Thank you Chairman Brownback for the opportunity to testifybefore the Subcommittee on Government Management on the AdvancedTechnology Program and other corporate subsidies. In keeping withthe truth in testimony requirements, let me first note that theCato Institute does not receive a single penny of federal money ofany kind.
Second, I wish to commend you and your staff for your leadershipin identifying wasteful and unnecessary spending in thebudget--particularly in the area of corporate subsidies. Americansare demanding deficit reduction and government downsizing that isfairminded and balanced--meaning that the budget knife is notspared the most politically well-connected K Street specialinterests. Both the social welfare and corporate welfare statesneed to be reformed with equal urgency. You are absolutely rightwhen you argue that the 104th Congress enacted reforms in socialwelfare programs and that now the 105th Congress must adopt welfarereform part II: eliminating the corporate safety net.
In my testimony today, I will highlight six points.
First, corporate welfare is a large and growingcomponent of the federal budget.
Two years ago Dean Stansel and I co-authored a Cato Institutereport entitled "Ending Corporate Welfare as We Know It" in whichwe estimated that the federal government now spends roughly $65billion each year on more than 125 programs that provide directtaxpayer assistance to American businesses. This dollar estimatehas been generally substantiated by the General Accounting Officeand other research organizations, such as the Progressive PolicyInstitute.
In our most recent report, which I wish to submit for therecord, we found that these subsidies were actually expanded byabout 1.5 percent on average in FY1997. Table 1 shows the resultsfor the fifty-five most egregious examples of corporate subsidyprograms.
The Clinton administration had been a fervent defender oftaxpayer aid to American industry. Last year, the White Houserequested a 3.6 percent hike in funding for corporations. In thisyear's budget request, the president has called for furtherincreases. Sixteen programs would receive an increase of 10 percentor more. Eight would see their budgets go up by 20 percent ormore.
Second, ending all corporate welfare would generateenough savings to entirely abolish the capital gains and estatetax.
To put the cost of these $65 billion in industry subsidies inperspective, if all federal spending programs that aid businesswere purged from the budget, the entire budget deficit could beeliminated for the first time in 30 years. Alternatively, ifCongress were to eliminate all corporate spending subsidies, thiswould generate enough savings to entirely eliminate the capitalgains tax and the federal estate tax--forever.
This point bears repeating: we could have a zero capital gainstax in the United States and a zero estate tax for the amount ofmoney 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 allegedbenefits to American industry and U.S. competitiveness fromprograms such as the Manufacturing Extension Partnership (MEP), theAdvanced Technology Program (ATP), and other business-relatedactivities of the Department of Commerce. But can anyone reasonablyargue with the proposition that if American businesses and workerswere competing in global markets today under a regime of zerocapital gains tax and zero estate tax, this would do far more toincrease their competitiveness than 100 Department ofCommerces?
Third, ATP and MEP are the essence of corporatewelfare.
Dean Stansel and I have defined corporate welfare as follows:corporate welfare is the use of government authority to conferprivileged or targeted benefits to specific firms or specificindustries. I would argue that the explicit purpose of programslike the ATP and MEP is precisely to provide targeted benefits tospecific firms and industries. In most other corporate welfareprograms, subsidizing business is a derivative objective. At ATPAnd MEP the business subsidy is the objective itself.
Our latest study concludes that the Department of Commercespends $2.3 billion per year on 7 corporate welfare programs. Thefollowing five programs are the worst abusers:
Advanced Technology Program (1997appropriation: $225.0 million). The mission of the ATP is toenhance the competitiveness of U.S. companies by helping them makebetter use of basic research in new technologies. In recent years,ATP R&D grants have gone to huge high-tech corporations likeCaterpillar, General Electric, and Xerox. ATP was zeroed out byCongress in the 1996 budget cycle, but President Clinton vetoedthat bill and secured a compromise that allowed ATP to survive witha 49 percent budget cut. In 1997, ATP's budget was actuallyexpanded by 2 percent.
