Government R&D is Important to Our Future: Trump Budget Cuts Will do Serious Harm, the Lessons from the Shale Revolution
American Eclectic posts articles twice a month, on the 1st and 15th. This is the fourth year of publication; previously published articles can be found on my site.
September 1, 2025
Government-financially supported research and development (R&D) has contributed to approximately 25 percent of productivity growth spread out across the American economy. Improved productivity helps to increase wages and contributes to better economic growth, which means increasing prospects for businesses looking for opportunities in the future as well as workers looking for jobs. As one study stated:
The data shows that federal research dollars seed innovations that private companies might not pursue on their own, especially in areas where the commercial payoff is uncertain or far in the future.
Another study has pointed out that nearly a third of all US patients were related to government financed research. As one researcher said, “government funding fuels innovation.” This study concluded:
By examining a database of all patents filed since 1926, the team found that the percentage of patents that involved government support has risen steadily. While government R&D spending as a percentage of gross domestic product has declined since the mid-1980s, the percentage of patents that received any government support rose from 12 percent in 1980 to a high of 30 percent by 2011 before falling slightly to 28 percent since then.
The importance of government-financed research cannot be underestimated. The problem is that Ronald Reagan's statement about government still resonates today. In his inauguration speech in 1981, he said, “Government is not the solution to the problem: government is the problem.” This attitude persists and, unfortunately, matters in how many see their government.
Ironically, Reagan did not have his administration step aside and let business run free. There were significant areas where businesses needed the Reagan administration's help to prosper and grow. One example is that during the Reagan years, the domestic auto industry was under severe competition from Japanese car sales. This particular situation does not address government R&D, but it highlights the role the government can play in supporting an industry. The Reagan administration had to address the threat that Japanese car sales would adversely affect the American domestic auto industry. As one study stated:
Unique decision-making and policy implementation processes arose as the result of the tension between the perceived need to afford the U.S. automobile industry time to respond to extraordinary circumstances and the desire to maintain the fiction that the administration would not violate its free market/free trade rhetoric in its first months in office.
The word “fiction” in the above quote is essential, as it helps convey what many Americans have failed to be made aware of: that there are numerous government programs and policies that have benefited them. In the case of Reagan addressing Japanese car sales, the administration successfully established an agreement with Japan, known as Voluntary Export Restraints (VER), which significantly aided the American auto industry. As this study concluded:
A once infantile industry recognized its predicament and grew up in a relatively few years. The U.S. automobile industry surprised many critics when it did not conform to the liberal traders' rule of thumb that industries receiving protection from imports do not restore their international competitiveness. Despite their immediate propensity to raise prices in the wake of more expensive Japanese imports, Chrysler, Ford, and to a lesser extent General Motors utilized the grace period provided by the VERs to restore their ability to provide what consumers wanted.
In addition to investing massively in new production facilities, the Big Three also adapted a number of highly effective manufacturing strategies perfected by their Japanese competition: enhanced quality control; greater coordination between engineers, product designers, assembly line workers, and suppliers; just-in-time delivery of parts; less middle management and more delegation of authority to assembly line workers; and so on. The empirical result was that the quality and cost structure of most U.S.-made cars had significantly improved by the onset of the 1990s, compared to a decade earlier.
Industrial policy, as a term, is often disdained by conservatives and Republicans; however, it is a broad and pliable concept that can be seen in other policies of the Reagan administration. In another area, the U.S. was concerned about computer chip manufacturing, as it was falling behind other countries. Sematech was a public-private partnership created to confront this issue. Again, Japanese electronics were threatening the American market, and the semiconductor industry was in dire straits. By 1985, Reagan’s first year of his second term, the sector saw a 20 percent drop in sales, as one site stated, it experienced “unprecedented losses.”
The Defense Science Review Board identified the problems associated with a vulnerable supply chain, and the solution was the creation of Sematech in 1987. Sematech was created as a consortium of 14 semiconductor companies. Half the funding for Sematech came from the Defense Advanced Research Projects Agency (DARPA), and the other half came from the 14 companies. By the time Bill Clinton became President in 1993, the consortium had decided to reject federal funding. Sematech was seen as a success by the 1990s, with the U.S. once again becoming a major maker of chips.
