Mr. Chairman, thank you for inviting me here today to discuss
corporate welfare. It should be noted that the following testimony
is my own view and does not necessarily reflect that of The
Heritage Foundation. I would like to focus on the Advanced
Technology program as a singular example of corporate welfare that
benefits no one, except the corporations receiving government
funding. ATP is a competitive cost-sharing program that since 1990
has funded 486 projects at a cost of about $1.5 billion in federal
matching funds.
According to ATP's Web site:
The Advanced Technology Program (ATP)
bridges the gap between the research lab and the market place,
stimulating prosperity through innovation. Through partnerships
with the private sector, ATP's early stage investment is
accelerating the development of innovative technologies that
promise significant commercial payoffs and widespread benefits for
the nation.
The Omnibus Trade and Competitiveness Act of 1988 (P.L.
100-418), which established the ATP program, states that the ATP
should not fund existing or even planned research that would be
conducted in the same time period in the absence of ATP financial
assistance.
The clear intent of Congress is that ATP funding should only be
provided to private-sector partners who have the technical
capability to develop beneficial new technologies but lack either
financing or motivation.
Nevertheless, the roster of ATP grant recipients reads like a
who's who of corporate America including 3M Company, AT&T Bell
Laboratories, Advanced Micro Devices, Alcoa, Amoco, British
Petroleum, IBM, and Sun Microsystems, to name just a few. The
financial ability of these corporations is unquestioned. IBM alone
spends over $5 billion per year in research and development, three
times the amount that the ATP has spent in a decade. They hardly
stand in need of financial assistance from the taxpayer.
Nor do ATP's grant recipients need federal funding to motivate
their interest in research projects. According to their Web site,
the single largest ATP grant has been $31,478,000.00 for Miniature
Integrated Nucleic Acid Diagnostic Development (MIND), a project
sponsored by Affymetrix, Inc., of Santa Clara, California. MIND is
essentially a DNA-based diagnostic device. Affymetrix's Web site
reveals that the company was founded and exists to develop and
market DNA-based diagnostic devices. In fact, that is the company's
only business, a reasonably compelling motivation to conduct
research with or without government assistance. Furthermore, 22
percent of their stock is owned by Glaxo Wellcome, a leading
pharmaceutical corporation, providing Affymetrix with both ready
access to venture capital for research projects and additional
motivation to develop and expand their product line.
The second largest project ($28,421,489) funded by the ATP is to
develop the critical technologies needed to enable production and
delivery of high-definition television (HDTV). This project is
being conducted by Sarnoff Corporation, a research arm of RCA which
has both a strong corporate motivation to develop HDTV on its own
and more than enough financial capability to do so. Additional
partners in this venture include IBM, MCI, NBC, and Sun
Microsystems. Any single company in this group could easily finance
the entire project, and each of them has a vested interest in the
outcome.
As early as 1996, the General Accounting Office examined whether
research projects would have been funded by the private sector if
they had not received funds from ATP and concluded that many of
these projects would have been funded with or without ATP
participation. The GAO also noted that
Most applicants did not look for
funding from other sources before applying to ATP; 63 percent of
applicants (77 of 123) said they had not.
IBM is listed as the lead sponsor on a project to develop a
Product-Family-Based Framework for Computer Integrated
Manufacturing. The ATP is contributing $1,864,000.00 to this
project, about 0.04 percent of what Big Blue spends each year on
research and development and less than what they spend on a single
30 second commercial during the Super Bowl.
The ATP lists 23 projects it has funded with over $10 million
and 63 funded at over $5 million, but the bulk of its grants have
been under $5 million, an amount which any serious technology
company with an attractive proposition should have no problem
raising in the private sector if they were willing to make the
effort.
Mr. Chairman, the Advanced Technology Program does not expand
the resources available for applied research and development. It
merely serves as a convenient source of petty cash for technology
companies. The projects that have real value would be funded with
or without federal funding. In many ways the ATP is like the "take
a penny/leave a penny" tray found in convenience stores. We could
all reach into our pockets and find some spare change; but if the
pennies are free, we are all more than willing to use them, and we
generally take more pennies than we leave.
I would like to close by extending the example of the ATP
program to other forms of corporate welfare and relating them to
the proposed commission. Corporate research and development
programs are rarely dependent on government funding. The same is
true of many other programs. Last year, Kevin McNew, Assistant
Professor in the Department of Agricultural and Resource Economics
at the University of Maryland, examined agriculture subsidies and
pointed out that
not all farmers are equal when it
comes to production costs. A 1996 University of Illinois study
illustrates this fact. It finds that the average 1,500-acre
Illinois grain farmer enjoys 15 percent lower production costs than
a 500-acre Illinois farmer. In real terms, this means that a $2.30
corn price would result in a $7,000 loss for a 500-acre farm, but
at that same price, the 1,500-acre farm would enjoy a $68,000
profit.
Government policy has failed to
recognize this fact, however, when designing farm program payments.
Farm program payments are made in terms of prices, not the measures
of a farm's profitability. Thus, a farm program payment of 20 cents
per bushel would mean a $15,000 payment for a 500-acre farm,
thereby turning a marginally unprofitable farm into a marginally
profitable one. In contrast, that same subsidy to a 1,500-acre farm
would be a $45,000 payment, creating an extremely profitable
situation. On the aggregate level, there is significant evidence
that larger farmers enjoy most of the farm program benefits. For
example, farms that have annual sales of $100,000 or more receive
70 percent of farm program payments, and their net-worth averages
nearly $1 million per farm.
Corporate farmers, like their technology counterparts, will base
their investment decisions on private-sector forces such as their
contracts with Cargill, ADM, Monsanto, or General Mills. Those who
are providing value to the market will prosper with or without
government funding; but if free money is available, they are not
going to turn it down.
Similarly, most U.S. corporations will strive to gain and hold a
place in the world market. Those with quality products and services
will succeed regardless of the activities of the Market Access
Program; but, again, if MAP can throw some marketing dollars in
their direction, they'll take them.
A BRAC-like commission examining corporate welfare must approach
this issue with the recognition that corporate interest is broad
but not deep. Almost every industry or corporation in America
qualifies for some form of government assistance. Very few of them
are dependent on it. Corporate lobbyists, farmers, small
businessmen, labor unions, and other special interests will bombard
the commission with subsidy success stories, examples of market
failure, dire predictions of economic hardship, and promises of
electoral revenge if their pet program is eliminated. Two year
after the program is gone, they will find they are better off
without it. Just ask Portsmouth, New Hampshire, which used all of
these arguments in an unsuccessful attempt to save Pease Air Force
Base and now enjoys an industrial campus which employs more people
at high wages.
Corporate welfare benefits no one; it merely distorts the market
and drains taxpayer resources.
Peter B. Sperry is a former Grover M. Hermann Fellow in
Federal Budgetary Affairs at The Heritage Foundation.