Cuts to Indirect Federal Grants Could Change Research for the Better

On February 7, the National Institutes of Health (NIH) announced that it will be reducing its negotiated proportion of grant funding that goes to overhead, or “indirect costs,” to 15 percent across the board. 

Indirect costs are basically fungible dollars that a research institution can spend however it wants. They are meant to cover all the ancillary services that researchers need, like human resources, information technology, buildings and grounds, and so on. When private foundations give grants, they generally require that 80, 85, or even 90 percent of the funding go to direct services, like research for research grants, so the new NIH rule finally puts the federal government in line with the private sector.

Last year, the NIH spent 26 percent of its research grants on indirect costs, and some institutions (including Harvard, Yale, and Johns Hopkins) received more than 60 percent of their grant funding for indirect costs. In other words, most of the money they received to do research didn’t go directly to research. The reduction of indirect funding should save taxpayers as much as four billion dollars a year. 

It still isn’t clear whether the move is lawful or not. Sen. Susan Collins reportedly claims it isn’t. I’m not an expert on constitutional law, but I am equipped to discuss the policy merits of the change.

Scientists are claiming that the cuts will “decimate basic and clinical research” and “are detrimental to academic biomedical research,” while economists tout “the case for government funding of basic research.” Reporters cover the political angle: “NIH funding cuts cause concern in Alabama.” A Brandeis professor even touted Hitler’s allegedly stellar record in funding German research in a piece for a progressive magazine to make the case why Trump needs to reverse the NIH rule. (If you’re confused as to why he would reach for Hitler of all people as his preferred example, you’re not alone.)

Government spending cuts are never easy, but this one really has sent the PhD class into a tizzy. But from the standpoint of the beleaguered American taxpayer, are these cuts a good idea or not?

Some economists will defend government funding of basic research as something that benefits the taxpayer. Basic research doesn’t pay, so the argument goes, but it’s valuable because the private sector can build on it. It’s a nonexcludable good that everyone can access, but for which no one has an incentive to pay. Compulsory payment for the good through taxes, therefore, will supposedly make everyone better off.

Now, it might be an interesting philosophical discussion whether all government science funding should be abolished, but that’s not what’s on the table. The question is whether the government should redirect funding away from fungible dollars for institutions that do research, and toward actual research costs.

As a recovering academic, I can tell you that the high proportion of “indirect” funding (in grant lingo) distorts incentives at universities. University administration makes successful grant-writing a major part of tenure and promotion decisions for faculty members. They shift resources away from departments that don’t get big grants toward ones that do. After all, the money that the chemistry department brings in on federal grants doesn’t just fund the chemistry department; it funds the new student center and the fancy new dorm and the study-abroad program and a fleet of deans and deanlets to manage it all.

Will cutting “indirect” hurt basic research at all? It will certainly hurt some of the institutions that do research, such as large research universities and research hospitals. But the policy change has both income effects and substitution effects. By shrinking the incomes of institutions that support research, the change could indeed reduce their ability to do research. But it also gives those institutions an incentive to switch from non-research activities toward research activities. As a result, we might end up with more research, not less.

If they hold and spread, cuts to federal indirect funding ratios should cause universities to prioritize undergraduate teaching more for hiring and promotion, and more basic research will take place in standalone research institutions staffed by scientists who do nothing but research. 

That bifurcation between teaching and research could be good for both. Science has progressed to the point that the vast majority of undergraduates simply cannot understand research at the frontier of scientific progress, even in their major fields of study. It doesn’t make much sense for world-class scientists to spend a lot of time in the classroom correcting the elementary errors of eighteen-year-olds. And they often do a bad job of that! Why not leave teaching to scholars who may not be at the frontier of scientific progress, but who can enliven the subject for those encountering it for the first time?

Let’s not forget, too, that the NIH has been shifting away from basic to applied research. Over time, the NIH has funded a greater proportion of applied research projects and offered applied research projects a greater share of funding. The majority of NIH funding now goes to applied, not basic research projects. 

But the nonexcludability rationale for basic research doesn’t carry over to applied research. Intellectual property law provides ample protection for applied technology innovators to make a profit from their publicly funded research. If the policy change cuts government funding for applied research, that cut likely benefits the American taxpayer.

We don’t really know what the right proportion of indirect funding for basic research is. It’s possible that private foundations keep their ratios so low because they know recipients get plenty of indirect funding from government grants. So cutting government indirect ratios could cause private foundations to raise theirs. A process of discovery in the marketplace could lead to a more efficient allocation of research grant dollars

The DOGE-inspired move to cut NIH indirect expense funding has produced a lot of wailing and gnashing of teeth, but that reaction seems disproportionate to the real effects of the move. The overall amount of basic research that the American economy produces, and the benefits it provides to American industry, could just as easily grow as shrink.