Thank you Chairman Brownback for the opportunity to testify before the Subcommittee on Government Management on the Advanced Technology Program and other corporate subsidies. In keeping with the truth in testimony requirements, let me first note that the Cato Institute does not receive a single penny of federal money of any kind.
Second, I wish to commend you and your staff for your leadership in identifying wasteful and unnecessary spending in the budget—particularly in the area of corporate subsidies. Americans are demanding deficit reduction and government downsizing that is fairminded and balanced—meaning that the budget knife is not spared the most politically well-connected K Street special interests. Both the social welfare and corporate welfare states need to be reformed with equal urgency. You are absolutely right when you argue that the 104th Congress enacted reforms in social welfare programs and that now the 105th Congress must adopt welfare reform part II: eliminating the corporate safety net.
In my testimony today, I will highlight six points.
First, corporate welfare is a large and growing component of the federal budget.
Two years ago Dean Stansel and I co-authored a Cato Institute report entitled “Ending Corporate Welfare as We Know It” in which we estimated that the federal government now spends roughly $65 billion each year on more than 125 programs that provide direct taxpayer assistance to American businesses. This dollar estimate has been generally substantiated by the General Accounting Office and other research organizations, such as the Progressive Policy Institute.
In our most recent report, which I wish to submit for the record, we found that these subsidies were actually expanded by about 1.5 percent on average in FY1997. Table 1 shows the results for the fifty-five most egregious examples of corporate subsidy programs.
The Clinton administration had been a fervent defender of taxpayer aid to American industry. Last year, the White House requested a 3.6 percent hike in funding for corporations. In this year’s budget request, the president has called for further increases. Sixteen programs would receive an increase of 10 percent or more. Eight would see their budgets go up by 20 percent or more.
Second, ending all corporate welfare would generate enough savings to entirely abolish the capital gains and estate tax.
To put the cost of these $65 billion in industry subsidies in perspective, if all federal spending programs that aid business were purged from the budget, the entire budget deficit could be eliminated for the first time in 30 years. Alternatively, if Congress were to eliminate all corporate spending subsidies, this would generate enough savings to entirely eliminate the capital gains tax and the federal estate tax—forever.
This point bears repeating: we could have a zero capital gains tax in the United States and a zero estate tax for the amount of money that we spend in Washington handing out grants, subsidies, cut rate insurance, loans, and loan guarantees to U.S. businesses. Now you will hear throughout this hearing of all the alleged benefits to American industry and U.S. competitiveness from programs such as the Manufacturing Extension Partnership (MEP), the Advanced Technology Program (ATP), and other business-related activities of the Department of Commerce. But can anyone reasonably argue with the proposition that if American businesses and workers were competing in global markets today under a regime of zero capital gains tax and zero estate tax, this would do far more to increase their competitiveness than 100 Department of Commerces?
Third, ATP and MEP are the essence of corporate welfare.
Dean Stansel and I have defined corporate welfare as follows: corporate welfare is the use of government authority to confer privileged or targeted benefits to specific firms or specific industries. I would argue that the explicit purpose of programs like the ATP and MEP is precisely to provide targeted benefits to specific firms and industries. In most other corporate welfare programs, subsidizing business is a derivative objective. At ATP And MEP the business subsidy is the objective itself.
Our latest study concludes that the Department of Commerce spends $2.3 billion per year on 7 corporate welfare programs. The following five programs are the worst abusers:
Advanced Technology Program (1997 appropriation: $225.0 million). The mission of the ATP is to enhance the competitiveness of U.S. companies by helping them make better use of basic research in new technologies. In recent years, ATP R&D grants have gone to huge high-tech corporations like Caterpillar, General Electric, and Xerox. ATP was zeroed out by Congress in the 1996 budget cycle, but President Clinton vetoed that bill and secured a compromise that allowed ATP to survive with a 49 percent budget cut. In 1997, ATP’s budget was actually expanded by 2 percent.