Admittedly, today, Taiwan produces over 60 percent of all semiconductors globally and over 90 percent of all advanced semiconductor chips, with a single company manufacturing the majority. However, Sematech stands as an example that government financial support can significantly benefit an industry. Indeed, the irony of the Reagan administration, which was seen as a champion of conservative ideas, was that it created the impression that the government was backing off and letting business do its own thing. However, the administration's two most significant accomplishments were the actions it actively took to help American business.
The Reagan administration's policies regarding the threat posed by Japanese cars to American domestic car manufacturers did not address R&D. Still, they demonstrated that government intervention is essential to the American business sector. The situation with Sematech bridges into R&D and gives insight into the role the government has played in helping an industry. This section of the article serves as a lead-in to discussing how to approach government R&D and the oil industry.
In the case of the United States, we are the largest consumer of oil, accounting for approximately 20 percent of global demand. However, a significant milestone was reached in 2020: we became a net oil exporter for the first time since 1949. 2022 marked another milestone, as it was the third consecutive year in which the United States was a net oil exporter in the Middle East. We were once heavily dependent on the Organization of Petroleum Exporting Countries (OPEC) and Persian Gulf oil, a situation that has changed dramatically. In 1977, OPEC was our source for 70 percent of total oil imports and 85 percent of our total crude oil imports. In 2022, 12 percent of our total crude oil imports came from Persian Gulf countries. How did this development come about? In a future article, I will address the geopolitics of American interests in the Persian Gulf, now that the country is no longer dependent on oil from this region.
The Department of Energy invested $137 million in research and development for horizontal and directional drilling. This was government R&D helping to bring about the shale revolution. As one site stated:
In the hands of the private sector, DOE-funded research and development technologies spurred production of shale gas across the United States—beginning with the Barnett Shale in Texas in the 1980s. These technologies allowed Barnett Shale to be the f irst to produce oil and gas from shale. From there, the technologies were used in other shale formations, and the shale revolution was born.
The United States appeared to peak in the number of barrels of oil a day it was able to extract from the ground in 1970. By the time we reached 2005, 35 years later, fewer barrels of oil were being removed from the ground each day. As one writer stated:
The U.S. economy was in a precarious situation, highly dependent on oil imports from countries like Venezuela and Saudi Arabia; countries whose interests weren’t always aligned with our own.
Horizontal drilling involves drilling into oil and gas deposits and then turning the drill horizontally to extract more oil and natural gas from the ground. Beginning in 2008, the production of oil and natural gas in the United States experienced a significant increase. As one article stated:
Extraction productivity has increased eight-fold for natural gas and nineteen-fold for oil, allowing the United States to surpass Russia as the largest natural gas producer in 2011 and Saudi Arabia for oil in 2018.
This is the shale revolution.
This increased extraction has mattered to American consumers. A Council of Economic Advisors report from 2019 estimated that the significant increase in oil and gas production contributed to a 63 percent price reduction of natural gas and a 45 percent drop in electricity’s wholesale price.
Government R&D has made significant contributions to the achievements of the business sector in the shale revolution. Another study pointing to the impact of government R&D spending stated:
Examining several measures of U.S. productivity, we find that increases in nondefense government research and development (R&D) appear to spur sustained growth in long-term productivity.
This particular study noted the importance of government R&D and that, as it declines, through reduced spending, the American economy is adversely affected:
While the slowdown in U.S. productivity growth since the late 1960s coincides with a relative decline in government R&D spending, the causality underlying this relationship is far from clear. Higher growth in public infrastructure or R&D spending by businesses could also have driven faster productivity growth in the early post-World War II era.
Why might government-funded R&D be particularly important for productivity growth?
Broadly speaking, the private sector invests more heavily in the development part of R&D, that is, bringing goods to market and creating work that can be patented. The government, conversely, tends to invest relatively more in basic and applied research, work that expands our fundamental knowledge and efforts that can generate big spillovers but can be hard to patent.
Think physics research conducted with particle accelerators at the National Laboratories or DNA sequencing for the Human Genome Project, R&D funded by the Department of Energy and National Institutes of Health. Other government-funded R&D is conducted at universities or contracted out to private firms. Much of this focuses on basic research, which the private sector underfunds because it can be difficult to monetize the results.
