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THE ADVANCED TECHNOLOGY PROGRAM AND OTHER CORPORATE SUBSIDIES (Testimony)
THE ADVANCED TECHNOLOGY
PROGRAM AND OTHER CORPORATE SUBSIDIES
TESTIMONY
STEPHEN
MOORE
DIRECTOR OF FISCAL POLICY STUDIES
CATO INSTITUTE
WASHINGTON,
D.C.
BEFORE THE:
SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, RESTRUCTURING AND THE
DISTRICT OF COLUMBIA
JUNE 3,
1997
Thank
you Chairman Brownback for the opportunity to testify before
the Subcommittee on Government Management on the Advanced
Technology Program and other corporate subsidies. In keeping
with the truth in testimony requirements, let me first note
that the Cato Institute does not receive a single penny of
federal money of any kind.
Second, I wish to commend you
and your staff for your leadership in identifying wasteful
and unnecessary spending in the budget--particularly in the
area of corporate subsidies. Americans are demanding deficit
reduction and government downsizing that is fairminded and
balanced--meaning that the budget knife is not spared the
most politically well-connected K Street special interests.
Both the social welfare and corporate welfare states need to
be reformed with equal urgency. You are absolutely right when
you argue that the 104th Congress enacted reforms in social
welfare programs and that now the 105th Congress must adopt
welfare reform part II: eliminating the corporate safety net.
In my testimony today, I will
highlight six points.
First, corporate welfare
is a large and growing component of the federal budget.
Two years ago Dean Stansel
and I co-authored a Cato Institute report entitled
"Ending Corporate Welfare as We Know It" in which
we estimated that the federal government now spends roughly
$65 billion each year on more than 125 programs that provide
direct taxpayer assistance to American businesses. This
dollar estimate has been generally substantiated by the
General Accounting Office and other research organizations,
such as the Progressive Policy Institute.
In our most recent report,
which I wish to submit for the record, we found that these
subsidies were actually expanded by about 1.5 percent on
average in FY1997. Table 1 shows the results for the
fifty-five most egregious examples of corporate subsidy
programs.
The Clinton administration
had been a fervent defender of taxpayer aid to American
industry. Last year, the White House requested a 3.6 percent
hike in funding for corporations. In this year's budget
request, the president has called for further increases.
Sixteen programs would receive an increase of 10 percent or
more. Eight would see their budgets go up by 20 percent or
more.
Second, ending all
corporate welfare would generate enough savings to entirely
abolish the capital gains and estate tax.
To put the cost of these $65
billion in industry subsidies in perspective, if all federal
spending programs that aid business were purged from the
budget, the entire budget deficit could be eliminated for the
first time in 30 years. Alternatively, if Congress were to
eliminate all corporate spending subsidies, this would
generate enough savings to entirely eliminate the capital
gains tax and the federal estate tax--forever.
This point bears repeating:
we could have a zero capital gains tax in the United States
and a zero estate tax for the amount of money that we spend
in Washington handing out grants, subsidies, cut rate
insurance, loans, and loan guarantees to U.S. businesses. Now
you will hear throughout this hearing of all the alleged
benefits to American industry and U.S. competitiveness from
programs such as the Manufacturing Extension Partnership
(MEP), the Advanced Technology Program (ATP), and other
business-related activities of the Department of Commerce.
But can anyone reasonably argue with the proposition that if
American businesses and workers were competing in global
markets today under a regime of zero capital gains tax and
zero estate tax, this would do far more to increase their
competitiveness than 100 Department of Commerces?
Third, ATP and MEP are the
essence of corporate welfare.
Dean Stansel and I have
defined corporate welfare as follows: corporate welfare is
the use of government authority to confer privileged or
targeted benefits to specific firms or specific industries. I
would argue that the explicit purpose of programs like the
ATP and MEP is precisely to provide targeted benefits to
specific firms and industries. In most other corporate
welfare programs, subsidizing business is a derivative
objective. At ATP And MEP the business subsidy is the
objective itself.
Our latest study concludes
that the Department of Commerce spends $2.3 billion per year
on 7 corporate welfare programs. The following five programs
are the worst abusers:
Advanced Technology
Program (1997 appropriation: $225.0 million). The mission
of the ATP is to enhance the competitiveness of U.S.
companies by helping them make better use of basic research
in new technologies. In recent years, ATP R&D grants have
gone to huge high-tech corporations like Caterpillar, General
Electric, and Xerox. ATP was zeroed out by Congress in the
1996 budget cycle, but President Clinton vetoed that bill and
secured a compromise that allowed ATP to survive with a 49
percent budget cut. In 1997, ATP's budget was actually
expanded by 2 percent.
