With
government spending surpassing $21,000 per household for the first time
since World War II and the budget deficit approaching $450 billion,
Congress is under pressure to reduce wasteful spending. Lawmakers
will find it politically difficult to achieve savings in expensive
programs such as Social Security, Medicare, Medicaid, and national
defense. Consequently, finding savings elsewhere in the budget is
of primary importance.
The
$90 billion corporate welfare budget provides an obvious starting
point for identifying and reducing wasteful spending. An
encouraging first step would be to defund the Advanced Technology
Program (ATP) in the upcoming Commerce-Justice-State appropriations
bill.
The
ATP has long been considered corporate welfare at its worst. In
1988, America was briefly fixated on the Japanese economic
"miracle." Some in Congress believed that Japan's system of
bypassing the free market in favor of government subsidies and
protections to preferred businesses was the new path to prosperity.
Based on this belief, they created the ATP to "bridge the gap
between the research and the market place" by providing matching
grants to businesses engaged in commercial research in such areas
as information technology, electronics, and biotechnology. Congress
did not design the ATP to support basic scientific research;
instead, taxpayers would fund projects with a "significant
commercial payoff" that could make substantial profits for
businesses.
The
Japanese economy has since drifted into stagnation, and so has the
ATP. Since its inception, the program has cost taxpayers $2
billion, with more than 40 percent going to Fortune 500 companies.
Most ATP-funded projects could have been funded by the private
sector, and only one-third of ATP projects successfully bring new
products to the market. Taxpayers fund these investments, but
businesses receive all the profits.
Budget reformers from both parties have
made several attempts to defund the ATP. Congress passed
legislation eliminating the program in 1995, but President Bill
Clinton vetoed the bill. President Clinton again blocked the
elimination of the ATP the following year, inducing Congress to try
to reform the troubled program. After those reforms failed to fix
the program, the House of Representatives voted in 2000, 2001, and
2002 to terminate the ATP, only to have the Senate restore funding
each time in conference committee.
President George W. Bush recently joined
the movement to close down the ATP after his own reform attempts
proved futile. Only the Senate stands in the way of saving
taxpayers $150 million per year.
Welfare for Fortune 500 Companies
The
Advanced Technology Program's status as a corporate welfare program
is beyond dispute:
- Five companies--IBM, General Electric,
General Motors, 3M, and Motorola--have received a combined total of
$376 million in ATP grants, or 21 percent of the program's total
expenditures, since 1990;
- More than 40 percent of ATP funding has
been distributed to a group of 40 Fortune 500 companies; and
- Those 40 Fortune 500 companies had
combined revenues of $1 trillion and profits of $11 billion in
2002. (See Table
1.)
These corporate giveaways are
unjustifiable. For example, IBM, with revenues that topped $83
billion in 2002, did not really need the $126 million in taxpayer
funding it has received since 1990. These companies can certainly
afford to finance their own profitable research projects.
Although most Americans strongly oppose
corporate welfare, programs like the ATP are kept alive by Members
of Congress who seek to "bring home the bacon" by helping
constituents and donors apply for grants. Yet the ATP does not
bring home a significant amount of government spending for most
lawmakers.
While taxpayers in every state are forced
to pay for the program, more than half of all ATP funding is
distributed to companies in five states: California, Michigan,
Massachusetts, New York, and New Jersey. (See Table 2.) Meanwhile,
29 states average less than $1 million in annual grants.
In
short, legislators wishing to "bring home the bacon" should not
assume that their constituents receive sufficient benefits to
justify their cost in taxes.
Subsidizing Existing Research
Many
people confuse the ATP's mission with that of the National Science
Foundation (NSF). The NSF spends over $5 billion per year
supporting basic scientific research, such as astronomy and pure
mathematics. The NSF is intended to remedy the market failure that
basic research, despite its importance, is "so far removed from
commercial application that private firms have little incentive to
undertake it on their own."
The
ATP does not fund basic research. It commercializes research so
that businesses can profit from it. The market failures that make
the NSF necessary do not apply to the ATP, as companies have every
incentive to fund this profitable research on their own. Not
surprisingly, businesses and investors already spend $150 billion
annually on commercial research and development. Since these
businesses and stockholders profit from the research, they should
be the ones to fund it.
Instead, the ATP shifts those business
expenses to the taxpayers. For example, the promise of huge profits
is motivating several private companies to invest millions of
dollars in high-definition television (HDTV) technology. Yet
Congress has used $28 million of the taxpayers' money to subsidize
HDTV research by a group led by the Sarnoff Corporation and another
$7.3 million for research on flat panel television by another group
of manufacturers.
If
these technologies will be as successful as ATP advocates claim,
businesses should have no problem funding the research internally
or recruiting outside investors. These grants also give the
recipient companies an unfair advantage over their unsubsidized
competitors.
ATP
officials claim the program leads to economic growth by funding
those innovative and profitable projects that fail to secure
private funding. This is unlikely. Investors vote with their
dollars, and a business's inability to secure funding from
investors signals the market's lack of confidence that the project
will succeed and earn a profit.
Far
from functioning as a "financier of last resort," the ATP is the
first place many businesses go to shift their own research costs to
the taxpayers. A mid-1990s survey revealed that 65 percent of ATP
recipients did not seek any private funding before applying for a
federal grant.
Program administrators responded by tightening the requirements
mandating that firms first seek private funding.
