over the next five years) to the NSF to establish a new Directorate for Technology, Innovation, and Partnerships (TIP) to accelerate translational research and support STEM-related workforce development. The CHIPS and Science Act also provides an additional $16 billion over baseline over the next five years for basic research and programs to develop the STEM workforce.

The Department of Agriculture allocates most of its $3.7 billion R&D budget to the Agriculture Research Service ($1.8 billion), USDA’s in-house basic and applied research agency, and to the National Institute of Food and Agriculture ($1.6 billion), USDA’s principal extramural research agency that partners with education institutions, private organizations, and individuals to conduct projects and research. The remainder of the agricultural R&D budget is allocated to the National Agricultural Statistics Service and the Economic Research Service.

The Department of Commerce splits its $2.4 billion R&D budget between two of its major agencies: the National Institute of Standards and Technology (NIST) and National Oceanic and Atmospheric Administration (NOAA). NIST research provides measurement, calibration, and quality assurance techniques to support US commerce, while NOAA produces research relating to ecosystems, atmosphere, and global climate change. The CHIPS and Science Act allocates an additional $2.8 billion over the next five years to research conducted by NIST (Department of Commerce, 2022).

The federal government also provides R&D funding to the Department of Veterans Affairs ($1.6 billion), the Department of Transportation ($1.2 billion), and the Department of the Interior ($1.1 billion). Included in the $2.7 billion funding represented in the “Other” category in Figure 5 are allocations for the Environmental Protection Agency ($781 million), the Department of Homeland Security ($664 million), the Department of Education ($405 million), and the Smithsonian Institution ($332 million).

 

6. Since the late 2000s, federal expenditure on R&D has shifted toward tax incentives and away from direct financing.

The research and development tax credit, first enacted in 1981 under the Economic Recovery Tax Act, was made permanent in 2015. The credit is calculated based on the change in a firm’s R&D expenses over a defined period, rather than on its gross R&D expenses. As Bloom et al. (2019) highlight, this method enshrines the United States among the bottom third least generous of Organisation for Economic Co-operation and Development (OECD) member countries. US tax incentives reduce the cost of R&D spending by an average of 5 percent, as compared to the 30 percent subsidy in countries with the most generous tax regimes.

Nevertheless, the Joint Committee on Taxation estimates the cost of government tax support for R&D rose from $9.5 billion in 2000 to $22.1 billion in 2018, as measured in 2015 constant dollars. According to the OECD (2021), 91 percent of the total tax subsidy credit is awarded to firms with gross receipts in excess of $50 million. Surveying the literature on the effectiveness of R&D credits, Hall (2019) concludes “that they are generally effective at increasing business R&D, with a price elasticity of minus one.” That is, each dollar of tax revenue foregone increases R&D spending by approximately a dollar.

Figure 6. Direct Funding of Business R&D and Tax Incentives for R&D in the United States, 2000–2018

Source: Chart recreated from OECD (2021).

 

7. Funders now employ a variety of traditional and newer mechanisms to select projects and scientists for funding.

While the federal government funds $160 billion in R&D each year, there remains significant debate over how to maximize that investment’s effectiveness. A substantial share of this funding, including an estimated 95 percent of academic medical research (Guthrie et al., 2018), is allocated through agency-led peer review processes at institutions such as the NIH and NSF. But various institutions have developed alternative models in response to recognized weaknesses in the traditional peer review model. Table 1 highlights the distinguishing features of four prominent project selection models, including the peer review model.

Table 1. Project Selection Models

Sources:  NIH (2021a); National Science Foundation (n.d.); Bonvillian (2020, 2021); Congressional Research Service (2021a, 2021b); GAO (2021); HHMI (2022); ARC (n.d.); MacArthur Foundation (2022).

1. Peer Review

The peer review model is a bureaucratic review process used to solicit and to select proposals for specific projects. After applications for a particular project are opened, submitted proposals are subjected to multiple rounds of expert review. Review teams are supervised by a lead program officer, who receives the team’s recommendations about proposal funding. If a lead program officer or Director recommends the proposal for award, some agencies will then require a review of business, financial, and policy implications. Once the review is completed, a final decision is made to fund or decline the proposal.

