With government spending surpassing $21,000 per household2 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.
Welfare for Fortune 500 Companies
- 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;3 and
- Those 40 Fortune 500 companies had combined revenues of $1 trillion and profits of $11 billion in 2002.4 (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.5
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."6
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.7 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."8 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.9
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.10
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.11 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.12
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:13
- 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.
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.