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Mr. Chairman, I thank you for the opportunity to testify this morning on the subject of the Department of Energy's (DOE) 1998 budget authorization for research and development. In brief, this committee should zero-out every penny of those funds. My testimony today will argue that:

• the Supreme Court notwithstanding, Congress is not permitted under the Constitution to appropriate funds to further technological advances in energy;
• the national laboratories cannot be expected to produce significant technological advances that would help our nation's economy; and
• federal energy R&D appropriations are unnecessary and counterproductive.

 

Constitutional Questions[1]

A rigorous examination of the United States Constitution finds the absence of even a shred of Constitutional legitimacy for federal energy R&D expenditures. The clause in the preamble of the Constitution, which says that one of the purposes of the Constitution is "to promote the general. welfare", is generally used to justify federal R&D expenditures, but a close reading of the Federalist Papers as well as Madison's notes about the Constitutional Convention does not support the view that the "welfare clause" is an open-ended invitation for federal intervention.

The Gone Welfare Clause: A Blank Check?

One of the more pervasive sources of present federal regulation is the claim that the enumerated powers of Congress enable the Congress to legislate essentially anything in the name of the "general welfare". The "commerce clause" at Article I, Section 8, Paragraph 3 reads "The congress shall have the power to regulate commerce with foreign nations, and among the several States, and with the Indian tribes." This enumerated power allegedly allows federal regulation of markets because the Preamble to the Constitution reads, in part "We the people of the United States, in order to ... promote the general welfare ... do ordain and establish this Constitution", and because Article I section 8 has similar language also in the initial paragraph of that section.

But the so-called "general welfare clause" of the Constitution is not a blank check that empowers the federal government to do anything it deems good. It is instead a general introduction explaining the exercise of the enumerated powers of Congress that are set forth in Article EL, section 8. Supreme Court Justice Joseph Story, who sat on the Court from 1811-1845, was an ardent nationalist who promoted Constitutional interpretations that expanded federal power. In a work explaining the Constitution to the general public[2], Justice Story devotes his entire discussion of the so-called "welfare clause" to how the commerce power is necessary to prevent states from interfering with interstate and international commerce through the adoption of non-uniform import duties. Justice Story's commentary does not suggest that the welfare language is anything other than a mere explanatory preface to the necessity of federal power to limit state interference with commerce.

If a more general federal power had been intended, surely Justices like Story, who were seeking to justify central power, would have made such arguments. They would cite it because a general welfare power, if it existed, would dwarf the highly limited regulatory authority that flows from the commerce clause. Indeed, if the general welfare clause really was pregnant with such power, why then bother with a list of specifically enumerated powers at all? A page or two would have sufficed, for all the Constitution would have needed were those parts that established the three separate branches of government and the general welfare clause. Article I, section 8 -- which enumerates the powers of the legislature -- would be superfluous window dressing. The conventional wisdom in constitutional law that the federal government has some allocated power to "promote the general welfare" in the broadest sense of those words is an incorrect interpretation.

Further support for this view comes from the Federalist papers, brief contemporary essays written to support ratification of the Constitution by no less than John Jay, Alexander Hamilton and James Madison. The most relevant are Papers 41 through 44 because of their content -- analysis of the commerce clause including the welfare clause language -- and their authorship, James Madison. Madison is well known as an author of the Constitution as well as the primary source of concurrent notes of the debates of the Federal Convention (today called the "Constitutional Convention") of 1787.[3]

In Federalist No. 41, Madison summarizes the relationship of the general preface language including the "welfare" language, to the subsequent more detailed enumeration of specific powers, as follows.

"Some who have denied the necessity of the power of taxation [to the Federal government] have grounded a very fierce attack against the Constitution, on the language on which it is defined. It has been urged and echoed that the power to "lay and collect taxes, duties, imports, and excises, to pay the debts, and provide for the common defense and general welfare of the United States" amounts to an unlimited commission to exercise every power which may be alleged to be necessary for the common defense or general welfare. No stronger proof could be given of the distress under which these writers labor for objections, than their stooping to such a misconstruction.."

Thus, Madison, who like Story after him sought to defend federal power, treats with derision the claim of opponents of federal powers the claim that the "welfare clause" is a general grant of power. Madison continues Federalist No 41 in this language of angry paradox:

"For what purpose could the enumeration of particular powers be inserted, if these and all others were meant to be included in the preceding general power? Nothing is more natural or more common than first to use a general phrase, and then to explain and qualify by an enumeration of the particulars. But the idea of an enumeration of particulars which neither explain nor qualify the general meaning, and can have no other effect than to confound and mislead, is an absurdity ... what would have been thought of that assembly, if, attaching themselves to these general expressions and disregarding the specifications which limit their import, they had exercised an unlimited power of providing for the general welfare?"

Earlier in Federalist No. 41, Madison grouped the powers granted the federal government into six "classes", which were: "1. Security against foreign danger; 2. Regulation of the intercourse with foreign nations; 3. Maintenance of the harmony and proper intercourse among the States; 4. Certain miscellaneous objects of general utility; 5 Restraint of the states from certain injurious acts; 6. Provisions for giving due efficacy to all of these powers." Note that there is no listing of "general welfare" as one of these general classes.

In Federalist No 42 especially, Madison discusses the third and fifth classes, which relate to the states. As to the third, "Under this head might be included the particular restraints imposed on the authority of the States ... 11 so that number 3, which sounds like a grant to intervene, is actually a listing of things the States can not do, coupled to a very specific list of things the federal government is specifically authorized to do, such as to establish posts and roads, or a uniform system of weights and measures. Promoting welfare is not in Madison's list of things that promote harmony among the States in Federalist No. 42. As to "the necessity of superintending authority over the reciprocal trade of confederated States," he gives as examples the problems of local taxation within the cantons of Switzerland, and similar constraints imposed against this in Germany and the Netherlands. So, consistent with the explanations of Justice

Story, Madison saw the commerce clause as a restraint on the powers of the States. Thus Federalist No 42 follows the theme of derision of No. 41, showing more rationally that an enumerated list of constraints on the States is certainly not anything like a general grant to do anything in the name of the general welfare.