Economic Development Administration (1997appropriation: $373.5 million). The Economic DevelopmentAdministration seeks to improve distressed economies by providinggrants and loans to state and local governments, nonprofitorganizations, and private businesses in areas with high andpersistent unemployment. EDA's activities include technicalassistance grants, which provide technology transfer assistance toprivate firms, and development grants, which fund the constructionand improvement of infrastructure for the development and expansionof private industrial parks and ports. EDA also funds the TradeAdjustment Assistance program, which doles out grants to assistprivate firms and industries that are deemed to have been adverselyaffected by increased imports.
International Trade Administration (1997appropriation: $270.0 million). The International TradeAdministration conducts export promotion programs directed towardspecific industry sectors through its Trade Development Program.ITA's U.S. and Foreign Commercial Service provides counseling toU.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, andinvestigates economically antiquated antidumping and countervailingduty cases. All those activities are more appropriately conducteddirectly by the private businesses and industries they are intendedto benefit.
Manufacturing Extension Partnership (1997appropriation: $95.0 million). MEP provides grants to fundthe creation and maintenance of dozens of extension centers toassist small and medium-sized manufacturing firms in making use ofmodern manufacturing and production technologies. General taxpayerfunds should not be used to provide assistance to one specificindustry, as they are in the case of MEP. This assistance, ifnecessary, should be paid for directly by the manufacturing firmsthat use it, not the American taxpayer.
Minority Business Development Agency (1997appropriation: $28.0 million). The Minority BusinessDevelopment Agency attempts to promote the development ofminority-owned businesses through the provision of management andtechnical assistance and assistance in gaining access to capital.MBDA activities often focus on helping minority-owned businesseschase government contracts. To encourage the development ofminority-owned businesses, the federal government should insteadfocus on removing the many government impediments to the formationand growth of minority firms, such as unnecessary regulations andthe onerous burden of taxation.
Fourth, the ATP and the MEP are modeled after failedindustrial policy initiatives in Europe and Japan.
In testimony before the House Science Committee earlier thisyear, Dr. Mary Goode, Underscretary for Technology at the CommerceDepartment, argued that other industrial nations are "rapidlyexpanding their scientific and technological capabilities,establishing a sophisticated array of technology policies, andexpanding their investment in R&D." This is a standard argumentin favor of corporate welfare: other nations are doing it, soshould we. As the late Commerce Secretary Ron Brown put it in 1995,"shutting down the Commerce Department would be the equivalent ofunilateral economic disarmament."
The inference in these statements is that European nations aregaining a competitive economic advantage by pursuing thesecorporate welfare strategies. But where is the evidence? Just acursory examination of the economic woes in Europe today, whereindustrial policy initiatives--of the kind that MEP and ATP aremodeled after--are systemic, suggest that if anything the strategyis economically debilitating. Table 2 shows that Germany, France,Sweden and other nations that subsidize major industries withtaxpayer dollars have unemployment rates at least 50 percent aboveours in the United States. These nations have propped up large,bureaucratic, inefficient corporations through billions of dollarsof taxpayer subsidies. The burden of these subsidies now appears tobe borne by the small business and entrepreneurial sector of theeconomy that has been the engine of growth and job creation in theUnited States. These are the very policies that have led tosuffocatingly high tax rates in these nations, and thus a massiveexodus 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 thanall of Europe and Japan--combined. Why at a time when industrialpolicy initiatives are in such universal disrepute around theglobe, would the United States want to adopt such anti-competitivestrategies? This can only be describes as chasing the losers.
Fifth, ATP unwisely converts the government into therole of investment banker.
The U.S. is the world leader in financial services today. Wehave the most sophisticated capital markets on the globe. Thesecapital markets work to allocate scarce investment capital tobusinesses, technologies, and industries that provide the highestrate of return. The investment community and especially venturecapital markets pick industrial winners and losers every day. Theydo this with their own money and with their clients' money. If theydo it poorly, they are out of business. This is the very essence ofour modern-day capitalist system.