The peer review system’s weaknesses are well-known: the process is time-intensive (Publons, 2019); the burden of which falls on applicants who may or may not receive funding (Rockwell, 2009; Guthrie et al., 2018; Herbert et al., 2013); and there is evidence of bias against the most innovative research and in favor of older or previously funded researchers (Luukkonen, 2012; Ayoubi et al., 2021). While the peer review process outperforms random assignment of science funding, it is a weak predictor of future research performance in some research sectors (Guthrie et al., 2018; Fang et al., 2016). And these critiques are not unique to the United States. In Canada, for example, researchers have observed that the cost of peer review is greater than the cost of awarding all qualifying scientists a $40,000 grant (Gordon and Poulin, 2009).

Researchers (Ricón, 2021; Fang and Casadevall, 2016) have proposed modifying the peer review system by instituting a lottery in instances where the supply of qualified applications exceeds the available funding. Proponents of these modified lottery systems emphasize the mixed results of the peer review process at generating innovative research and highlight that a quasi-randomized system could substantially reduce reviewer bias, improve grantee diversity, and expedite the selection process. The idea has gained momentum internationally, with notable institutions such as the Health Research Council of New Zealand and the Swiss National Science Foundation becoming the latest to experiment with the process (Adam, 2019).

2. Portfolio

The portfolio approach, used most notably by DARPA and Operation Warp Speed (OWS), is geared toward generating new ideas to address novel problems. Unlike the peer review process, the portfolio approach simultaneously funds a variety of projects working to solve the same problem. By investing in a wide range of options (a “portfolio”), organizations increase the chance that at least one project will prove successful, while also accepting the risk that more projects will likely fail. Unlike the peer review model, the portfolio approach encourages funding organizations to invest in “risky” proposals that may otherwise be rejected.[6] Organizations that use the portfolio approach often employ a flat, non-hierarchical structure, allowing them to expedite the project selection process.

DARPA is one of the more prominent examples of an organization using the portfolio approach. Established in 1958 as an agency of the DOD, DARPA aims to maintain and to advance US technical superiority (Congressional Research Service, 2021b). The agency is composed of a Director, a Deputy Director, and approximately 100 program managers (PMs), each of whom serve five-year appointments to create and oversee ambitious R&D programs. Programs that are approved by the Director and Deputy Director are then issued budgets, and a PM next solicits, reviews, and selects proposals for the program’s various components. Once funding recipients are selected, the PM then plays a supervisory role throughout the project’s duration. PMs may supervise more than one program at a time, and programs typically last between three and five years. While the PM can often take over a year to research and to design programs, performers typically receive funding around six months after proposals are submitted.

OWS, an interagency partnership between the DOD and the Department of Health and Human Services (HHS) created by the Trump administration in 2020 to facilitate and accelerate the development, manufacture, and distribution of COVID-19 vaccines, also used the portfolio approach. Organizationally, OWS functioned like an accelerated version of the DARPA model, selecting multiple firms to receive funding for vaccine research and development (Bonvillian, 2021). However, unlike DARPA, OWS guaranteed the purchase and distribution of the firms’ final product. These guaranteed purchases were instrumental in accelerating vaccine development, but also required that the government incur substantial financial risk. By March 2021, OWS had issued $18.2 billion in contracts for vaccine development and production, in addition to over $950 million for ancillary COVID-19 supplies (GAO, 2021; Congressional Research Service, 2021a). But OWS ultimately delivered vaccines at scale in unprecedented time—by January 2021, only eight months after the program’s launch, five of the six contracted vaccine manufacturers had begun commercial manufacturing, and by month’s end these companies had released 63.7 million doses of the vaccine.

3. People, Not Projects

The “people, not projects” approach focuses the selection process on scientists, rather than on specific projects. It is currently favored by a variety of non-government agencies. For example, The Arc Institute selects “Core Investigators” for renewable, eight-year appointments to operate fully funded labs. Investigators have complete autonomy over their research agenda and “pursue their very best research ideas in accordance with their own judgment, regardless of short-term risk” (ARC). The Howard Hughes Medical Institute (HHMI) adopts a similar approach: HHMI investigators receive renewable seven-year appointments that confer flexible funding for salary, lab staff, and equipment at their primary research institutions. Likewise, the MacArthur Award is a $650,000, “no strings attached” grant to “talented individuals who have shown extraordinary originality and dedication in their creative pursuits,” and does not require that recipients affiliate with any particular institution during their fellowship (MacArthur, 2022).

The “people, not projects” approach removes short-term pressures for recipients to reach specific goals within limited timeframes, and instead allows them substantial freedom to construct their own research agendas, enabling them to explore ideas that may not be funded by traditional project selection models. However, critics highlight that the approach, much like the peer review model, tends to favor already prominent researchers. It also often leaves them with little or no accountability for the work they produce (Ioannidis, 2011; Ricón, 2020).