Madison discusses his fifth class of Federal powers, "restraint of the states from certain injurious acts"I in Federalist No. 41. Again, Madison makes no statement remotely implying the federal government has some general power over the general welfare. Instead, he continues his theme of enumerating ways in which the Constitution constrains states. For example, regarding the Constitutional restraint on States from laying duties for imports or exports except "what may be absolutely necessary for executing its inspection laws"I he explains:

"the manner in which the restraint is qualified seems well calculated at once to secure to the States a reasonable discretion in providing for the convenience of their imports and exports, and to the Unites States a reasonable check against the abuse of this discretion." (emphasis added).

In Federalist No. 43 Madison discusses other powers including the "power to promote the progress of science and the useful arts by securing for a limited time to authors and inventors the exclusive right to their respective writings and discoveries." Since the Constitution is a document of enumerated powers, it seems clear that Congress may promote the progress of science but not by any means it deems appropriate; only by what are thought of today as "patents. "

It is abundantly clear that the Constitution does not contain a grant of power to the federal government in the form of a "welfare clause", and also that the commerce clause is not, by any stretch of the imagination, a general grant to regulate all commerce, and especially not a grant for the Federal Congress to legislate generally in the name of the general welfare.

To reinforce this fact, shortly after adoption of the Constitution, the Tenth Amendment was added, reading "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." Clearly, the advocates of the constitution envisioned the Tenth Amendment as an exclamation mark for the limitations implied by the structure of Article 1 Section 8, stipulating, in effect, "and we really mean it."

The Constitutional Convention: The Rejection of Federal R&D Power

We do not need to speculate about what the authors of the Constitution meant regarding the extent of federal power to promote "the general welfare." The delegates to the Constitutional Convention specifically considered a form of power that allowed Congress to act when it deemed some matter of public good to exist and when "the authority of a single State may be incompetent". The Convention also rejected this language. That is to say, the Congress has no power to act, merely because some matter of public good is demonstrated Ln some fashion, and even if it is believed the States have no ability to act on the circumstance. This particular deliberate omission suggests that the Convention foresaw, from knowledge of history, the kinds of justifications often used today for creating statutes under the (non-existent) welfare clause and intentionally excluded them.

The Convention specifically considered whether the federal government should be empowered to directly aid academic research and rejected the idea. Of particular note was an amendment rejected that proposed:

To secure to literary authors their copy rights for a limited time, To establish a University, To encourage, by proper premiums and provisions the advancement of useful knowledge and discoveries.[4]

Another rejected text also included more expansive powers:

"To establish seminaries for the promotion of literature and the arts and sciences, To grant charters of incorporation, To grant patents; for useful inventions, To secure to Authors exclusive rights for a certain time, To establish public institutions, rewards and immunities for the promotion of agriculture, commerce, trades and manufactures.[5]

That these various powers were considered and rejected suggests that the federal power to create, guarantee, promote, or limit economic rights was intentionally granted only in a very narrow form, that of the grant of limited term exclusive rights to writers and inventors.

The failure of the Constitutional Convention to adopt this language, or anything similar, tells us three important things. First, like the English Parliament of 1624, the Convention rejected the use of claims of the "general good" as a basis for legislation by Congress. Madison's derision of claims that the welfare language is a general grant of power is also supported by the Convention's rejection of specific language that might have granted such general power.

That the Supreme Court has been reluctant to acknowledge the clear limits of federal power in general -- and of federal power to promote the sciences in general -- is obvious. But any dereliction of duty by the Court should be remedied by the Congress. After all, each of the members of this subcommittee swore to protect and defend the Constitution as a condition for holding office. That oath should be kept regardless of whether the justices of the Supreme Court are serious about upholding oaths of their own.

The National Laboratories: scientific Investment or Political Pork?

The DOE maintains 10 major laboratories and 18 minor laboratories with a joint annual budget of $6 billion and a 50 000 employee payroll. The taxpayer's 'investment' in these laboratories has truly been staggering -- over $100 billion since the creation of the DOE. [6] Although funded by the federal government, most are managed by private corporations or universities. The national laboratories today are no longer focused exclusively on weapons programming, but have instead branched out to include environmental, commercial, and various other research activities now that the Cold War is over. For example, 40 years ago, 90 percent of Lawrence Livermore's budget was devoted to defense activities. Today, only 40 percent of their budget is so targeted.

A long list of reports and audits have repeatedly warned of ongoing administrative, managerial, and cultural problems at the laboratories. The U.S. General Accounting Office (GAO) issued a grim report in January 1995 detailing rampant DOE mismanagement. Among its findings:

"DOE's day-to-day management of the laboratories - perceived as costly and inefficient by laboratory managers -- inhibits the achievement of a productive working relationship between the laboratories and DOE that is necessary if the laboratories are to move successfully into new mission areas." [7]

DOE imposes approximately 8,400 "administrative requirements in areas such as; procurement; travel; human resources; and environment, safety, and health ... Both laboratory and DOE operations office managers who administer directives told us they were -numb' from the proliferation of requirements. According to a consensus of both laboratory and DOE managers, the laboratories have been overwhelmed, not only by the volume of new requirements but also by their detail and by inconsistent guidance for implementing them. "[8]

"Closely related to the proliferation of administrative requirements has been the equally aggressive expansion of oversight activity ... DOE and other agencies conduct as many as 400 reviews annually at each laboratory. One laboratory manager calculated that his program was reviewed more than once a day in 1992. Laboratory managers deplored the enormous amount of time required to prepare for oversight reviews, adding that the impact of losing the best researchers' time during reviews is difficult to quantify. Many scientists have become discouraged by administrative chores. One manager complained that administrative oversight consumed as much as 40 percent of his working time."[9]

The laboratories' missions are set forth as broad goals and activity statement rather than as a coordinated set of objectives with specific implementation strategies ... Laboratory managers fear that the lack of proper departmental direction is compromising both their effectiveness in meeting traditional missions and their ability to achieve new national priorities."[10]