The underlying theology of the ATP is that government canidentify companies and emerging technologies that warrant capitalfinancing better than the proven experts in the financial marketscan. This is government hubris in the extreme. Moreover, we havehad decades of experience with such programs--and the results havebeen universally disappointing. Examples:
* In the mid-1980s the Department of Commerce issues $1.23billion in loans and loan guarantees. Not even half were paidback.
* The Supersonic Transport -- considered an essentialtechnological innovation in transportation by the feds -- was givenmore than $900 million of taxpayer subsidies. The plane was neverdeveloped in the U.S. and is a commercial flop in Europe.
* In the late 1970s the Carter Administration created theill-fated Synthetic Fuels Corporation to develop a cost-effectivealternative to fossil fuels. The SFC was ended in 1981 after $1billion was wasted and not a single kilowatt of electricity wasgenerated.
But the best example of what happens when the federal governmentgets into the business of commercial banking is the Small BusinessAdministration. The ATP is analogous to an SBA for high-techcompanies. Yet the SBA has a dismal lending record. Historically,many SBA loan programs have had default rates above 20 percent. Fora commercial bank, a 5 percent default rate on commercial loans isconsidered unhealthy.
On a macro-economic level, there is no evidence that the federalgovernment's already huge investment in science and high-techinitiatives has benefited the economy. For example, despite morethan $20 billion spent since the end of World War II on federalexpenditures in the area of science and technology, Terence Kealydemonstrates in his book The Economic Laws ofScientific Research, that these funds have had no impact inincreasing GDP in the U.S.
Sixth, the ATP and other Commerce Departmentcorporate welfare programs put government up for sale to thehighest bidder.
In the world of corporate welfare, big is beautiful. Apreponderance of the high technology subsidies are diverted to manyof America's largest companies, those with K Street lobbyists thathelp chase down "free" federal dollars. For example, in 1995 thePhiladelphia Inquirer monitored the largest beneficiaries ofgovernment technology subsidies from 1990 to 1994. Eight of thelargest recipients alone had 1994 profits of just below $25billion. (Table 3 shows the lucky winners.) Can anyone reasonablyargue that at a time when the United States government is running$100 to $200 billion annual budget deficits, there is either equityor economy in having Uncle Sam sending out checks to billionairecompanies? Can anyone argue that these companies cannot fund vitalR&D projects and product development strategies without thehelp of Uncle Sam?
WELFARE TO THE WELL-OFF
|Company||1990-94 TechnologySubsidies||1994 Profits|
Source: Philadelphia Inquirer, "How Billions in TaxesFailed to Create Jobs," June 4, 1995.
But what is even more insidious is that Commerce Departmentcorporate welfare grants appear to be closely tied to campaigndonations. Table 4 lists 13 large ATP award winners with thecontributions made to the two parties--the DNC and the RNC. ATPappears to be little more than a cash-in, cash-out system. The bestway to end this symbiotic relationship between industry andgovernment is to shut down the cash dispensing programs that invitecorruption.
|ATP Award Winners 1992-95||($ 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 ofdenigrating the contributions of these great and successfulcorporations. And I do not come to the issue with an anti-business,or anti-big business motivation. To the contrary. I want to seeU.S. companies like MCI And General Motors dominating in globalmarkets. The good news is that American firms are out-competingtheir foreign competitors today in industries across theboard--from microchips to potato chips. Mostly these U.S. firms arewinning without the help of government "aid."
It is not pro-business for government to try to help businessesone at a time--as seems to be the overriding mission of theDepartment of Commerce. It is not free enterprise for thegovernment to be picking winners and losers in high technologymarkets--or in any industry. The way that the United States Senatecan help create more Microsofts, more Intels, more FederalExpress's, and more MCI's is not to have government go searchingfor them. It is to cut taxes, cut government spending, andstreamline anti-business regulations that cause more problems thanthey solve.
A good way to start this crusade to keep American industrycompetitive is to abolish the ATP and the MEP and the rest of thecorporate welfare state that impedes the free market fromfunctioning.