Hydraulic drilling predates the federal government’s R&D focus, which began in the 1970s. In 1947, fracking was applied to limestone deposits, but that was different than shale deposits. The development of diamond drill bits and horizontal drilling was crucial to the shale revolution. The path from government R&D to commercial application can be understood from the following statement:
[I]t’s…difficult to see the path from 1970 to today's shale gas boom without the guiding support of the federal government. Industry officials agree that shale fracking would be impossible without microseismic imaging, a technique developed for entirely different purposes by researchers at Sandia National Laboratories.
Sandia National Laboratories was established in 1949. It is United States-owned but managed privately through a subsidiary of Honeywell International. Sandia has successfully linked its primary R&D efforts with commercial ventures. As a New Mexico Sun article states:
Sandia's success in moving technology to industry is evident through its Cooperative Research and Development Agreements (CRADAs) and Patent License Agreements (PLAs). These agreements have enabled Sandia to collaborate with external parties and license federal government-owned inventions to for-profit corporations, driving innovation and economic growth.
Specifically, the shale revolution can be seen in a statement by a geologist whose company was involved in shale gas production in Texas:
I'm conservative as hell, [but the government] …did a hell of a lot of work, and I can't give them enough credit for that. [The Department of Energy] started it, and other people took the ball and ran with it. You cannot diminish DOE's involvement.
Shale oil production is evident in its rapid growth. In 2008, less than 500,000 barrels per day were extracted from the ground through the shale process. By 2014, this figure had increased to approximately five million barrels per day, and by 2019, it had reached seven million barrels per day. Two states, Texas and North Dakota, account for the majority of shale oil production in the United States. As a study that analyzed the impact of the production increase stated:
We find that the shale boom caused both oil prices and oil product prices to fall. Although refiners amped up output by using a greater amount of their refining capacity, the sheer magnitude of crude production was so high that not all the oil could be absorbed, leading to a significant decline in imports. The decline in imports generated a major improvement in the trade balance for oil, amounting to about 1 percent of GDP.
It probably comes as a surprise to many that the “hidden hand” of government involvement in the economy even exists. In looking at the Fiscal Year 2026 federal budget (which begins on October 1st), the Trump administration proposed a 34 percent cut in basic scientific research. Understandably, to a public that has been weaned to believe that “government is not the solution to the problem: government is the problem,” this type of thinking is now influencing Trump administration policies. As one administrator/researcher involved in government-supported financing for R&D stated: “[Trump’s budget cuts] would essentially end America’s longstanding role as the world leader in science and innovation.”
Federal government R&D has been on a downward spiral since before Trump became President. In his first term as president, spending on R&D declined; he is simply accelerating the process in his second term. In 1964, for example, federal government R&D spending accounted for 1.86 percent of the United States’ Gross Domestic Product (a measure of the country’s economic activity). That was the high point. By 1987, it had fallen to 1.21 percent, and by 2000, it was at its lowest level at 0.66 percent. It then climbed slightly to 0.87 percent by 2009, but since then, it has been on a downward, rocky road. Regarding where Trump’s cuts would take us, one individual familiar with government R&D stated:
The impacts of these cuts would be unlike anything seen in U.S. history. Slashing funding for university research will make it harder for the U.S. to stay ahead as other nations accelerate their progress in areas that are critical for economic and national security, like quantum computing, energy and biotechnology.
I have pointed out in previous articles that it will take several years to see the actual impact of Trump’s policies and their adverse effects on Americans. A New York Times article indicated one way to look at the future:
The proposed drop in federal funding for science research, if approved by Congress, could let China match or take the lead in global science investments.
[A] science group published figures showing that China had greatly increased support for its scientific enterprise in the past two decades. As of 2023 — the most recent year available for comparisons — China’s investment was close to equaling that of the United States.
Experts say it could take years of data gathering to know if China is pulling into the lead.
Try to apply what the government's R&D efforts did for the shale revolution, and where we are today with oil production. We are no longer dependent on oil from the Persian Gulf. Now, imagine the impact of government R&D on scientific and medical advances, and where you would like us to be in the future. One thing we can say about Donald Trump is that he is doing everything he can to undermine his own signature slogan, "Make America Great Again."
