I'm sure lots of folks have lots to say about this, but I've been up to my ears in data, so I've not had time to read all the worthies on twitter and in the blogosphere on this subject. So, just my thoughts:
Reducing overhead, by fiat, by negotiation, by reluctant blood letting, will not necessarily have the end result that The Government wants. Overhead is a major component of research/academic budgets. Yes, they keep the lights on, the air con in the summer, and the animal facilities happy. They help provide seed money to get new faculty going. In the end, something or somebody will have to pay for this stuff.
Will any university, big or small, MRU or almost-MRU or SLAC give up overhead? Not willingly. Reduce overhead? Watch fringe rates go up substantially (fringe rates are allowable in salary/direct costs). Watch pressures on faculty to bring in even more money go up. At places I have been, clinical faculty must bring in their entire salary, either through seeing patients, grants, or explicit teaching. Overhead makes it possible to bring in young clinical faculty, and protect some of their time (in which they better damn well be writing K-awards to cover 75% of their salary).
Money is fungible, as our brothers, sisters and non-binary sibs in economics say. That means while there are things overhead/F&A/IDC can't be used for, if they are applied to things that are allowable, it may free up other money, from other sources to be used for those other things. For example, renovation of space is pretty regulated. So say a University has general funds for renovation but not quite enough for both projects A and B. The PI for project B gets a grant, it has F&A/overhead, and that covers project B, freeing up more money for project A. So universities will likely move funds around in new and creative ways to support what the admin wants.
For example, from the NIH webpage on policy & compliance (my emphasis):
Office equipment (copiers, laptops, desktop computers, personal handheld computers, fax machines, scanners, etc.) that is used for general office purposes (rather than justified as a specific research purpose) are not allowable as direct costs; they are allowable as an F&A cost.
Where do you think that money for you new computer comes from? You want a new computer, make it come out of directs or do without.
One of the things I have seen kicked around for decades is the idea that faculty should be sorted into tracks, more so than now. This is not just a flavor of adjuncts. In medical schools where there are small, intense bouts of teaching, this means basic science folks would be "teachers" or "researchers". Teachers (and we have one at almost-MRU) teach not just one subject, but in our department, in nearly every first year course: anatomy, neuro, histology, biochemistry, physiology, cell biology. Twelve months a year of teaching. There is no research expectation, except possible pedagogical research. The admin here would like people to either teach that much (you'd need far fewer) or be bringing in 90% of their salary. That's very different from the scholar/teacher model that is true of most faculty. Reducing overhead would be a push in this direction.
Will changing overhead push research into the middle of America, where things are cheaper? Who are you kidding? What it will do is make Universities tighten their belts a bit, pressure the faculty more, and in general, one more time, increase the selection gradient on younger people, as this money was part of what a Uni could do to get the new ones started. Positions in basic science departments may disappear, clinical departments will become even more polarized into clinical service/research.
Will it save the government money? Well, yes, because it won't be giving this money to NIH. But the end result? Less research. Done by fewer people. Smaller universities. Fewer young people going into research. Will this work shift to corporations? Unlikely. We all know the logic there.
The only small thing that might be a saving moment in this is that the F&A on training grants (F & K awards) is usually much less, often just 8%, across the board. F&A/indirect on R-awards are negotiated university by university, and often hover in the 60-80% range. That means if NIH reduces the number of awards to make them bigger to pick up the difference, training awards may less impacted.
In any case, I hope that the academic big dogs are lining up their big guns to go to congress about this. We little dogs can do our bit, and make noise. But I remember the importance of political activity from an incident, probably well over 20 years ago. There was another recession. There was more belt tightening suggested. One of the things that, in a spurt of pseudo-patriotism, the Governor and State Legislature decided was that the Engineering College at Big-Midwestern-Public-University should stop giving teaching fellowships/assistantships to people who were not American citizens. This would save money! They would support True! Pure Blooded Americans! Of course, they said "we'll just knock that much money out of your budget". It would have been, needless to say, a disaster, since about 80% of the TA's for undergraduate training were foreign. The President of the Uni, as well as the CEO of the Local Big Manufacturing Corporation that hired a significant portion of the grads of the College of Engineering went to the governor and said "are you out of your mind?". And the problem disappeared. Maybe that governor was smarter (doubt it). Maybe he saw the light. Maybe the CEO threatened to move out of state. But this solution just disappeared. It was never mentioned again. And it never came back.