Why government-backed R&D pays for itself in tech, jobs and sustainability

Since the collapse of the Soviet Union in 1991, the advent of globalization and international reach of capitalism has lifted over a billion people out of extreme poverty. Fewer people now struggle in that socio-economic bracket than ever before in history. In 1991, global GDP stood at approximately $47 trillion. In 2022, that figure now stands at a towering $100 trillion.

But in that same period, the rise of hyper-inequality – to be distinguished from natural levels that arise from differences in effort, intellect and circumstance – now rivals America’s Gilded Age. However, this is not an US-specific phenomenon, but rather a world trend that has led to dissolving social cohesion across and within nations.

Economic globalization has also meant “the integration of labor markets, which multinational companies have leveraged by offshoring jobs to reduce costs and boost shareholder value”. The result has been a hollowing-out of manufacturing hubs – in the US dubbed the Rust Belt – with those same communities struggling with opiate addictions and gloomy job prospects.

Over the past five decades, R&D spending as a percent of GDP in the US has fallen below optimal levels, while other aspiring global powers, such as China, have been ramping up. Simultaneously, the urgency to invest in sustainable, climate change-mitigating innovations has increased at a commensurate rate with the impressive economic growth the world has undergone.

Reforming the educational system to better prepare students for 21st-century problems is essential to strengthening national economic and democratic integrity. Nation states with a more educated population generally enjoy greater politically stability and frequently boast better growth rates. With the rise of artificial intelligence, this task is becoming more urgent.

Teaching students how to think rather than what to think will be crucial for graduates to find work in fields that offer fulfillment and compelling remuneration. Higher R&D spending in response to global risks such as climate change will create a market for a plethora of high-paying jobs in cutting-edge sectors focusing on sustainability. One stone, two birds.

An IFC report published in November shows that the Paris Agreement helped open up about $23 trillion in opportunities for climate-smart investments in emerging markets alone between now and 2030. Reinforcing these global efforts means a cascading effect of stronger growth, political stability, social cohesion and economic sustainability across and within nation states.

R&D spending in the US has historically been responsible for technological breakthroughs in areas the private sector was too risk-averse to take on in the early stages. This includes but is not limited to: the internet, Siri, GPS, semiconductors, the Human Genome Project (HGP) and many other strategic technologies that have fostered growth not just in the US but globally.

The latter two technological endeavours are prime case studies. In 1959, close to 90% of US research into electronics was funded by the federal government. More specifically, defence spending supported close to 50% of all semiconductor-related R&D from the 1950s-70s, according to the book Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream. Integrated circuits now constitute the data-processing nerve centre of the global economy.

Studies found government-funded research into mapping the human genome between 1988 and 2012 led to an economic impact-to-government-spending ratio of 65:1. The return on investment for the federal government was considerable: The genomics-enabled sector generated the same amount of tax revenue in 2012 as the entire cost of the HPG over its 13-year investment cycle.

HPG has provided the foundation for the emerging field of precision medicine, where patients can receive custom treatments down to their specific genomic profile. This multi-billion dollar market is also closely connected to the semiconductor-dependent tech sector. A confluence of two government-funded research ventures decades later are flourishing in the private sector.

The CHIPS Act in the US is a laudable pivot for investing in domestic production of strategic technologies and fortifying local economic integrity. One study concluded that every dollar of publicly financed military spending in R&D translated to $2.40-5.90 in private sector R&D (122).

Market fundamentalists would argue that the private sector should be leading innovation. However, higher interest rates and a lower risk threshold among investors for early-stage, highly advanced technologies frequently scares private funders away. In 2012 alone, the direct and indirect effects of HGP generated 280,000 jobs with an average salary close to $70,000 (or $92,391.41 in inflation-adjusted terms for 2023).

An economic model created by Jonathan Gruber and Simon Johnson suggests one job is created for every $25,000 spent in public R&D. Using these metrics, a $100 billion investment would in theory then generate 4 million new jobs. The data across sectors and industries is clear: Government-funded R&D directly and indirectly fosters innovation and job growth.

Scaling up R&D also directly impacts government-wide efforts to shift away from fossil fuels and towards green technologies. While the price of wind and solar have significantly fallen, petroleum as a source of fuel and energy is still cheaper. Using cars as an example, the shift from gasoline to electric also carries a plethora of risks that require more research.

High demand for key minerals and metals – copper, cobalt, lithium, etc. – in a net-zero emissions scenario would push commodity prices to astronomical levels. The result could be an inflationary surge that would hurt the most socioeconomically vulnerable. Prudence and pragmatism will be necessary to exercise to avoid creating a backlash against an energy transition.

Narrowing the gap of the so-called “green premium” – that is, the cost of using a green alternative over fossil fuels – is essential for global energy transition efforts. History would suggest that additional R&D would help accelerate innovation, create jobs and reduce the green premium of sustainable tech.