Amid news reports that the Trump administration is considering a budget blueprint developed by the conservative Heritage Foundation to slash trillions of dollars of federal spending, the Information Technology and Innovation Foundation (ITIF) has warned that key aspects of the Heritage plan are premised on erroneous assumptions, empirical inaccuracies, and misguided leaps of logic, and adopting these particular proposals would severely harm U.S. innovation, productivity, and competitiveness.
ITIF, the top-ranked science and technology think tank in North America, concluded in its analysis that the country has suffered for more than a decade from chronic underinvestment in foundational areas such as science, technology, education, and infrastructure. Crippling key functions of the federal government that support business innovation and competitiveness, as the Heritage blueprint would do, would only compound the damage.
“The administration and Congress need to recognize the difference between wasteful spending and critical investment,” said Robert D. Atkinson, ITIF’s president and the report’s co-author. “There are certainly federal programs that can be cut with little to no impact on economic growth. However, many federal programs compensate for serious market failures and play a pivotal role in ensuring the United States is succeeding in global economic competition. Unfortunately, Heritage dwells in a fictional world where market outcomes are by definition optimal, even if the winners aren’t on U.S. shores, and where government programs are by definition failures, even when there is evidence to the contrary. In the real world, we need to adopt a more nuanced, less ideological approach to put the U.S. economy, businesses, and workers in a position to flourish.”
“The United States has suffered from private and public underinvestment for more than a decade,” Atkinson continued. “Crippling key functions of the federal government, which would be the consequence of adopting Heritage’s budget, will set the nation back even further.”
The ITIF report breaks down Heritage’s doctrinaire errors in two major areas: trade and competitiveness, and energy and R&D. On the first, ITIF says the Heritage plan pretends that the United States and its industries are not in competition with other nations, because whatever the market produces are ideal by definition. This simplistic worldview ignores the fact that if the United States loses traded-sector output to other countries, then it will also lose jobs and face more expensive imports. As ITIF points out, conservative governors and mayors recognize these facts and promote state-level economic development programs to maximize the benefits of economic competition. Federal programs like the Export-Import Bank, Manufacturing Extension Partnership, and the U.S. Interagency Trade Enforcement Center complement these efforts, and cutting them as Heritage proposes would only diminish U.S. competitiveness further.
ITIF points out that Heritage’s plan also ignores market failures like the lack of investment in technology commercialization. While many of these investments do pay off, there is less than optimal private-sector activity because these investments are viewed as too long-term or risky. Programs like the Small Business Innovation Research (SBIR) and Small Business Technology Transfer initiatives, which Heritage suggests cutting, counter this market failure. Unfortunately, Heritage’s ideological position predisposes it to detest government programs despite evidence of their success. For example, a recent study found that for every dollar the Air Force spent on its SBIR program, it returned $3.60 in sales and 50 cents of additional outside investment or venture capital.
With regard to energy and R&D, ITIF argues that by calling for the elimination of all climate-related programs and for massive cuts to basic R&D, the Heritage proposal blithely disregards the scientific consensus on climate change. This is not just bad environmental policy; it also makes no sense as an economic program. In particular, the Heritage plan ignores biases in the energy market that favor incumbents and the complementary nature of public and private investment in this space. ITIF argues that if the United States fails to accelerate its progress toward cheaper, cleaner energy, then the pressure for a regulatory and tax response to reduce reliance on dirty energy will grow. What Heritage fails to understand is that federal support for clean-energy innovation in the near term will limit the need for such costly and heavy-handed responses later.
“America’s economic and energy challenges are too great for policy to be shaped by ideological extremists, either on the right or the left,” said Stephen J. Ezell, ITIF’s vice president for global innovation policy and the report’s lead author. “Targeted federal government programs to help businesses in America are not crony capitalism. They are smart economic development programs, the very same kind that the most conservative Republican governors champion. To foster an innovative and competitive economy in a turbulent and sometimes hostile world, the U.S. government must use an array of tools, but use them judiciously. Heritage’s kit contains only one tool: the axe.”