Economic Development
Administration (1997 appropriation: $373.5 million). The
Economic Development Administration seeks to improve
distressed economies by providing grants and loans to state
and local governments, nonprofit organizations, and private
businesses in areas with high and persistent unemployment.
EDA's activities include technical assistance grants, which
provide technology transfer assistance to private firms, and
development grants, which fund the construction and
improvement of infrastructure for the development and
expansion of private industrial parks and ports. EDA also
funds the Trade Adjustment Assistance program, which doles
out grants to assist private firms and industries that are
deemed to have been adversely affected by increased imports.
International Trade
Administration (1997 appropriation: $270.0 million). The
International Trade Administration conducts export promotion
programs directed toward specific industry sectors through
its Trade Development Program. ITA's U.S. and Foreign
Commercial Service provides counseling to U.S. businesses on
exporting and facilitates participation of U.S. firms in
trade shows. ITA also provides marketing services, develops
regional and multilateral trade strategies, and investigates
economically antiquated antidumping and countervailing duty
cases. All those activities are more appropriately conducted
directly by the private businesses and industries they are
intended to benefit.
Manufacturing Extension
Partnership (1997 appropriation: $95.0 million). MEP
provides grants to fund the creation and maintenance of
dozens of extension centers to assist small and medium-sized
manufacturing firms in making use of modern manufacturing and
production technologies. General taxpayer funds should not be
used to provide assistance to one specific industry, as they
are in the case of MEP. This assistance, if necessary, should
be paid for directly by the manufacturing firms that use it,
not the American taxpayer.
Minority Business
Development Agency (1997 appropriation: $28.0 million).
The Minority Business Development Agency attempts to promote
the development of minority-owned businesses through the
provision of management and technical assistance and
assistance in gaining access to capital. MBDA activities
often focus on helping minority-owned businesses chase
government contracts. To encourage the development of
minority-owned businesses, the federal government should
instead focus on removing the many government impediments to
the formation and growth of minority firms, such as
unnecessary regulations and the onerous burden of taxation.
Fourth, the ATP and the
MEP are modeled after failed industrial policy initiatives in
Europe and Japan.
In testimony before the House
Science Committee earlier this year, Dr. Mary Goode,
Underscretary for Technology at the Commerce Department,
argued that other industrial nations are "rapidly
expanding their scientific and technological capabilities,
establishing a sophisticated array of technology policies,
and expanding their investment in R&D." This is a
standard argument in favor of corporate welfare: other
nations are doing it, so should we. As the late Commerce
Secretary Ron Brown put it in 1995, "shutting down the
Commerce Department would be the equivalent of unilateral
economic disarmament."
The inference in these
statements is that European nations are gaining a competitive
economic advantage by pursuing these corporate welfare
strategies. But where is the evidence? Just a cursory
examination of the economic woes in Europe today, where
industrial policy initiatives--of the kind that MEP and ATP
are modeled after--are systemic, suggest that if anything the
strategy is economically debilitating. Table 2 shows that
Germany, France, Sweden and other nations that subsidize
major industries with taxpayer dollars have unemployment
rates at least 50 percent above ours in the United States.
These nations have propped up large, bureaucratic,
inefficient corporations through billions of dollars of
taxpayer subsidies. The burden of these subsidies now appears
to be borne by the small business and entrepreneurial sector
of the economy that has been the engine of growth and job
creation in the United States. These are the very policies
that have led to suffocatingly high tax rates in these
nations, and thus a massive exodus of capital.
Table 2
Unemployment Rates in OECD Nations
Nation
Unemployment
Rate
February 1997
United States
5.3%
OECD-Total
7.5%
France
12.5%
Germany
9.6%
Spain
21.7%
Sweden
10.9%
United Kingdom
7.1%
Source: OECD News
Release, April 15, 1997.
Since 1980,
the United States has created more net new jobs than all of
Europe and Japan--combined. Why at a time when industrial
policy initiatives are in such universal disrepute around the
globe, would the United States want to adopt such
anti-competitive strategies? This can only be describes as
chasing the losers.
Fifth, ATP unwisely
converts the government into the role of investment banker.
The U.S. is the world leader
in financial services today. We have the most sophisticated
capital markets on the globe. These capital markets work to
allocate scarce investment capital to businesses,
technologies, and industries that provide the highest rate of
return. The investment community and especially venture
capital markets pick industrial winners and losers every day.
They do this with their own money and with their clients'
money. If they do it poorly, they are out of business. This
is the very essence of our modern-day capitalist system.
The underlying theology of
the ATP is that government can identify companies and
emerging technologies that warrant capital financing better
than the proven experts in the financial markets can. This is
government hubris in the extreme. Moreover, we have had
decades of experience with such programs--and the results
have been universally disappointing. Examples:
* In the mid-1980s the
Department of Commerce issues $1.23 billion in loans and
loan guarantees. Not even half were paid back.