Economic Development Administration (1997 appropriation: $373.5 million). The Economic Development Administration seeks to improve distressed economies by providing grants and loans to state and local governments, nonprofit organizations, and private businesses in areas with high and persistent unemployment. EDA’s activities include technical assistance grants, which provide technology transfer assistance to private firms, and development grants, which fund the construction and improvement of infrastructure for the development and expansion of private industrial parks and ports. EDA also funds the Trade Adjustment Assistance program, which doles out grants to assist private firms and industries that are deemed to have been adversely affected by increased imports.
International Trade Administration (1997 appropriation: $270.0 million). The International Trade Administration conducts export promotion programs directed toward specific industry sectors through its Trade Development Program. ITA’s U.S. and Foreign Commercial Service provides counseling to U.S. businesses on exporting and facilitates participation of U.S. firms in trade shows. ITA also provides marketing services, develops regional and multilateral trade strategies, and investigates economically antiquated antidumping and countervailing duty cases. All those activities are more appropriately conducted directly by the private businesses and industries they are intended to benefit.
Manufacturing Extension Partnership (1997 appropriation: $95.0 million). MEP provides grants to fund the creation and maintenance of dozens of extension centers to assist small and medium-sized manufacturing firms in making use of modern manufacturing and production technologies. General taxpayer funds should not be used to provide assistance to one specific industry, as they are in the case of MEP. This assistance, if necessary, should be paid for directly by the manufacturing firms that use it, not the American taxpayer.
Minority Business Development Agency (1997 appropriation: $28.0 million). The Minority Business Development Agency attempts to promote the development of minority-owned businesses through the provision of management and technical assistance and assistance in gaining access to capital. MBDA activities often focus on helping minority-owned businesses chase government contracts. To encourage the development of minority-owned businesses, the federal government should instead focus on removing the many government impediments to the formation and growth of minority firms, such as unnecessary regulations and the onerous burden of taxation.
Fourth, the ATP and the MEP are modeled after failed industrial policy initiatives in Europe and Japan.
In testimony before the House Science Committee earlier this year, Dr. Mary Goode, Underscretary for Technology at the Commerce Department, argued that other industrial nations are “rapidly expanding their scientific and technological capabilities, establishing a sophisticated array of technology policies, and expanding their investment in R&D.” This is a standard argument in favor of corporate welfare: other nations are doing it, so should we. As the late Commerce Secretary Ron Brown put it in 1995, “shutting down the Commerce Department would be the equivalent of unilateral economic disarmament.”
The inference in these statements is that European nations are gaining a competitive economic advantage by pursuing these corporate welfare strategies. But where is the evidence? Just a cursory examination of the economic woes in Europe today, where industrial policy initiatives—of the kind that MEP and ATP are modeled after—are systemic, suggest that if anything the strategy is economically debilitating. Table 2 shows that Germany, France, Sweden and other nations that subsidize major industries with taxpayer dollars have unemployment rates at least 50 percent above ours in the United States. These nations have propped up large, bureaucratic, inefficient corporations through billions of dollars of taxpayer subsidies. The burden of these subsidies now appears to be borne by the small business and entrepreneurial sector of the economy that has been the engine of growth and job creation in the United States. These are the very policies that have led to suffocatingly high tax rates in these nations, and thus a massive exodus of capital.
Unemployment Rates in OECD Nations
|Source: OECD News Release, April 15, 1997.|
Since 1980, the United States has created more net new jobs than all of Europe and Japan—combined. Why at a time when industrial policy initiatives are in such universal disrepute around the globe, would the United States want to adopt such anti-competitive strategies? This can only be describes as chasing the losers.
Fifth, ATP unwisely converts the government into the role of investment banker.
The U.S. is the world leader in financial services today. We have the most sophisticated capital markets on the globe. These capital markets work to allocate scarce investment capital to businesses, technologies, and industries that provide the highest rate of return. The investment community and especially venture capital markets pick industrial winners and losers every day. They do this with their own money and with their clients’ money. If they do it poorly, they are out of business. This is the very essence of our modern-day capitalist system.