The GAO went on to note that the lack of clear mission for the national laboratories has decried time and time again -- by the GAO itself in a report issued as long ago as 1978 [11], the White House Science Council Federal Laboratory Review Panel in 1983 (the so-called "Packard Report") [12] , the Secretary of Energy's own Energy Advisory Board in 1992 [13], and an internal DOE task force report in 1993 [14] -- yet the DOE has done little about the problem but talk it to death. The GAO itself gingerly put it this way; "None of those past studies and reviews has resulted in overall consensus about the future missions of the multiprogram laboratory system, raising questions about DOE's capacity to provide to provide a vision for this system."[15]

Indeed, more than 50 recent audits of the national laboratory complex have found rampant mismanagement inadequate financial and cost controls, excessive legal fees, and fraudulent practices. [16] Perhaps the most compelling recent analysis of the national laboratories is the February, 1995 Galvin Report, the product of a corporate/academic task force appointed by the Secretary of Energy. Although the Report was more inclined to support certain federal research and development activities than was warranted (more on this later), it trumpeted "one critical finding" as "so much more fundamental than we anticipated that we could not in good conscience ignore it. The principle behind that finding is: government ownership and operation of these laboratories does not work well."[17] The prescription?

The principle organizational recommendation of this Task Force is that the laboratories be as close to corporatized as is imaginable. We are convinced that simply fine tuning a policy or a mission, a project, or certain administrative functions will produce minimal benefits at best.[18]

Accordingly, the Congress should float stock for each separate laboratory for purchase by any interested party. If there is insufficient commercial interest for any particular facility, the federal government should turn over each laboratory fee simple to the management agent currently contracted by the federal government to operate the facility. That agent would then retain full ownership rights to the laboratory and be free to operate it as they wish, contracting with public and private entities in the free market. The federal government would retain full liability for environmental contamination at all the privatized laboratories and would be responsible -- through the NNWA -- for remediating any environmental contamination that threatened public health. As noted by the Galvin Report:

We suggest that the country must. try one or more concepts that are radically new in order to revitalize the laboratories and to achieve significant improvements. If some parts of a bold solution were to prove to be not as beneficial as this Task Force is confident that they would be, that unto itself should not be a matter of concern. The laboratories and the country would still be better off than they otherwise will be from the continued repetition of federal governing policies. [19]

Indeed, the bill of particulars presented in the Report can be boiled down to the finding that "the national laboratory system is oversized for its current mission assignments. This appears to be the result of inefficiencies that stem from the current management practices of the laboratories and the DOE; excess capacity in areas associated with nuclear weapons design and development; and political considerations which have inhibited downsizing and laboratory restructuring." [20] The Report further remarked that "numerous instances of poor DOE regulatory and management practices have come to the attention of all members of the Task Force during its investigation of the national laboratories. The system has been tried long enough; the evidence is in. "[21]

The vision offered for the labs by the Galvin Report makes sense. "The government should be the customer of the laboratories." says the Report. "World-class commercial customers do not tell their suppliers how to do things. They simply buy a result for a given price. world-class commercial suppliers are not audited by their customers. "[22] Even Dr. Eric Bloch, former director of the National Science Foundation and currently a fellow at the Council on Competitiveness, agrees that federal ownership of the labs leads to mismanagement, politicization, and scientific atrophy.[23]

DOE Research and Development

Over the past four decades the federal government has poured $17 billion into general nondefense nuclear science and $63 billion into general energy research and development, 70 percent of which since the mid-1980s devoted to applied energy R&D. [24] "Priority for federal funding of R&D," observes Dr. Maxine Savitz, "has been given to projects where the risks are so great (but potential awards are so great), the time for commercialization is so long, or potential returns based on present energy price are so low that private investment alone cannot rationally be expected to be adequate."[25] Former Energy Secretary Hazel O'Leary likewise suggests that DOE spends money on technologies "that are so high-risk and so expensive that no one company's board of directors will agree to invest in it."[26]

DOE's "High Risk" Portfolio

It is interesting to note that this federal concentration on long-term, high-risk R&D investments was not a major focus of the Carter Energy Department (which concentrated on R&D which addressed energy externalities and "insurance" against foreign oil destabilizations), but was instead largely a product of the Reagan Department of Energy.[27]

Nonetheless, when markets find that a particular research activity involves high risk and minimal return due to low energy prices, the market does not "fail" by not investing in the project; it operates rationally. The DOE crows so loudly and often about the high-risk, long-term nature of its R&D portfolio that one cannot help but conclude that they believe the more dubious the investment, the stronger the case for government financial support (indeed, government enthusiasm for fusion and solar power research reinforces this conclusion). To say that this position is counterintuitive would be an understatement. As economist Ronald Sutherland of Argonne National Laboratory -- a supporter of publicly funded R&D -- flatly concedes, "such funding cannot be justified on grounds of being long-term or high-risk."[28]

Money spent on R&D is money not spent on some other business endeavor, such as plant expansion, marketing, and performance upgrades. If other corporate investments have a higher rate of return than investments in R&D, it would be economically inefficient to divert resources away from their most productive use. A landmark study by Edward Denison indicates that, contrary to popular wisdom, the historic social rate of return on organized R&D is no greater than investments in nonresidential capital, and thus, federal subsidy of such activities is at best an economic wash.[29]

Public R&D: No-Remedy for "Market Failure"

Other rationales have been marshaled to support publicly funded energy R&D. Typical is this passage from a 1995 DOE report:

Private firms are finding it increasingly difficult to recoup their R&D costs by appropriating exclusively to themselves the true benefits of the R&D. In today's highly competitive global market, technical secrets are short-lived and too easily stolen, scientists are hired away, and inventions are slightly modified in order to circumvent intellectual property rights. More fundamentally, the R&D itself is often too challenging, requiring large interdisciplinary teams of scientists, working year after year on expensive and unique laboratory equipment. Finally, the structure of certain industries is often too fragmented, or the firms too small, to mount the sustained R&D campaign necessary for success.[30]

Consider, for a moment, each of the concerns listed above.