* The Supersonic
Transport -- considered an essential technological
innovation in transportation by the feds -- was given
more than $900 million of taxpayer subsidies. The plane
was never developed in the U.S. and is a commercial flop
in Europe.
* In the late 1970s the
Carter Administration created the ill-fated Synthetic
Fuels Corporation to develop a cost-effective alternative
to fossil fuels. The SFC was ended in 1981 after $1
billion was wasted and not a single kilowatt of
electricity was generated.
But the best example of what
happens when the federal government gets into the business of
commercial banking is the Small Business Administration. The
ATP is analogous to an SBA for high-tech companies. Yet the
SBA has a dismal lending record. Historically, many SBA loan
programs have had default rates above 20 percent. For a
commercial bank, a 5 percent default rate on commercial loans
is considered unhealthy.
On a macro-economic level,
there is no evidence that the federal government's already
huge investment in science and high-tech initiatives has
benefited the economy. For example, despite more than $20
billion spent since the end of World War II on federal
expenditures in the area of science and technology, Terence
Kealy demonstrates in his book The Economic Laws of
Scientific Research, that these funds have had no impact
in increasing GDP in the U.S.
Sixth, the ATP and other
Commerce Department corporate welfare programs put government
up for sale to the highest bidder.
In the world of corporate
welfare, big is beautiful. A preponderance of the high
technology subsidies are diverted to many of America's
largest companies, those with K Street lobbyists that help
chase down "free" federal dollars. For example, in
1995 the Philadelphia Inquirer monitored the largest
beneficiaries of government technology subsidies from 1990 to
1994. Eight of the largest recipients alone had 1994 profits
of just below $25 billion. (Table 3 shows the lucky winners.)
Can anyone reasonably argue that at a time when the United
States government is running $100 to $200 billion annual
budget deficits, there is either equity or economy in having
Uncle Sam sending out checks to billionaire companies? Can
anyone argue that these companies cannot fund vital R&D
projects and product development strategies without the help
of Uncle Sam?
TABLE 3
WELFARE TO THE WELL-OFF
Company
1990-94
Technology Subsidies
1994
Profits
(Millions $)
Amoco
$23.6
$1,800
AT&T
$35.6
$4,700
Citicorp
$9.6
$3,400
DuPont
$15.2
$2,700
General Electric
$25.4
$4,600
General Motors
$110.6
$4,900
IBM
$58.0
$3,000
Motorola
$15.1
$1,600
Source:
Philadelphia Inquirer, "How Billions in Taxes Failed to
Create Jobs," June 4, 1995.
But what is even more
insidious is that Commerce Department corporate welfare
grants appear to be closely tied to campaign donations. Table
4 lists 13 large ATP award winners with the contributions
made to the two parties--the DNC and the RNC. ATP appears to
be little more than a cash-in, cash-out system. The best way
to end this symbiotic relationship between industry and
government is to shut down the cash dispensing programs that
invite corruption.
TABLE 4
CASH-IN, CASH-OUT?
1996
Contributions to
DNC
RNC
ATP Award Winners 1992-95
($ Thousands)
General Electric
$133
$130
BP America
57
218
Dow Chemical
91
268
AT&T
422
552
BellSouth
115
276
BellAtlantic
160
251
Boeing Co.
148
313
Chevron Co.
176
526
United Technology
Corp.
231
239
MCI
607
357
Time Warner
401
325
Textron Inc.
274
373
General Motors
77
426
Source: FEC
and Department of Commerce, 1997.
Mr. Chairman, I do not come
to this issue with the intention of denigrating the
contributions of these great and successful corporations. And
I do not come to the issue with an anti-business, or anti-big
business motivation. To the contrary. I want to see U.S.
companies like MCI And General Motors dominating in global
markets. The good news is that American firms are
out-competing their foreign competitors today in industries
across the board--from microchips to potato chips. Mostly
these U.S. firms are winning without the help of government
"aid."
It is not pro-business for
government to try to help businesses one at a time--as seems
to be the overriding mission of the Department of Commerce.
It is not free enterprise for the government to be picking
winners and losers in high technology markets--or in any
industry. The way that the United States Senate can help
create more Microsofts, more Intels, more Federal Express's,
and more MCI's is not to have government go searching for
them. It is to cut taxes, cut government spending, and
streamline anti-business regulations that cause more problems
than they solve.
A good way to start this
crusade to keep American industry competitive is to abolish
the ATP and the MEP and the rest of the corporate welfare
state that impedes the free market from functioning.
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