I want to thank the committee for the opportunity to testifytoday on proposed expenditures for the Commerce Department'sNational Institute of Standards and Technology.
The Clinton administration is seeking $491 million for theAdvanced Technology Program (ATP) for FY 1996, up from the $431million in projected expenditures for FY 1995. Further, theadministration is seeking $147 million for the ManufacturingExtension Partnership (MEP) for FY 1996, up from some $91 millionin the current fiscal year.
These expenditures are examples of unneeded corporate welfare,wasted in a market that already produces world-class technology. Itis of such expenditures that budget deficits measured in thehundreds of billions of dollars are made.
I suggest that the correct level of expenditure for theseprograms is zero. The reasons why are as follows:
1) These handouts are justified by the fallacy offocusing on the recipients.
Bureaucrats handing out other people's money often justify theirprograms based on two facts: First, that the recipients of thefunds approve of the handouts; and second, that the recipientsspend that money on something of which most people approve. And Isuspect much of the testimony that you will hear in favor of theATP and MEP will be based on--I would say bogged down in--these twofacts.
But these facts are true almost by definition for every federalgovernment handout. Most individuals receiving free goods arepleased to have them and would like the handouts to continue.
If one dropped money from a plane over Washington and tracedeach dollar, one would find first that everyone picking up themoney was happy to have it, and, second, that most individualsspend the money in ways we approve, for example, to purchase foodor shoes, or to invest in a small business. But this would not begood public policy.
If these are the only arguments in favor of a particulargovernment expenditure, including the ATP and MEP, they are notsufficient.
2) The market works well without governmenthandouts.
The private sector is the principal engine of this country'smulti-trillion dollar economy, not government handouts. In the areaof advanced commercial technologies, that is, the high-techrevolution of the past 15 years, the private sector already does aworld-class job in developing new products and technologies.
Thus, ATP is unnecessary.
The way a market system--as opposed to a corporatist orsocialist system--works is that if there is a prospect for aprofit, entrepreneurs will risk investing in order to reap profits.For example, the cost of bringing a new pharmaceutical product tomarket is now on average $390 million. Yet drug companies make suchinvestments. If there is a profit to be made, entrepreneurs willact with or without government handouts.
3) Bureaucrats have no special talent for pickingwinners and losers.
Federal bureaucrats have no unique abilities, better than thoseof private investors and entrepreneurs, to pick winning companiesand technologies. It is not by virtue of their keen abilities tospot future market needs or their creative talents for inventingnew products or services that bureaucrats acquire power to disburseinvestment funds. It is by virtue of their ability to function wellin a rule-bound organization that is insulated from market forces,or their ability to secure a political appointment. If anything,one should suspect that the capacities that make for successfulbureaucrats and politicians would make dull, incompetententrepreneurs.
To put it bluntly, if bureaucrats and political appointees didhave special abilities to pick winners and losers, they wouldbecome entrepreneurs or would work for entrepreneurs, and actuallyproduce the new products for which they claim consumers clamor.They would put their own money, not taxpayers', and theircreativity and energy, where their mouths are.
It is important to note that bureaucrats tend not to discoverthe Steve Jobs and the Bill Gates of the world.
4) The government's record of success in subsidizingenterprises is abysmal.
Here are offered but a few example of this history.
- In the 1970s Department of Commerce, which oversees ATP andMEP, issued $1.23 billion in loans and loan guarantees throughvarious programs. Not even half were paid back. The Americantaxpayers lost over $650 million. And those loans still carried onthe books are of questionable value. For example, the EconomicDevelopment Administration at Commerce, which lent $471 million inthe 1970s but has recovered only $60 million to date, recentlysought congressional approval to sell off some of its bad loans forless than ten cents on the dollar.
- On the more focused issue of advanced technology, recall thatthe Supersonic Transport (SST) plane in the 1960s was considered a"crucial" commercial technology and gobbled up $920 million intaxpayer dollars. The result: Congress mercifully put the projectout of its misery in 1973. The benefit to the public: None. Bycontrast, the governments of France and Britain continued to fundtheir SST. Now they operate a few of these planes at a huge lossand have not even come close to covering the costs ofdevelopment.
- High Definition Television (HDTV) is one of the clearestfailures of the government's targeted handouts. Japanesebusinesses, with subsidies that totaled $1 billion from theirgovernment, in the late 1980s sought to develop HDTV using existinganalog technology. Thomson Consumer Electronics of France, asubsidiary of that country's state- owned Thomson S.A., receivedaround $1 billion to develop a similar system. American firmssought, but were denied by the Bush administration, $1.2 billion insubsidies to compete with these foreign rivals. The U.S. governmentin the end probably spent $200 million for miscellaneous researchand feasibility studies. As a result of being denied massivesubsidies, American companies were forced to develop an evenbetter, more efficient form of HDTV.