Appropriatability of the rewards of research can be overcome by industrial research consortiums, as is practiced by such organizations as the Electric Power Research Institute, or more rigorous enforcement of public patents, Consortia, however, are restricted by the uncertainty about whether such organizations are violations of antitrust law and patents are routinely dismissed by courts when challenged by competitors. Any problem here is the result not of market failure, but of government's failure. Rather than throw money at the problem, why not fix those government policies at the root of the problem?

The fact that employees are free agents who can sell their services to the highest or most satisfactory bidder likewise is not a market failure. If it were, it would be a wonder that the market could operate at all. In fact, flexible labor markets are an economic plus, not a minus, because it allows workers to maximize income and firms to procure valuable labor resources at a moments notice. Moreover, it ensures that labor is allocated to its highest and best use. And if proprietary work is too easily "stolen," then this seems to be an indictment not of the private sector but of government's failure to protect property. How this particular problem is resolved by public funding, moreover, remains a mystery.

Complex, long range undertakings are routinely accomplished by the private sector in every other industrial endeavor and are certainly not beyond the capability of universities or even Corporate America:

• During the industrial revolution, for example, the University of Manchester became the center of cutting edge technological scientific research and its science was funded exclusively by textile and chemical companies [31];
• At the turn of the century, astronomy was the "Superconducting Supercollider" of its day, an extremely expensive, capital intensive scientific undertaking. Yet every observatory -- with the sole exception of the Naval Observatory -- was built with private, not public, funds [32];
• America's first major scientific research facility -- the University of Chicago -- was built with private money from wealthy benefactors such as John D. Rockefeller [33] ;
• Hundreds of important and fundamental scientific breakthroughs and over a dozen Nobel prizes have been awarded to researchers at private laboratories operated or funded by GE, AT&T, Kodak, Humana, Glaxo, DuPont and others [34];
• DuPont's breakthrough discovery of linear superpolymers -- commercialized as Nylon among other products -- resulted from an open general scientific inquiry sponsored by the company with no particular objective at the start.[35]
• In the 1960s, IBM raised $5 billion to develop and market the System 360 an amount that exceeded its net worth at the time [36];
• Private foundations such as the Hughes Medical Institute, the Markey Trust, the Kresge Foundation, the MacArthur Foundation, the Beckman Foundation, the W.M. Keck Foundation, and others have provided large sums to basic scientific endeavor. From 1986 to 1987, for example, 353 private foundations made more than 4,300 grants totally $380 million.[37]

Indeed, if major scientific advances were too difficult absent massive government help, it's a wonder that the communist world ever fell behind the West at all.

Finally, small companies in fragmented industries are not necessarily disadvantaged in the race for new technologies and developments. In fact, most analysts recognize that it is precisely those firms that produce the most valuable new technologies and radical ideas that advance the march of science. Moreover, joint ventures and industrial research consortiums are certainly capable of overcoming the problem where it might exist.

Public R&D: Industrial Planning "Light"

Recently, former Energy Secretary, Hazel O'Leary has further argued that federal energy research and development is crucial for America's international competitiveness. "All of the U.S.'s competitors have industrial policies," she told the House Appropriations Committee on January 19, 1995. "If the U.S. is to remain competitive, it too must have an industrial policy. This can be done either through a direct investment policy or a taxing policy ... The government must aid the private sector in using jointly developed technologies to capture these markets." After noting that other nations support energy research and development, she asked, "Do we permit some other nation to beat us?" [38]

What Ms. O'Leary ignores, however, is that there is very little relationship between "scientific leadership" and economic competitiveness. Japan, for example, spends less on basic R&D than any other OECD nation but routinely introduces cutting-edge technological products. [39] Similarly, gross expenditures for R&D indicate that the U.S. spends the rest of the world into the dust. In 1987, for instance, the U.S. government spent 60 percent more on research and development than did the governments of Japan, West Germany, France, England, and Italy combined.

There are several reasons for this. First, the international character of science is such that discoveries made in one nation are available to scientists in all. Notes Sutherland, "the existence of the free rider problem at the international level also means that the relative competitive position of the U.S. may not be improved by funding basic research." [40] Moreover, the practical value of a discovery may not be apparent for some time and is frequently contingent on other discoveries and unpredictable applications. As noted by the late Harry Johnson, an economist at the University of Chicago, a position of leadership in basic science:

might benefit a nation almost exclusively in terms of intangible national prestige of scientific accomplishment, the concrete benefits of the application of scientific findings being reaped mainly by other nations. In that case, the expenditure of public money on the support of basic scientific research would serve mainly to save other countries the cost of basic research and enable them to concentrate on development and application.[41]

Industrial analysts have indeed witnessed the phenomenon Johnson warned about time and time again. The most vivid example was when two IBM scientists -- Nobel laureates Muller and Bednors --discovered superconductivity at high temperatures, the Japanese moved quickly to reproduce the science. [42]

Second, national "industrial policies" have historically proven to be spectacular busts in virtually all western nations. MITI was famous for having advised Japanese industry to stay out of the automobile and consumer electronics market. France in the 1980s spent billions on a quickly obsolete international computer information system. British and French subsidies for their airline industries has done little to affect America's dominance in that area. The list could go on and on.

Market Failure vs. Government Failure

Still, the basic story of market failure continues to haunt economists across the political spectrum. And it is certainly true that, in the field of R&D, the market does not work as perfectly as economic theorists would like. Appropriateability of findings can be problematic. The proper comparison, however, is not between an imperfect market and a theoretically perfect government, since postulating textbook perfection on the part of government agents is just as unrealistic as doing so for market actors. The proper comparison is between market failure and government failure. And in order to bring the R&D debate back to reality, there are several "government failures" which we might note.

Longer Public Time Horizons?

First, many of the imperfections noted by DOE in the private sector apply as much if not more so to publicly-funded R&D. The idea that elected officials (who are, in the final analysis, making the decisions about how much is to be spent on R&D and who gets it) have longer time horizons than businessmen is dubious to say the least. Long term government projects are difficult to sustain politically given the short time horizons of legislators forced to face constant elections and thus quick results. Government finds that doing even simple thinks like growing crops and delivering mail a constant challenge. Its record at accomplishing complex tasks is even more spotty, as the record of NASA, the Strategic Defense Initiative, and various large-scale projects like the Clinch River Breeder Reactor and the Superconducting Supercollider can attest.