 

Conclusion

The triangular partnership that Vannevar Bush envisioned between government, academia, and the private sector to fund US research and development lives on today in an ever-evolving form and at ever-increasing scale. As Chinese expenditures come to rival American investment, understanding the dynamics of R&D funding will be critical to efficiently allocating resources, and to developing new approaches that address some of the peer review model’s drawbacks, including its potential for sluggishness. Recent successes such as Operation Warp Speed provide cause for continued optimism that US innovation will continue as the preeminent source of scientific breakthroughs and widespread economic prosperity.

 

[1] Dollar amounts in this section are listed in constant 2012 $millions.

[2] Data from Wolfe (2021) is extracted from the 2019 Business Enterprise Research and Development Survey and dollar amounts carry minor discrepancies with data used in Figures 3 and 4.

[3] Data from Gibbons (2021) is extracted from the 2019 Higher Education Research and Development Survey and dollar amounts carry minor discrepancies with data used in Figures 3 and 4.

[4] The R&D budget for the Department of Defense discussed here refers to funding appropriated in Title IV, “Research, Development, Test, and Evaluation” (RDT&E). For consistency, we refer to “RDT&E” as “R&D” throughout this section.

[5] The DOD’s total R&D budget in Figure 5 includes funding for all budget activities (6.1-6.8) under Title IV. The OMB does not count 6.7 and 6.8 as R&D. For this and other reasons, the total R&D amount discussed in this section does not align with total federal R&D investment figures used elsewhere in this report.

[6] The newest of the NIH’s programs, the Advanced Research Projects Agency-Health, which aims to undertake “agile, risky, transformational biomedical research projects,” is using a DARPA-like portfolio model to fund projects rather than the traditional NIH peer review process in order to better “establish a culture of championing innovative ideas” (AAAS, 2021; NIH, 2021).

Foreword: Economic Policy in a More Uncertain World

The Aspen Economic Strategy Group releases its fifth annual policy volume against a backdrop of historic economic and strategic uncertainty. 

Supply shocks resulting from a senseless Russian war in Ukraine are exacerbating already soaring energy and food prices. Increasing hostility between the United States and China is accelerating the transition to a world of rival economic blocs. A global energy crisis threatens political upheaval and undermines both economic security and progress toward the world’s climate goals. 

The upshot is a world economy thrown into an era of uncertainty, unlike any we have seen since the end of the Cold War. How can the United States navigate this new era? The challenge facing economic policymakers is to ensure American firms and workers are able to thrive in the face of these global shifts. 

Can US firms continue to innovate the technologies of the future if crucial links to global talent are cut off? Will the recent push for industrial policy help or hurt American firms competing with foreign companies? To what extent can public policy alter America’s demographic trends towards an aging population and lower fertility? Can workers adapt to the shifting labor markets caused by the global energy transition? 

This policy book examines these questions and highlights potential policy directions that are informed by the evidence. The first section grapples with issues around government-directed science and technology funding, the role of talent in advancing innovation, and the structure of R&D investments. 

The second section discusses America’s demographic challenges: the causes of America’s declining population growth, why it matters, and what can or cannot be done in response. 

The third section discusses the challenges confronting US workers and firms. It raises questions and proposes solutions for how to deal with the impact of the green energy transition on the labor force. It also features policy lessons learned from the unprecedented federal aid provided to state and local governments during COVID-19. 

This volume is not intended to represent the consensus view of the Aspen Economic Strategy Group membership. Rather, its intent is to bring to bear the best economic research in service of non-partisan policy solutions that can better position the United States for a more uncertain world.

 

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Introduction: Economic Policy in a More Uncertain World

Economic policymakers are confronting the highest inflation in a generation, energy supply shortages, and shifting geopolitical alliances. These challenges rightfully occupy news headlines and policy debates, but longer-run headwinds in the American economy also warrant focused attention. This volume aims to highlight three such challenges and provide constructive policy options for addressing them: the need to promote long-run productivity growth through investments in science and innovation; US demographic challenges including population aging, declining fertility, and restrictive immigration policies; and ongoing labor market reallocation driven by technological change and the transition to green energy. 

This volume is organized into three parts. Part I focuses on Economic Security, Science Funding, and Innovation Policy, topics of critical and timely economic importance on which the AESG has now focused for several years. The chapters in this section consider how funding should be directed to advance US scientific innovation. Moving beyond the question of whether the country ought to increase investment in innovation (the consensus being a clear yes), this year’s volume addresses how to move an innovation agenda forward. Chapter 1 describes macroeconomic economic trends that have hampered US innovation and discusses policies to promote greater competition and innovation. Chapter 2 describes trends in US science and innovation funding. 

