Testimony on Corporate Welfare

Testimony Welfare

Testimony on Corporate Welfare

June 8, 2000 5 min read
Peter Sperry
Visiting Research Fellow

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.

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Peter Sperry

Visiting Research Fellow