Second, federal employees and contractors are scarcely the indentured servants DOE implies are necessary to ensure successful research projects. Governmental undertakings are also plagued by duplication, fragmentation contradictory efforts, and lack of coordination to say the least.

Economic vs. Political Decision Making

Private actors are motivated by the pursuit of profit and are thus constantly driven to efficiently meet the demands of consumers. Public Officials, as noted by Nobel laureate James Buchanan founder of the " public choice" school of Political economics are driven by an entirely different set of incentives; budget maximization, expansion of regulatory power, job security, etc.[43] As noted by Milton Friedman, "People who intend to serve only the public interest are led by an invisible hand to serve private interests which was no part of their intention." [44] Thus, government tends to decide which industries technologies, and projects to support on the basis of political- not economic or scientific -- considerations. Older, more labor-intensive companies typically exercise the most clout. and growing firms --the kind that typically produce the most New technological breakthroughs -- may be economically strong but are usually Politically weak. And as former Senator William Proxmire once remarked, "Money will go where the Political power is. Anyone who thinks government funds will be allocated to firms according to merit has not lived or served in Washington very long." [45] Eric Reichl, former director of the synthetic Fuel Corporation and long-time member of the DOE's Energy Research Advisory Board, agrees;

... we have lots of ideas. The problem is how to select the right ones to pursue. If we have many ideas their relative merit will vary from high merit to extremely marginal. It also follows that the more R&D dollars are available the more of them will 90 to some marginal ones. The high merit ideas Will always find support even from -- or particularly from -- private industry. In general then government R&D dollars will tend to flow to marginal ideas. Exceptions always exist, but they are just that, exceptions.[46]

Corporate lobbying power ensures that projects which might have otherwise been funded fully by industry become part of the public R&D portfolio. After all, given the government's "come and get it!" call to private business (in the words of Eric Reichl [47] ) it certainly makes sense for businessmen to invest to convince taxpayers to pay for what his company otherwise would.

The argument that public R&D only acts to displace private R&D is tellingly made by Cambridge biochemist Terence Kealey:

The irrelevance of the government funding of science is illustrated by the comparative statistics ... Consider the first graph, which relates the wealth per capita of members of the OECD with the quality of their scientific papers, as judged by the number of times their scientific papers were cited. It shows a very strong correlation. A plot of national wealth per capita against the numbers of papers published per capita, or the numbers of patents published per capita, would look very similar.

This, to me, is a fundamental economic law: the quantity and quality of a nation's science and of its R&D is determined by its wealth per capita ... If a company is situated in a country where taxes are low, like Japan of Switzerland, it simply invests its own money. If it is in a country like France or Germany, with high taxes, then it lobbies hard for its government to fund science. Either way, successful companies in rich countries ensure their research need are met.[48]

Yet all things are not equal. A survey of OECD countries reveals a strong correlation between a country's total spending on civilian R&D and the degree to which private companies contribute to that expenditure. Governments that do not heavily fund R&D oversee economies that devote a greater proportion of their national spending to that activity. This suggests that publicly-funded R&D doesn't simply displace private R&D, but that it actually subtracts from what expenditures might otherwise have been.[49]

And, as noted by the Galvin Report

To be effective, near-term R&D work must take place in an environment rich in interactions with users and customers.

Market-based influence, direction, and control are critical to success ... The more distant the laboratories are from the marketplace, the more remote the likelihood that they will have something useful to contribute to such activities."[50]

Clearly, Congressional appropriators or bureaucratic servants, isolated as they are from the marketplace and the incredibly detailed and varied knowledge held by millions of private agents, are incapable of intelligently directing societal resources. [51]

Private Underinvestment or Public Overinvestment?

Finally, as noted by economist Richard Nelson, "since Sputnik it has become almost trite to argue that we are not spending as much on basic scientific research as we should. But, though dollar figures have been suggested, they nave not been based on economic analysis of what is mean by -as much as we should." [52] Indeed, if we assume that market imperfections lead the economy to otherwise under invest in R&D, we must presume that there is some optimal level. What that "optimal" level is anyone's guess. How do we know when we've reached it, or more importantly, when we have surpassed it? The hazard of overinvestment in R&D is theoretically just as socially injurious as under investment. Economists are, in essence, telling government officials that society has not gone far enough down a certain road and that they must force such travel. Yet economists lack any clue about how far down that road society should travel and are without any practical means to determine when it has gone too far.

Energy R&D: A Track Record of Failure

Since the portfolio of federal energy R&D investments is directed, according to the DOE, at supporting "high-risk, precompetitive research," which results in a "high-risk portfolio of capital investments in the Nation's future," it should not surprise us when government's "high-risk capital investments" don't pan out -- they are, after all, risky by definition.[53] Government officials, however, are not as worried about losing the money of their stockholders -- taxpayers -- as is Corporate America.

The likelihood of systemic "government" failure in the realm of energy research and development is not simply a matter of theory. It is a clear matter of record, and that record is no stranger to most economists outside the Washington beltway.

Academic Analysis Show Failure

Perhaps the most serious examination of federal R&D programs -- conducted for the Brookings Institution by economists Linda Cohen of the University of California at Irvine and Roger Noll of Stanford University -- found that energy R&D has been an abject failure and nothing but a pork barrel for political gain. "The overriding lesson from the case studies is that the goal of economic efficiency -- to cure market failures in privately sponsored commercial innovation -- is so severely constrained by political forces that an effective, coherent national commercial R&D program has never been put in place."[54]

Other dispassionate observers note that, despite the occasional R&D success, DOE energy research expenditures fail to pay for themselves. As MIT's Thomas Lee, Ben Ball, Jr., and Richard Tabors observe, "the experience of the 1970s and 1980s taught us that if a technology is commercially viable, then government support is not needed; and if a technology is not commercially viable, no amount of government support will make it soot (emphasis in original). [55] The Galvin Commission likewise reported that the DOE's laboratories -- the main tool by which the Department forwards its R&D agenda -- has a poor record of achieving the goals DOE sets for it:

The Task Force learned of significant examples of laboratory-developed technology being usefully transferred into industry and of the laboratories providing useful technical services to industry. However, the laboratories are not now, nor will they become cornucopias of relevant technology for a broad range of industries. A significant fraction of the laboratories' industrial competitiveness activities concern technologies which are of Less than primary importance to their industrial collaborators and/or which these partners could obtain from other sources. There are only a relatively few instances in which the laboratories have technology that is vital to industry and that is uniquely available at the laboratories ... [such R&D investments] are unlikely to produce results that will benefit either the agency's industrial partners or the public in the long run ... While there are instances of successful "by-product" R&D, the historical evidence demonstrates that such events are statistically improbable. [56]

Even the laboratories' strongest political supporter, Senator Pete Dominici (R-New Mexico) acknowledges that "their record of traceable new products spun off is so small that one would almost think they are not charged with doing it." [57]

DOE Defenses of R&D Anemic

In response to this near consensus about the dismal failure of publicly-funded energy R&D, the DOE has issued two documents; a May 1995 a document titled "Success Stories: The Energy Mission in the Marketplace," and Energy R&D: Shaping our Nation's Future in a competitive World, a report from a DOE-appointed task force on strategic energy R&D.[58]

The former purports to document the Department's R&D achievements which apparently have escaped the notice of both academics and dispassionate business professionals. The report details 61 technologies supported or developed by DOE's applied research program deemed "substantial economic successes" and "fundamentally important in one technical areas after another in positioning U.S. industry at the forefront of global competition." [59] Yet the report consistent of only paragraph-length discussions of each "impressive" success without any references or citations provided whatsoever. It had all the markings of a hastily put-together talking paper, not a serious product.

Accordingly, the Congress asked the GAO to determine whether the claims made by DOE in the report were valid and whether "Success Stories" could be used to assess the value of DOE's applied R&D programs. GAO selected 15 case studies for examination (about a quarter of those listed in the report) covering all major program areas and fuel sources. More importantly, GAO chose those alleged successes that account for the bulk of the economic benefits identified in the report. GAO's findings were a scathing indictment of not only the report but the fundamental competence of the DOE itself:

"We found problems with the analyses DOE used to support the benefits cited in 11 out of the 15 cases we reviewed. These problems include basic math errors, problems in supporting economic analyses, and unsupported links between the benefits cited and DOE's role or the technology. These problems make DOE's estimates of the benefits of these cases questionable." [60]

"While Success Stories shows that DOE's applied R&D programs do produce some benefits, it cannot be used to assess the effectiveness of DOE's applied research programs overall because it only describes the -successes' of a very small percentage of the projects DOE has funded. In addition, Success Stories does not report how much DOE spent to support any of the technologies we evaluated. Without a comparison of costs and benefits, the successes of DOE's applied energy R&D programs cannot be determined."[61]

The math errors mentioned by GAO are truly astonishing. Two of the 15 'success stories' examined "were based on analyses containing basic math errors that greatly affected the estimates of benefits." The economic 'success" claimed for carbon dioxide sand fracture production technology, for example, "improperly applied the price of natural gas to an incorrect amount of expected increased production." Instead of $20 million of increased revenue per gas well over the course of seven years, GAO calculates the proper gain from the technology at between $216,000-$294,000 per well over seven years; a 100-fold error in DOE calculation! [62]

Nine of the 15 cases examined contained analyses replete with "weak economic reasoning," For example, simply discounting the sales figures to reflect the time value of money reduces DOE's projected value of integrated gasification combined cycle technology over 32 years (a product of the clean coal program) from $150 billion to $44 billion (and that still takes at face value DOE's optimism regarding the marketability of the technology; most analysts consider the clean coal technology program nearly as big as bust as the notorious Synfuels program). In another example, GAO found the report assumed that the total amount of money the well-drilling industry has spent on mud-pulse telemetry technology equals the amount saved by the industry. [63]

In three of the cases examined, GAO also found -- not at all surprisingly -- that the benefits claimed were either not attributable to DOE or were not attributable to the technology in question.[64]

Additionally, two points need to be made about such reports. First, there are almost certainly energy R&D projects funded by DOE that have panned out for the taxpayer and the economy as a whole. Given the thousands of such projects that have been undertaken, it would be indeed startling if not a single one ever provided net benefits to the economy. If the government simply dumped a million dollars out of an airplane, a few individuals would likely use the money to create more societal resources than what they gathered from the ground. But no sane economist would endorse a widespread policy of money dumping based on a few such It success stories." One would calculate a total cost benefit analysis before one could even begin to think along those lines.

Second, even if all such public investments in energy R&D provided net social benefits, that would not be enough to justify the program. Those benefits would have to be larger than other potential benefits that might have been accrued had the money been spent in some other way (even by the taxpayer himself). Some limited data is available to judge the matter. In 1995, DOE spent $1.71 billion dollars on "technology transfers" to the private sector. Royalty and licensing income from R&D programs amounted to only $3.4 million; a 0.2 percent return. In other words, for every $100 DOE invested in 1995, it received just 20 cents. The figures for 1992-1994 similarly show returns of .21, .29, and .2 percent respectively.[65] While the social benefits from its R&D portfolio are not, in theory, strictly limited to simple returns to the government in the form of royalties, such data certainly suggests that when royalties and licenses are involved, publicly-funded technology has not proven near as attractive to market actors as it has to government agents.

Simply put, if the energy research and development investments made by the DOE were made by a private corporation, that company would have gone bankrupt long ago.

The second report, Energy R&D: Shaping our Nation's Future in a Competitive World (known popularly as the "Yergin Report") made quite a splash largely due to the membership of the task force which produced the document. Chaired by energy celebrity Daniel Yergin (author of The Prize and president of the Cambridge Energy Research Associates), the task force consisted of a veritable whose who of major recipients of DOE's R&D largesse and a few of the most prominent professional advocates of federal R&D. [66] The report itself, however, was simply one more tired restatement of the assertions forwarded to justify publicly funded energy R&D and a primer on how taxpayer money has been spent over the years. A few "success stories" were thrown in for good measure, most of which appeared in the aforementioned DOE "Success Stories" report with only slightly more anecdotal information provided for the reader. once again, however, no references for this information were provided.