Part II focuses on US Demographic Challenges and Potential Policy Responses. Chapter 3 describes the causes and consequences of declining US fertility and policies to address the decline in births. Chapter 4 describes the current state of US immigration and argues for the expansion of both low- and high-skill immigration to help address US demographic challenges. Chapter 5 discusses the role of population aging in America’s fiscal trajectory and the distributional choices policymakers are making to shift America’s budget imbalance across and within generations.

Part III focuses on Challenges Facing US Workers and Firms. Chapter 6 describes the local labor market impacts that are expected to result from the transition to green energy and targeted policies to mitigate the costliest impacts. Finally, Chapter 7 gleans lessons from federal aid allocated to state and local governments during the COVID-19 pandemic, highlighting how pandemic aid to individuals and households successfully shored up household balance sheets and in turn stabilized local government tax revenue bases, even before unprecedented federal assistance was provided directly to states and localities. 

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Financial Times Op-Ed: America’s slowing population growth is here to stay

The US faces a demographic challenge that many other high-income countries have been facing for decades: below replacement level fertility. As American adults are choosing to have fewer children than previous generations did, the nation faces the prospect of slower population growth. Though some celebrate a decline in births as good news for the planet, a slowdown in population growth also poses fiscal and economic challenges that cannot be ignored.

Luckily, the recipe for stimulating economic growth plays to America’s historic strengths: welcoming immigrant labour and establishing the institutional conditions in which innovation can flourish.

To maintain the size of a country’s population without migration, there needs to be a total of 2.1 children born per woman, on average. This number is captured in a statistic called the “total fertility rate.” The US total fertility rate is now around 1.66, which reflects a rapid and precipitous drop over the past 15 years. As recently as 2007, the US total fertility rate was 2.12. This decrease in births has contributed to a slowdown in US population growth.

The size of America’s working age population has been stagnant for over a decade. If fertility continues to decline or stabilises at a low level, then without a substantial increase in immigration, the working-age population will soon begin to shrink. This means fewer workers, which means lower economic output overall. But it also could mean less economic output per person and lower standards of living. A shrinking working age population poses challenges too for the solvency of the US social security system, which, if fertility continues to fall, will be in even worse fiscal shape than official government projections assume.

The US, along with many other high-income countries, saw fertility rates drop to below replacement levels in the 1980s. While the fertility rates of other high-income countries have remained well below 2 since that time, the US fertility rate climbed to above 2 during the 1990s and remained elevated well into the 2000s. Now the US looks to be on a path of convergence toward the sustained lower levels of total fertility in other high-income countries. Even in Scandinavian countries, with their especially generous systems of public support, the total fertility rate is far below replacement level.

The stubbornness with which fertility rates have remained low in other advanced economies probably suggests that the current low level of fertility in the US is not an aberration, but rather, is here to stay. The country needs to be prepared to face the demographic reality of slower population growth head on.

In response to sustained low levels of fertility, many other countries have implemented pronatalist policies, aiming to make it more financially attractive or feasible for people to have children. For example, in 2003, France announced a bonus of €800 for each baby born. In 2007, Spain introduced a baby bonus of €2,500 per child. In China after decades of a one-child policy, the country is now providing financial incentives and tax credits for having more children. Incremental pronatalist policies, such as expanded child tax credits, more generous childcare subsidies or expanded paid family leave, might have at best a modest effect on the aggregate US fertility rate. It is unlikely though that total fertility rate would return to replacement level in the near future.

Ensuring the vibrancy of the US economy will therefore require letting more foreign-born workers into the country. America’s demographic outlook makes it all the more imperative that we fix our broken immigration system. However, the politics of doing so are difficult. Federal policy will have to be designed in a way that recognises that increased immigration, while in the nation’s interest, might negatively affect certain communities, at least in the short run.

Immigration reform is the most obvious and immediate policy response to the challenge of falling birth rates and slower population growth. Others include dedicated steps to promote scientific innovation, as well as a range of efforts to bolster human capital.

In uncertain economic times, a divided Congress must come together with the White House to temper the impacts of stagnating population growth with smart policy. The pursuit of immigration reform and a robust plan to boost innovation must be at the top of the agenda when the new Congress convenes in January.

This article was originally published in the Financial Times.