The underlying theology of the ATP is that government can identify companies and emerging technologies that warrant capital financing better than the proven experts in the financial markets can. This is government hubris in the extreme. Moreover, we have had decades of experience with such programs—and the results have been universally disappointing. Examples:
* In the mid-1980s the Department of Commerce issues $1.23 billion in loans and loan guarantees. Not even half were paid back.
* The Supersonic Transport — considered an essential technological innovation in transportation by the feds — was given more than $900 million of taxpayer subsidies. The plane was never developed in the U.S. and is a commercial flop in Europe.
* In the late 1970s the Carter Administration created the ill-fated Synthetic Fuels Corporation to develop a cost-effective alternative to fossil fuels. The SFC was ended in 1981 after $1 billion was wasted and not a single kilowatt of electricity was generated.
But the best example of what happens when the federal government gets into the business of commercial banking is the Small Business Administration. The ATP is analogous to an SBA for high-tech companies. Yet the SBA has a dismal lending record. Historically, many SBA loan programs have had default rates above 20 percent. For a commercial bank, a 5 percent default rate on commercial loans is considered unhealthy.
On a macro-economic level, there is no evidence that the federal government’s already huge investment in science and high-tech initiatives has benefited the economy. For example, despite more than $20 billion spent since the end of World War II on federal expenditures in the area of science and technology, Terence Kealy demonstrates in his book The Economic Laws of Scientific Research, that these funds have had no impact in increasing GDP in the U.S.
Sixth, the ATP and other Commerce Department corporate welfare programs put government up for sale to the highest bidder.
In the world of corporate welfare, big is beautiful. A preponderance of the high technology subsidies are diverted to many of America’s largest companies, those with K Street lobbyists that help chase down “free” federal dollars. For example, in 1995 the Philadelphia Inquirer monitored the largest beneficiaries of government technology subsidies from 1990 to 1994. Eight of the largest recipients alone had 1994 profits of just below $25 billion. (Table 3 shows the lucky winners.) Can anyone reasonably argue that at a time when the United States government is running $100 to $200 billion annual budget deficits, there is either equity or economy in having Uncle Sam sending out checks to billionaire companies? Can anyone argue that these companies cannot fund vital R&D projects and product development strategies without the help of Uncle Sam?
WELFARE TO THE WELL-OFF
|Company||1990-94 Technology Subsidies||1994 Profits|
Source: Philadelphia Inquirer, “How Billions in Taxes Failed to Create Jobs,” June 4, 1995.
But what is even more insidious is that Commerce Department corporate welfare grants appear to be closely tied to campaign donations. Table 4 lists 13 large ATP award winners with the contributions made to the two parties—the DNC and the RNC. ATP appears to be little more than a cash-in, cash-out system. The best way to end this symbiotic relationship between industry and government is to shut down the cash dispensing programs that invite corruption.
|1996 Contributions to|
|ATP Award Winners 1992-95||($ Thousands)|
|United Technology Corp.||231||239|
Source: FEC and Department of Commerce, 1997.
Mr. Chairman, I do not come to this issue with the intention of denigrating the contributions of these great and successful corporations. And I do not come to the issue with an anti-business, or anti-big business motivation. To the contrary. I want to see U.S. companies like MCI And General Motors dominating in global markets. The good news is that American firms are out-competing their foreign competitors today in industries across the board—from microchips to potato chips. Mostly these U.S. firms are winning without the help of government “aid.”
It is not pro-business for government to try to help businesses one at a time—as seems to be the overriding mission of the Department of Commerce. It is not free enterprise for the government to be picking winners and losers in high technology markets—or in any industry. The way that the United States Senate can help create more Microsofts, more Intels, more Federal Express’s, and more MCI’s is not to have government go searching for them. It is to cut taxes, cut government spending, and streamline anti-business regulations that cause more problems than they solve.
A good way to start this crusade to keep American industry competitive is to abolish the ATP and the MEP and the rest of the corporate welfare state that impedes the free market from functioning.