A few interesting tidbits are provided, however, which are worthy of note. First, the report reviews the history of American R&D thus:

As one of the landmark studies of American research and development observed, until the 19th century, it was 'Yankee mechanical ingenuity, building largely upon the basic discoveries of European scientists,' that drove technological change in the United States. America's great industrial achievements of the first decades of the 20th century continued to be based upon European science and innovation ... it was only after World War I that the U.S. government began to support R&D.[67]

This passage is a stark rebuke to the Washington "common wisdom" about energy policy, although this apparently never occurred to the task force. Europe's leadership in "basic science" failed to translate into economic dominance of the early American republic, whose scientists simply appropriated European discoveries and were among the first to profitably market them in an applied commercial sense. So much for the report's concern (left ominously without comment) that the Japanese government is spending more on energy R&D than the United States federal government.[68] Who cares? And anyway, if this federal R&D spending is so scientifically important, why don't we see a dominance of Japanese science vis-a-vis American science?

Or consider this admission, one conspicuously absent from DOE's "Success Stories" report:

The Task Force finds that many successful technologies have come out of DOE's R&D programs over the years ... However, the Task Force was unable to make a comprehensive assessment across all R&D programs because of the lack of meaningful and consistent metrics of performance across various groups responsible for energy R&D within DOE at this time.[69]

According to Maxine Savitz, vice chair of the task force, that is a polite way of saying that no solid data exists upon which a comprehensive cost-benefit analysis can be made concerning DOE's energy R&D investment. [70] Of course, one might reasonably conclude that if no evidence exists to prove that DOE's R&D portfolio provides net social benefits, one should refrain from making that assertion. Unfortunately, the task force showed no such restraint.

The task force also noted near the end of the document that "the fact that industry is cutting back energy R&D does not itself justify federal spending on R&D. "[71] Yet the task force suggests exactly that in its "summary of findings" at the front of the document.[72]

Finally, the last sentence of the report notes that "federal macroeconomic policy and national economic performance matter a great deal in determining levels of private-and-public-sector spending on energy R&D (and R&D generally) as well as on rates of capital investment that incorporate the results of successful R&D into economic and social improvements."[73] Fine, but one might of asked the task force to investigate this matter a bit further to determine whether pro-market economic policies could do more to further energy R&D in the United States than simply throwing taxpayer money at the problem.

Conclusion

Federal energy research and development expenditures should be immediately eliminated. The argument that they have provided a net social benefit to the economy is simply dogma masquerading as fact. Any research needs the government might have to accomplish otherwise constitutional ends -- such as the cleanup of federal facilities -- should be bid out to private sector entities under the direction of the newly created National Nuclear Weapons Agency at the Department of Defense.

Whether or not a particular R&D program is aimed at achieving some "worthy cause" is irrelevant. The worthier the cause, the more likely it is that private money would be available if the worthy cause were indeed viable. More often than not, however, such expenditures are merely the high-minded justifications proffered to mask what is in reality corporate welfare.

Thank you Mr. Chairman. I look forward to answering any questions you or the subcommittee may have.

---

Notes

[1] This discussion of the constitutional issues surrounding energy R&D expenditures is taken largely from Paul Ballonoff, Shock Therapy: Ending the Never Ending Energy Crisis (Washington, DC: Cato Institute, 1997) in press.

[2] See pages 64 to 65 in Joseph Story, A Familiar Exposition of the Constitution of the United States originally published 1859, reprinted 1986, Regnery Gateway.

[3] James Madison, Notes on the Debates of the Federal Convention of 1787, reprint edition of W. W. Norton, New York, 1987. A thoroughly documented discussion of Madison's views of the welfare language is given by Leonard R. Sorensen, Madison on the "General Welfare" of America, His Consistent Constitutional Vision, Rowman and Littlefield, Lanham, Maryland, 1995.

[4] See I. Bernard Cohen, Science and the Founding Fathers, W.W. Norton and Company, 1995, especially at pages 237-243 as well as Madison's Notes for August 18, 1787.

[5] See Cohen, Science and the Founding Fathers, as well as Madison's Notes for August 181 1787.

[6] Department of Energy: National Laboratories Need Clearer Missions and Better Management," U.S. General Accounting Office, GAO/RCED-95-10, January 1995, p.2.

[7] "Department of Energy: National Laboratories Need Clearer Missions and Better Management," p. 5.

[8] Ibid, pp. 23-24.

[9] Ibid, p. 24.

[10] Ibid, p. 3.

 

[11] "The Multiprogram Laboratories: A National Resource for Nonnuclear Energy Research, Develop, and Demonstration," U.S. General Accounting Office, EMD-78-62, March 22, 1978.

[12] "Report of the White House Science Council," Federal Laboratory Review Panel, Office of Science and Technology Policy, May 15, 1983.

[13] Secretary of Energy Advisory Board, "Final Report," 1992.

[14] " Changes and Challenges at the Department of Energy Laboratories," Final Draft Report of the Missions of the Laboratories Priority Team, 1993.

[15] "Department of Energy: National Laboratories Need Clearer Missions and Better Management," p. 19.

[16] Gilbert Gaul and Susan Stranahan, "The Price of Keeping Labs Busy," The Philadelphia Inquirer, June 5, 1995.

[17] Ibid., p. 53.

[18] Ibid., p. 55.

[19] Ibid., p. 54.

[20] Ibid., p. 10.

[21] Ibid., p. 53.

[22] Ibid., p. 55.

[23] Comments, "What is the Appropriate Federal Role in Industrial R&D?" forum sponsored by the Institute for Alternative Futures, April 12, 1995.

[24] "Historical Tables," Budget of the Unites States Government, FY 1996 (Washington: U.S. Government Printing Office) 1995, pp. 135-140, and "DOE's Success Stories Report," United States General Accounting Office, GAO/RCED-96-120R, April 15, 1996, p.2.

[25] Maxine Savitz, "The Federal Role in Conservation Research and Development," The Politics of Energy Research and Development, John Byrne and Daniel Rich, eds. (New Brunswick, NJ: Transaction Books) 1986, p. 92.

