Digging a $7.6 Billion Hole and the Possible End of R&D
Part I of Our Series on the Conflict Between the Fiscal Responsibility Act and the CHIPS and Science Act and How it Will Impact Emerging Technology
If you frequent a local gym, you know what’s coming. The leaves are changing, the days are shorter, and the wind is crisp. You might need to grab a hoodie in the morning before you go, but the extra clothing isn’t the issue. You know that your gym routine is about to be disrupted for about three months starting in January.
January through March is a notoriously busy time at gyms for one reason: New Years resolutions. New Years resolutions are a wonderful idea; the new year represents a reset and making a commitment to things that you know are important, even if they were overlooked, is a wonderful way to start out the year. But if you frequent a gym, you know what comes next. The January-March rush dies down and by the spring you are back to your routine until the next resolution cycle. According to an Ohio State University study, a whopping 91% of New Years resolutions fail. There are a lot of reasons for this according to the study, but if you’ve been paying attention to the signals on emerging technology and research and development (R&D) from Congress, you might see where a lot of Americans get it.
In 2022, a much ballyhooed CHIPS and Science Act passed Congress authorizing $280 billion in subsidies for chip manufacturing, tax credits, and direct investments in our STEM workforce to improve America’s strategic technological position globally. It was a referendum on the US position as a leader and manufacturer in foundational sciences and a strategic investment in the long-term success of our innovation ecosystem as a strategic economic, homeland, and national security asset. Many in the emerging technology field remember its passage fondly and eagerly await news alerts about the construction of fabs in the midwest. But much like our New Years resolutions, this piece of legislation and what it sought to create were to fade away faster than a COVID era Peloton purchase.
Just one year after the CHIPS Act was passed, another significant bill passed Congress and was signed into law, the Fiscal Responsibility Act or FRA. The FRA significantly curtailed non-defense discretionary (NDD) funding, which includes all non-military R&D funding.
The FRA has effectively nullified the strategic goals of the CHIPS Act and is poised to have a real impact on the long-term health of the American innovation ecosystem and strategic global leadership in emerging technology development.
In 2024, BEFORE the DOGE cuts, there was a $7.6 billion shortfall between what was authorized in the CHIPS Act and what key agencies received due directly to the cuts imposed by the FRA. The 117th Congress chose a path to strategically position the US as a leader in emerging technology and foundational science in the long-term. The 118th Congress chose short-term fiscal stability over the goals that Congress itself set.
In a national moment where the government federal government is being cut in terms of staff and funding, a conversation should begin about how long-term effects are brewing as a result of a short-term choice over a long-term strategy. The CHIPS Act funds, as authorized by duly elected representatives of the people of the United States, will not go to the foundational R&D. Without this work, all the visions of strong onshore manufacturing and secure supply chains may not come to fruition. Fundamentally, these laws sit in contrast, and the consequences are not clear to us yet. What is clear is that the US is in a great power competition with emerging technology as its core. The conflict between the FRA and CHIPS Act will have geopolitical implications unless action is taken.
CHIPS and Science
The CHIPS Act was an outgrowth of the COVID-19 pandemic and the supply chain disruptions that many Americans felt. Shining such a bright light on supply chains broadly made many observers turn squarely to the supply chain for semiconductors. Worthy of an entire article themselves, semiconductors, or chips, are essential for our current technological needs and to continue to innovate and monetize technology. Military systems need chips and the biggest chip producer in the world is inconveniently located on the island of Taiwan. The Taiwan Semiconductor Manufacturing Company or TSMC is a world leading producer of semiconductors and the Chinese government has not exactly been subtle about their desire to retake Taiwan, TSMC and all. This fact combined with the COVID-19 supply chain disruptions led many to believe that the US needed to move its manufacturing of chips onshore. This is a great idea, but one that will take decades, by conservative estimates, to achieve. Without government intervention, few, if any, companies will be able to invest the billions of dollars required just to build the factories let alone have a trained workforce to run them.
The CHIPS Act sought to not only solve this problem in the form of tax credits, investments in workforce, and subsidies for building these manufacturing facilities, but also to solve a long-term problem. Out of its $280 billion, the CHIPS Act authorizes $26 billion for technology R&D projects to be administered by the National Science Foundation (NSF), the Department of Energy (DOE), and the National Institute of Standards and Technology (NIST) within the Department of Commerce. That money was intended to fund foundational scientific research that would create the feeder for what the subsidies and tax credits sought to create.
Think about it.
Building a factory is the easy part. That factory must be staffed with people that are trained to build what they factory was designed to build. What the factory is designed to build needs to come from R&D. The discoveries that will fuel these factories today and into the next century will come from R&D projects that discover new materials, new methods, and new applications. It’s a cycle. Build…train…discover…repeat.
In the DOGE era, many may ask what business it is of the government to fund R&D for what will ultimately be private industry. R&D is an inherently expensive undertaking that has a high rate of failure, which private industry tends not to tolerate well. In 1960, the federal government funded 65% of national R&D efforts only to see that number drop to 21% in 2019, shifting the burden to the private sector. Given the expense of R&D, only the top companies can truly afford to fund it and even that funding is on a leash. Companies of that size are answerable to their boards and shareholders and there is an expectation that share prices will go up. Through that lens, R&D can be seen as a money pit that takes away from profits.
In contrast, the government is not trying to turn a profit. Its interest is in the national, homeland, and economic security of the country and an attractive and robust innovation ecosystem is critical to that security. Foundational R&D that fuels, for example, a long-term and robust onshore semiconductor manufacturing capability will benefit the country broadly from job creation to stronger and more resilient military capabilities.
It creates another cycle; one where governments fund the exploratory research that leads to big breakthroughs with industrial payoff. The CHIPS Act had this vision.
Next week, we will examine the FRA and how it has specifically impacted the R&D funding authorized under the CHIPS Act. We will also look at the potential impacts of an erosion of the foundational scientific research that feeds the emerging technology future that many desire. The CHIPS Act was a resolution made for America’s future. The FRA saw to it that we quit the gym less than a year later.
Come back for Part II!