Commerce Department Restructuring

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I want to thank the committee for the opportunity to testifytoday on plans to restructure or dismantle the Commerce Department.I shall address myself principally to the National Institute ofStandards and Technology's Advanced Technology Program (ATP). Butthis program is just one example of many government efforts toadvance science and technology by passing out taxpayers' dollars. Isubmit that most of these efforts are ill- founded and that thisdiscussion of the Commerce Department should open the generalquestion of the government's proper role in science andtechnology.

Dismantling Commerce.

Before considering technology programs I want to endorse apolicy of dismantling the Commerce Department piece by piece. Itwould be legislative slight-of-hand to retain most of the CommerceDepartment's activities and functions by transferring thempiecemeal to other departments, perhaps cutting back on someoverhead and a few of the more clearly expendable offices. I notethat starting around 1986 the Mexican government claimed to befollowing a policy of privatization while in many cases onlyreorganizing bureaus and changing the titles on the office doors.Those of us who followed events in that country saw through thissham. While Mexico went on to pursue genuine privatization, thesort of tricks they occasionally played are well known and we willbe watching for them as Congress considers genuine downsizing ofgovernment.

Consider some examples of genuine Commerce Departmentdismantlement would include:

  • Abolish the U.S. Travel and Tourism Office, eliminate itsfunctions, and dismiss its personnel or allow them to take otheralready open positions for which they are qualified in otherdepartments. Every major hotel, amusement park, airline and stategovernment in the country floods the world with information aboutthe advantages of visiting America. This is not the federalgovernment's business in any case;
  • Abolish the Economic Development Administration, eliminate itsfunctions, and dismiss its personnel or allow them to take otheralready open positions for which they are qualified in otherdepartments. This 1965 Great Society program simply redistributestaxpayers' dollars to various parts of the country in wastefulpublic works and other projects;
  • Abolish the Minority Business Development Agency, eliminate itsfunctions and dismiss its personnel or allow them to take otheralready open positions for which they are qualified in otherdepartments. This agency contributes little help to minoritybusinesses. In any case, the government should not engage inrace-based discrimination. The best way to help small enterprises,minority or otherwise, is to keep taxes low and regulationsminimal.
  • Eliminate Commerce Department export promotion functions. Thisis a form of corporate pork that we can do without.

Commerce and Technology Policy

Turning now to technology policy, the Clinton administrationoriginally sought $491 million for FY 1996, up from the $431million in projected expenditures for FY 1995. Further, theadministration sought $147 million for the Manufacturing ExtensionPartnership (MEP) for FY 1996, up from some $91 million in thecurrent fiscal year. The House proposes to zero out theseprograms.

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. I frame the discussion and offer reasons asfollows:

  1. Generally, the federal government should only expend taxpayers'funds to protect directly life, liberty, property and the Republic,with the burden of proof for other expenditures place on thoseseeking funds or intervention.

    By this standard there is a prima facia federal government roleto perform a census function, since this power is granted it by theConstitution, and is necessary to determine voting eligibility.Similarly, the federal government has a Constitutional role in theprotection of intellectual property by granting patents. Thus thesetwo Commerce Department functions should be retained in some form,though preferably in other agencies. Other Commerce functions andexpenditures do not prima facia meet these criteria.

  2. Commerce handouts are justified by the fallacy of focusing onthe 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. Ifone dropped money from a plane over Washington and traced eachdollar, one would find first that everyone picking up the money washappy to have it, and, second, that most individuals spend themoney in ways we approve, for example, to purchase food or shoes,or to invest in a small business. But this would not be good publicpolicy. And third, the government would take credit for theprosperity of any individuals who picked up a few dollars, ignoringthe fact that in nearly all cases, individuals, like businesses,prosper through their own efforts, not through transfers of wealth.If these are the only arguments in favor of a particular governmentexpenditure, including the ATP and MEP, they are notsufficient.

  3. The market works well without government handouts.

    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.

  4. Bureaucrats have no special talent for picking winners andlosers.

    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.

  5. The government's record of success in subsidizing enterprisesis 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.
  6. The ATP is indeed a high-tech version of the Small BusinessAdministration (SBA): wasteful and counterproductive.

    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."

  7. The proposed ATP expenditures are the kind of corporate welfareagainst which the Clinton administration inveighs.

    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 1994recipients 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.

  8. The funding decisions for these handouts are often based onpolitical concerns.

    The list above of large corporations receiving funds is enoughto suggest that political influence plays a part in distributinglargess.

    Here I wish to call attention to the National Aeronautics andSpace Administration (NASA), not only as a wasteful agency, and onethat is an obstacle to space enterprise, but also as a highlypoliticized agency.

    In the early 1970s, as NASA saw Moon landings curtailed and Moonbases ruled out, it sought to preserve big budgets and staffs. Itsnew big-ticket project, the Space Shuttle, was sold to policymakersas a reusable and thus cheaper way to put payloads in orbit thanexpendable launch vehicles. It turned out to be more expensive thanexpendable launch vehicles. But many of the large contractorslobbied hard for the project.

    As NASA developed and flew early Shuttle missions, it had tofend off private competitors. In the late 1970s and early 1980sfederal agencies were forbidden to contract with the infant privatelaunch industry to put government payloads in orbit.

    In the early 1980s, as the Shuttle was seen as a costly whiteelephant, NASA needed a mission to justify the Shuttle's continuedexistence. Aside from any commercial or scientific benefits, anorbiting space station seemed to serve this purpose. Again, largecontractors led the lobbying for this project. Most spacescientists see the station as wasteful.

    A special Presidential Advisory Commission, chaired by MartinMarietta Corporation CEO Norman Augustine, in 1991 stated that "Wedo not believe that the space station ... can be justified solelyon the basis of the (non-biological) science it can perform, muchof which can be conducted on Earth or by unmanned robots."

  9. Some businessmen do realize that corporate welfare in the endonly 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 my companyand our industry.Why? Because they represent tax-and-spendeconomics--a brand of economics that is a known failure. I do notwant handouts. The men and women of our company do not wanthandouts. And if Congress wants to help American high technology,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.

  • The U.S. Constitution does not allow for government subsidiesof 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, [3] 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.

    Summary

    The bottom line is that Commerce Department 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.

    The United States and, for that matter, all Westernindustrialized democracies are struggling overcome the economicallydebilitating effects of their corporatist, government- dominatedregimes. Rearranging the deck chairs on the sinking ship is notenough. The federal government must shed entire functions andagencies. The Commerce department is a good place to start.

    Committee on Governmental Affairs
    United States Senate