NOTES
Oscar Berry, “A Crude Restructuring: How America’s Shale Revolution Changes the Calculus in the Middle East,” Harvard International Review (January 18, 2020): https://hir.harvard.edu/a-crude-restructuring-how-the-american-shale-revolution-is-changing-the-geopolitical-calculus-in-the-middle-east/
William Broad, “Trump Seeks to Cut Basic Scientific Research by Roughly One-Third, Report Shows,” New York Times (July 10, 2025): https://www.nytimes.com/2025/07/10/science/trump-science-budget-cuts.html?smid=nytcore-ios-share&referringSource=articleShare
Julia Busiek, “Cuts to federal science spending will cost every American,” University of California (June 26, 2025): https://www.universityofcalifornia.edu/news/cuts-federal-science-spending-will-cost-every-american
Stephen Cohen, “The Route To Japan’s Voluntary Export Restraints on Automobiles: An Analysis of the U.S. Government’s Decision-Making Process in 1981,” National Security Archive (no date): https://nsarchive2.gwu.edu/japan/scohenwp.htm
Andrew Fieldhouse and Karel Mertens, “Government-funded R&D produces long-term productivity gains,” Federal Reserve Bank of Dallas (February 13, 2024): https:///www.dallasfed.org/research/economics/2024/0213#:~:text=Productivity%20growth%20occurs%20when%20more,growth%20in%20long-term%20productivity.
From a Diamond Drill Bit to a Renaissance in American Manufacturing, U.S. Department of Energy, Fossil Energy (no date): https://www.energy.gov/sites/prod/files/2017/07/f35/Shale%20Revolution%20Infographic_FNL.pdf
David Hart, “Sematech: A public-private partnership for spurring domestic manufacturing,” Bipartisan Policy Center (February 2024): https://bipartisanpolicy.org/download/?file=/wp-content/uploads/2024/02/Sematech-A-public-private-partnership-for-spurring-domestic-manufacturing.pdf
Hearing entitled “American Energy Expansion: Strengthening Economic, Environmental, and National Security,” Committee Majority Staff, Committee on Energy and Commerce, Congress of the United States (January 29, 2023): https://docs.house.gov/meetings/IF/IF00/20230131/115356/HHRG-118-IF00-20230131-SD002.pdf
Robert Hof, “Lessons from Sematech,” Technology Review (July 25, 2011): https://www.technologyreview.com/2011/07/25/192832/lessons-from-sematech/
“Oil and petroleum products explained: Oil imports and exports,” eia, U.S. Energy Information Administration: https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php
Robert Rapier, “How the Shale Boom Turned The World Upside Down,” Forbes (April 21, 2017): https://www.forbes.com/sites/rrapier/2017/04/21/how-the-shale-boom-turned-the-world-upside-down/
Angela Ruth, “Public R&D Investment Drives 25% of US Productivity Growth,” Calendar (May 20, 2025): https:// www.calendar.com/blog/public-rd-investment-drives-25-of-us-productivity-growth/#:~:text=According%20to%20economists%2C%20government-funded,one%20of%20the%20study's%20authors.
“Sandia Pumps $140B Into The Economy Through Technology Development,” New Mexico Sun (April 2, 2024): https://newmexicosun.com/stories/657515980-sandia-pumps-140b-into-the-economy-through-technology-development
Michael Shellenberger, Ted Nordhaus, Alex Trembath, Jesse Jenkins, “New Investigation Finds Decades of Government Funding Behind Shale Revolution,” The Breakthrough Institute (December 20, 2011): https://thebreakthrough.org/issues/energy/new-investigation-finds-decades-of-government-funding-behind-shale-revolution-1
Dennis Yao, “Corporate Innovation Increasingly Benefits from Government Research,” Harvard Business School, Working Knowledge (November 12, 2019): https:// www.library.hbs.edu/working-knowledge/government-funded-research-is-increasingly-funding-corporate-innovation
Mine Yucel and Michael Plante, “GDP gain realized in shale boom’s first 10 years,” Federal Reserve Bank of Dallas (no date): https://www.dallasfed.org/research/economics/2019/0820