Nevertheless, the application questions
remain vague, and applicants have every incentive to overstate
their efforts to obtain private funding. The Commerce Department
admits that "project proponents have better information than the
ATP about the prospects for private funding, and also have an
incentive to conceal this information." Applicants, in fact, have little reason
to be honest. Even under the tightened requirements, the ATP has
approved grants to firms that refused to answer whether or not they
attempted to obtain outside funding.
Of
the rejected research projects, 50 percent of the "near
winners"--which supposedly had already exhausted all options for
private funding--found private funding after the ATP rejected their
grant application. Of the other 50 percent, most of the companies
had never sought private funding before applying to the ATP, and it
is unlikely that they diligently sought private funding after
rejection. Instead, many simply continued reapplying for ATP
grants.
Taxpayer-Financed Failures
While businesses profit from the ATP's
successes, taxpayers fund both its failures and its successes. Only
one in three ATP projects successfully brings a new product to the
market. The rest either fail completely or result in research that
has not made it to the market. It is difficult to assess whether ATP
officials simply approve the wrong applications, because program
officials do not keep records of which projects are rejected and
why.
One
reason that so many projects fail is that many ATP officials lack
sufficient knowledge of the relevant markets. This inevitably
occurs because officials seek outside reviewers without any
conflicts of interest with the project. Such conflicts are reduced
by assuring that grant reviewers have knowledge of the relevant
science and technology, but not of the market. Accordingly, their
lack of market knowledge frequently causes grants to be awarded to
projects the market does not demand.
Another reason that projects fail is that
ATP grant reviewers do not know whether a certain project would
duplicate research performed by other companies. Most businesses
conceal their research agendas, not wanting to tip off their
competitors. Consequently, ATP officials often have to guess
whether a grant application represents new or duplicative research.
This duplicative research adds little value to the relevant
industry, and it also provides an unfair advantage to the
government-subsidized firm.
These and other factors explain the
following examples of taxpayer-financed ATP boondoggles:
- In the early 1990s, several private
companies were investing tens of millions of dollars in efforts to
increase the data transmission capacity of fiber optic cables. In
1993, Accuwave applied for an ATP grant so it too could enter this
market. Accuwave's approach of using "volume holography" had been
so discredited by the rest of the industry that no other private
company even considered it. Yet, despite an already-competitive
market, a discredited scientific approach, and a rejection
recommendation from the ATP's own business reviewers, ATP managers
still approved the $2 million grant. Predictably, the other
companies' research led to more than 2,000 new patents, full market
commercialization, and a $40 billion industry in 2003. Accuwave's
technique failed, and the firm declared bankruptcy in 1996.
- In 1991, ATP officials gave the
Communications Intelligence Corporation (CIC) $1.2 million for
initial research into computer recognition of cursive handwriting,
despite the fact that similar technology had already been
developed, patented, and marketed. Furthermore, ATP grantmakers
needed only to open an issue of PC Week to see how many other
companies were concurrently improving that technology. The other
companies' research resulted in 450 new patents, while the
taxpayer-financed CIC project provided negligible benefits to the
industry.
- Agridyne Technologies received $1.2
million in 1992 for a project intended to reduce the human side
effects of certain pesticides. Agridyne lacked the resources to
commercialize the product and declared bankruptcy in 1995. Biosys
then purchased Agridyne, declined to continue the project, and
declared bankruptcy itself a year later. Finally, Thermo Trilogy
acquired Biosys's assets and patents and determined that the
pesticide project was both obsolete and unprofitable.
- A group led by Boeing received $5.2
million in 1992 to develop a common framework for automating
different types of circuit boards. Although much of the technology
was completed, company upheavals have prevented it from being fully
commercialized. A project review explained that participating
companies had prioritized their own mergers and acquisitions over
completing this project and that reductions in other government
contracts created "turmoil" for three of the four participating
corporations.
- ETOM Technologies received $1.4 million in
1993 to increase the storage capacity of compact disks. The
technology was developed, yet ETOM was unable to acquire the green
lasers needed for the product. Additionally, the market for
video-on-demand service, which would have used this technology,
never developed. ETOM declared bankruptcy in 1998.
- Hampshire Instruments received $900,000 in
1991 to improve the miniaturization of computer chips. Within two
years, Hampshire Instruments fell into financial distress, declared
bankruptcy, and was liquidated. No other firms have offered to
purchase this research for further development.
Conclusion
Many
lawmakers agree that the ATP is just another shameless corporate
welfare program. Before every important vote, however, many
lawmakers ask themselves whether a future opponent could use their
vote against them. In the ATP's case, a vote to continue the status
quo is always safe, while a vote to terminate could be misconstrued
as a vote against business and technology.
Legislating by worst-case political
scenarios is neither a formula for effective public policy nor a
reliable reflection of political reality. Among current Members of
Congress, 355 Representatives and 47 Senators have voted to defund
or significantly reduce the ATP at some point between 1995 and
2002. Lawmakers could easily win public support by explaining the
importance of eliminating such unnecessary and wasteful
spending.
Eliminating the ATP is both smart public
policy and smart politics. By eliminating the ATP, lawmakers can
show taxpayers that Congress can responsibly confront unnecessary
and wasteful government spending.
Brian M. Riedl is Grover M. Hermann
Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute
for Economic Policy Studies at The Heritage Foundation.