[26] Margaret Kriz, "Conserving Energy," National Journal, June 3, 1995, p. 1328.

[27] Ronald Southerland, "An Analysis of the U.S. Department of Energy's Civilian R&D Budget," The Energy Journal, Vol 10, no. 1, 1989, p. 51, 53.

[28] Ibid, p. 35.

[29] Edward Denison, The Sources of Economic Growth in the United States and the Alternatives Before Us (New York: Committee for Economic Development) 1962.

[30] "Success Stories: The Energy Mission in the Marketplace," U.S. Department of Energy, April 1995, p. 1.

[31] Joseph P. Martino, Science Funding: Politics and Porkbarrel (New Brunswick, New Jersey: Transaction Publishers) 1992, pp. 280-281.

[32] Ibid. pp. 201-214.

[33] Ibid p. 213.

[34] Ibid. pp. 217-230, 293-296.

[35] Richard Nelson, "The Simple Economics of Basic Scientific Research," Journal of Political Economics, Vol. 67, no. 5, June 1959, p. 303.

[36] Martino, p. 358.

[37] Ibid., pp. 302-305.

[38] Hazel O'Leary, testimony before the House Appropriations Committee's Subcommittee on Energy and Water Development, January 19, 1995.

[39] Lewis Branscomb, Empowering Technology: Implementing a U.S. Strategy, Lewis Branscomb, ed. (Cambridge: MIT Press) 1993, P. 24.

[40] Sutherland, p. 52.

[41] Harry Johnson, "Federal Support of Basic Research: Some Economic Issues," in Basic Research and National Goods, National Academy of Sciences (Washington, D.C.: U.S. Government Printing Office) March, 1965, p. 129.

[42] Lewis Branscomb and George Parker, "Funding Civilian and Dual-Use Industrial Technology," Empowering Technology: Implementing a U.S. Strategy.

[43] Geoffrey Brennan and James Buchanan The Reason of Rules (Cambridge MA: Cambridge University Press) 1985, and Public Choice and constitutional Economics, James Gwartney and Richard Wagner, eds. (Greenwich, CT: JAI Press/Cato Institute) 1988.

[44] Milton Friedman, Why Government is the Problem (Stanford, CA: Hoover Institution) 1993, P. 11.

[45] Murray Weidenbaum, "A New Technology policy for the United States?" Regulation, vol. 16, no 4, Fall 1993, P. 19.

[46] Eric Reichl, "Alternate opinion on Energy R&D in the U.S.," unpublished manuscript, p. 2.

[47] Ibid, p. 4.

[48] Terence Kealey, "You've All Got it Wrong," New Scientist, June 29, 19960, p. 25.

[49] Ibid, p. 26.

[50] "Alternative Futures for the Department of Energy National Laboratories," p. 47.

[51] See generally Israel Kirzner, Discovery and the Capitalist Process (Chicago: University of Chicago Press) 1985.

[52] Nelson, p. 297.

[53] "Success Stories: The Energy Mission in the Marketplace," p. 3.

[54] Linda Cohen and Roger Noll, The Technology Pork Barrel (Washington: The Brookings Institution) 1991, p. 378.

[55] Thomas Lee, Ben Balls, Jr., and Richard Tabors, p. 167.

[56] "Alternative Futures for the Department of Energy National Laboratories," pg. 45, 47.

[57] Science, May 13, 1988, cited in Lewis Branscomb, "National Laboratories: The Search for New Missions and New Structures," p. 115.

[58] Energy R&D: Shaping our Nation's Future in a competitive World, Final Report of the Task Force on Strategic Energy Research and Development, Secretary of Energy Advisory Board, U.S. Department of Energy, June 1995.

[59] "Success Stories," p. 1.

[60] "DOE's Success Stories Report," pp. 1-2.

[61] Ibid, p.2.

[62] Ibid, pp. 4-5.

[63] Ibid, p. 5.

[64] Ibid.

[65] Data compiled from Office of Management and Budget and the DOE in "The Price of Keeping Labs Busy"

[66] Corporate members of the task force included Maxine Savitz of AlliedSignal Ceramic Components, Michael Baly of the American Gas Association,, Micheal Bonsignore of Honeywell Inc., Bobby Brown of CONSOL Inc., William Burnett of the Gas Research Institute, Stephen Dean of Fusion Power Associates, Linn Draper, Jr. of American Electric Power, Roger Herbert of Baker Hughes Oilfield Operations, Fritz Kalhammer of EPRI, Robert Kelly of Amoco/Enron Solar Power Development, Regis Matzie of ABB Combustion Engineering, Mark Murphy of Strata Production Co., Roger Naill of AES Corp., Lawrence Papay of Bechtel, Larry Smith of Shell Oil Co., Richard Stegemeier of Unocal, Leonard Wohadlo of National Power Co., and James Wolf of Honeywell. Consultants and University directors on the task force included energy consultant Mason Willrich, Kofi bota of Clark-Atlanta University, Elisabeth Drake of MIT, H.M. Hubbard of the Pacific International Center for High Technology Research, Franklin Orr, Jr., of Stanford University, Marc Ross of the University of Michigan, David Shirley of Pennsylvania State University, and Susan Nardone of Cambridge Energy Research Associates. Professional advocates included Ralph Cavanagh of NRDC and Scott Sklar of the U.S. Export Council for Renewable Energy. Finally, two state bureaucrats were included; Larry Bean of the Iowa Department of Natural Resources and Ronald Eachus of the Oregon Public Utilities Commission.

[67] Energy R&D: Shaping Our Nation's Future in a competitive World, p. 9.

[68] Ibid, p. 8.

[69] Ibid, p. 43.

[70] Telephone conversation with the author, July 22, 1996.

[71] Energy R&D: Shaping Our Nation's Future in a Competitive World, p. 47.

[72] The report's fourth of 17 findings is that "Widespread cutbacks, restructuring, and foreshortening of time horizons threatens the U.S. R&D enterprise at a time when science and technology are of growing importance for meeting global challenges and may portend a brewing R&D crisis." Ibid, P. viii.

[73] Ibid, p. 53.