Commentary

Uncle Sam: Venture Capitalist

By Stephen Slivinski
This article appeared on TCSdaily.com on June 20, 2007.
Many members of Congress fancy themselves as venture capitalists. But instead of using their own money, they’re using yours.

Of the $92 billion spent each year on what is commonly known as “corporate welfare,” $27 billion goes to subsidize private research and development activities. Some of these programs reside in the Department of Commerce, the Pentagon budget, or the National Institutes of Health. Most federal research money is spent on “basic research,” the kind with no immediate commercial application and for which there may be underinvestment in the private sector. But many federal programs support “applied” and “commercialization” R&D that goes exclusively to developing marketable products.

Supporters of these sorts of programs often claim that certain crucial investments and industries just wouldn’t be financed by the private sector so Uncle Sam should step in to remedy this market failure. Yet many of these supporters see market failure when it suits their purposes, not when it really exists.

Far from siring into existence burgeoning infant technologies and industries, for instance, some of these programs just throw money at incumbent firms. A recent grant from the Pentagon to Raytheon to develop cheaper cellular antennas is a good example. It was declared a “dual purpose” research project in the Pentagon budget, and its supporters noted its obvious commercial appeal beyond the military applications. But the cell phone business is hardly a cottage industry strapped for cash.

Then there’s the Department of Commerce Advanced Technology Program. It provides matching funds for firms researching what the agency calls “pre-competitive” or “high risk” technologies that presumably would not get private funding on their own. But a recent government audit of the program showed that 63 percent of companies that applied for ATP grants never bothered looking for private capital investment before they turned to the government for support.

In the cases where the ATP funded promising new technologies, the federal money was often redundant. According to the Government Accountability Office, the ATP gave $1.2 million in the early 1990s to the Communications Intelligence Corporation to develop a system to recognize cursive handwriting for pen-based computer inputs in handheld devices. Far from being under-funded by the market, this line of research had begun in the 1950s and 450 patents for workable versions of the same technology - based on privately-funded research - were issued years before. Then there’s Accuwave, the company that received $2 million in ATP grants to discover ways to expand the capacity of fiber optic cables even though private-sector research funding had already resulted in over 2,000 patents for similar innovations.

A better policy for spurring innovation is to cut funding to these corporate welfare programs and use the savings to make permanent the tax provisions that actually encourage more fluid capital markets, like a capital gains tax cut. But if you’re a congressman, you probably have a greater incentive to pursue policies that allow you to attend ribbon-cutting ceremonies at futuristic high-tech labs rather than support those policies that don’t require your direct input. Only in Washington is playing to your vanity considered a successful long-term investment strategy.

Stephen Slivinski, an economist at the Cato Institute, is the author of Buck Wild: How Republicans Broke the Bank and Became the Party of Big Government (Nelson Current, 2006).