- Zenith and American Telephone and Telegraph invented a fullydigital system that made the analog Japanese and European systemsobsolete before they even went into production. Japan has announcedthat it will abandon its system, losing its $1 billion ingovernment funds and private investment, and adopt the Americansystem. The French firm also lost over $1 billion. If the Bushadministration had listened to those seeking subsidies, allcountries would be working with inferior technologies, and Americanfirms would be just a few among the many mediocre.
5) The ATP is indeed a high-tech version of the SmallBusiness Administration (SBA): wasteful andcounterproductive.
The ATP has been called a high-tech version of the SBA. This isa good analogy because SBA has an abysmal record, with a defaultrate of around 20 percent. Some 99.8 percent of American smallbusinesses do not receive SBA assistance. As long ago as 1963 Lifemagazine described SBA as "an almost brand-new device for soakingup money and getting rid of it."
6) The proposed ATP expenditures are the kind ofcorporate welfare against which the Clinton administrationinveighs.
Even when an investment does promise to pay off and there arewilling private investors, businesses often are still willing todefray expenses by accepting handouts taken from taxpayers; and thefederal government is willing to transfer such funds so thatpoliticos can curry favor with recipients and claim to be friendsof business. Labor Secretary Robert Reich correctly denounces suchhandouts as corporate welfare. Yet the Clinton administration stillwishes to hand out such welfare through ATP.
Among the 1994 recipients of corporate welfare:
- 3M-3M Center received 6.1 million over five years to developfilm technologies to replace aircraft paint;
- BP Chemicals received $5.2 million over four years to developdual-purpose ceramic membranes;
- Caterpillar Inc. received $3 million over three years todevelop engineered surfaces for rolling and sliding contacts;
- Texas Instruments received $2.2 million over 28 months for asingle-chip receiver front-end with integrated filters, and $2million over three years for ultra-low k dielectric materials forhigh-performance interconnects;
- DuPont Fibers received $9.6 million over five years forthermoplastic composites for structural applications;
- IBM received $1.9 million over three years for a framework forenhancing computer-integrated manufacturing;
- Xerox Corporation received $1.8 million over three years forreusable performance-critical software components.
These are hardly new, poverty-stricken, desperately strugglingbusinesses that cannot fend for themselves without corporatewelfare.
7) The funding decisions for these handouts are oftenbased on political concerns.
The list above of large corporations receiving funds is enoughto suggest that political influence plays a part in distributinglargess.
8) Some businessmen do realize that corporate welfare inthe end only harms them and the economy.
On March 25, 1993 Dr. T.J. Rodgers. President and CEO of CypressSemiconductor Corp. testified before the House Committee onScience, Space and Technology, Subcommittee on Technology,Environment and Aviation on government subsidies for high-techinnovations. After showing several of his company's products,Rodgers observed that "we would benefit greatly if billions oftaxpayer dollars were showered on the various technology projectsfavored by the Clinton administration." He then made his mainpoint: But I am here to say that such subsidies will hurt mycompany and our industry. Why? Because they represent tax-and-spend economics--a brand of economics that is a known failure.I do not want handouts. The men and women of our company do notwant handouts. And if Congress wants to help American hightechnology, handouts are the wrong way to go.
This is the attitude that businesses and Congress should taketowards technology policy. I call your attention to thistestimony.
9) The U.S. Constitution does not allow for governmentsubsidies of private commercial endeavors.
I realize that to bring up the U.S. Constitution in the U.S.Congress is a bit of an anachronism. But I believe that if we areto reestablish a republic of limited government in this country, wemust refer to the law upon which it was and should be based.
Article I, section 8,  of the Constitution gives Congress thepower "To regulate Commerce ... among the several States..." Thiswas meant to allow the federal government to remove trade barriersbetween states. In this century the federal government has used--Ishould say misused--this power to regulate the way entrepreneursactually run their enterprises. But it is an unreasonable stretchto maintain that this paragraph implies that the governmentregulates by passing out taxpayer dollars to favoriteindustries.
Article I, section 8, gives Congress the power "To promote theProgress of Science and useful Arts, by securing for limited Timesto Authors and Inventors the exclusive Right to their respectiveWritings and Discoveries." This quite clearly refers to protectionof intellectual property rights, not to passing out checks tofavored industries.
The bottom line is that federal government handouts tobusinesses through the ATP are not needed. The kind ofgovernment-business partnerships promoted by the MEP have someunique problems of their own but, on the whole, the abovecriticisms apply to these as well.
If Congress is to cut federal spending, subsidies like theseshould go. And if the Clinton administration is to cut corporatepork and welfare, it should join Congress in these cuts.