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Elimination of Agricultural Research Funds: Bad Public Policy, Bad Economics

Posted by | February 8, 2010

At a time when the state most needs to support its primary and reliable economic engines, a movement is afoot in Olympia which would cripple one of the state’s most economically important industries — agriculture.

An anomaly in the language surrounding use of federal stimulus funds to prop up higher education potentially leaves the $26 million in state appropriated funds allocated by WSU for research vulnerable to state cuts; $21 million of that allocation is to the WSU Agricultural Research Center. The WSU Agricultural Research Center (ARC) serves as the primary research and development arm for the state’s agricultural industry. It suffices to say that both the short- and long-term economic consequences of a decision to eliminate some or all of the state allocation to the ARC would be catastrophic.

The Value of Agriculture to the Washington Economy

While sometimes taken for granted by many within Washington State, agriculture is a major economic engine for our state, and has flourished during a time when some of the state’s other major industries have languished. According to the 2007 U.S. Agricultural Census, Washington ranked 15th nationally in total value of agricultural products sold. Washington is also the second most diverse agricultural economy in the nation, producing over 250 commodities commercially. In recent years, farm gate value has exceeded $7 billion, and the Washington State Department of Agriculture estimates its total economic impact to the state at $30-$38 billion, depending upon the year. The food and agriculture industry is also the largest employer in the state, employing over 160,000 people.

Some may question whether this $30+ billion estimated economic impact is accurate; however, studies conducted on three different commodities within the state, as well as estimates of the economic contributions of agriculture in other states (e.g., Wisconsin, Idaho, Arkansas) corroborate this estimate. In recent years, the tree fruit, potato, and wine and grape industries have commissioned their own independent studies to estimate the economic contributions of their industries. In 2005, Holland and Beleiciks, estimated that the potato industry contributed $3.5 billion to the Washington economy. A 2006 study commissioned by the Washington Wine Commission estimated the economic impact of the Washington grape and wine industry on the Washington and national economies at $3.0 billion and $4.7 billion, respectively. A 2004 study estimated the total economic impact of the Washington tree fruit industry at over $4.2 billion.

Economic Consequences of Reducing Agricultural Research Funding

So, let’s look at the economic impacts of this proposal to save $21 million in state spending. I have divided the economic losses resulting from the departure of state-sponsored research funds into three categories: direct, indirect, and long-term economic impacts.

Direct Impacts

Direct impacts are simply the reductions in expenditures that would occur due to the loss of personnel, infrastructure, and operating expenses currently paid for with state appropriations. In addition to the $21 million in lost state appropriations, three other significant losses of funds would occur. First, the state would lose over $45 million in annual expenditures from competitive grants earned by the 174 permanent faculty, 195 temporary faculty, and 518 staff whose positions would be eliminated. Second, over $8 million in contracts and gift funds received annually by these personnel would be lost. Third, over $27 million in USDA Agricultural Research Service funds would be lost due to the elimination of the presence of their researchers in the state, since there would be no WSU facilities or collaborators with whom to collaborate.

Therefore, the total ledger on direct impacts is as follows:

State research allocation….$21 million
External research grants…..$45 million
Research contracts…………$  8 million
USDA-ARS units…………..$27 million
Total…………………………$101 million

These economic impacts are direct and undeniable. There are no underlying economic assumptions at work here. Over $80 million of non-state funding currently flowing through the state’s economy would be eliminated as a consequence of the loss of $21 million in state agricultural research funding.

Indirect Impacts

A second source of adverse economic consequences resulting from the loss of state agricultural research funding would be the indirect and induced economic impacts resulting from the loss of the payroll expenditures and spending. Some people term this the “multiplier effect” associated with economic activity. This impact includes “indirect effects” (the loss created by the decreased demand for supporting industries’ goods and services) and “induced effects” (the loss to all local industries caused by the decreased household income generated by the direct and indirect effects). There is much debate about the size of this multiplier, so to avoid any arguments, let’s simply employ a very conservative estimate and use a multiplier of 1.0. That is, a $1 loss in direct expenditure will result in an additional $1 of indirect and induced effects. Hence the $101 million direct effect is now doubled, resulting in a total loss of over $200 million per year.

Long-term Impacts

Of course, the largest, and most important, economic loss would result from the absence of agricultural research and the resulting practices and technologies which contribute to the profitability and sustainability of the Washington food and agriculture industry. Over the last several decades, the U.S. agricultural sector has sustained impressive productivity growth, and the nation’s agricultural research system has been a key driver of this growth. USDA Economic Research Scientists Keith Fuglie and Paul Heisey outline this process nicely in their 2007 publication “Economic Returns to Public Agricultural Research”:

  • Expenditures on agricultural research generate new knowledge that eventually leads to improved technology that is adopted by farmers.
  • Technology adoption increases average productivity (the output of crop and livestock commodities per unit of land, labor, capital, and intermediate inputs employed in production).
  • Higher productivity of agricultural resources leads to lower costs, higher production, and/or exit of some resources (such as labor) from the agricultural sector.
  • Higher agricultural production leads to lower commodity prices, passing some of the technology-induced cost reductions on to the food industry and consumers.

Economists have long been interested in measuring the economic impact of public investment in agricultural research, and these analyses have found strong and consistent evidence that investment in agricultural research has yielded high returns per dollar spent. A recent study conducted by Professors Wallace Huffman (Iowa State University) and Robert Evenson (Yale University) reviewed 35 of these studies conducted over the last four decades and found that over 80 percent of the studies estimated a social rate of return between 20 and 60 percent, with a median return of 45 percent. As a rough approximation, this 45 percent rate of return implies that each dollar spent on agricultural research returned about $10 worth of long-term economic benefits to the economy. Using this estimate, the $101 million of public expenditures on agricultural research spent annually would generate over $1 billion in long-term economic benefit. Of course, the departure of agricultural research funds would eliminate this benefit to the state.

In Summary

One must question the logic of a proposal which would cripple the research and development arm of one of the state’s most critical industries at a time when it is facing increasing global competition, as well as economic and environmental pressures. In addition, the economic consequences of such a decision are profound — both in the short run and the long run. This proposal is not only bad public policy, but it is bad economics! Hopefully, rational minds will prevail.

Best regards,
Dan Bernardo