Bureaucrats as Venture Capitalists?

Corporate welfare is something we love to hate. On the political left, economist and former Secretary of Labor Robert Reich derides it as "business subsidies that don't make sense." The consumer watchdog group Common Cause estimates that federal subsidies to U. S. businesses amount to more than $150 billion annually in various manifestations, including "direct payments to companies, provision of public goods or services at below-market value, federal purchases of goods or services at above-market value, federal tax breaks, and exemptions from otherwise applicable laws." Aggressive, highly competitive entrepreneurs and business executives also oppose corporate welfare, which, they say, distorts the marketplace by substituting bureaucrats' amateur judgments for market forces. Worse still, American industry falls victim to the vicious circle created by government taxing and spending to "support" commercial growth. With corporate taxes high, companies lobby for give-backs to remain competitive--leading to higher taxes and a new tax-and-spend cycle. The form of the give-backs also warrants concern. Many just don't make sense. A case in point is the Commerce Department's Advanced Technology Program (ATP), a perennial favorite of the Clinton administration. The administration has just proposed a 34.7 percent budget boost next year, to $260 million, with a target of $500 million by 2002. Among the general competition awards announced last year, project after project focused on relatively late-stage applied research that, while unlikely to contribute substantial new knowledge, may advance product development for an individual company. ATP's 62 general competition awards in 1997 averaged $2.55 million per project at a time when eminent laboratories at major research universities routinely operate on no more than a few hundred thousand dollars annually. If the program did not exist, most of the work funded by ATP would be undertaken anyway by the private sector. The recipients of ATP grants are often America's largest, most successful high-tech companies--including, last year, IBM, Chevron, and G.D. Searle--for work that is highly focused, applied, and commercial. A far more effective use of federal funds is to support early-stage, pre-commercial research that lies upstream of what companies can typically afford. Such basic research generates new knowledge that could be applicable to many companies and industrial sectors and even spawn whole new industries. (Although such early basic research may provide great benefits to many people, companies have little incentive to make the investments because they cannot expect to capture profits from those social benefits.) This is the approach taken by the highly successful programs of the U.S. National Institutes of Health and National Science Foundation. As the world's largest supporters of science and technology, they have invested in the essential fundamental research that generated entirely new fields of technology and industry, including biotechnology, stroboscopy, and fiber optics. ATP awards are also inefficient. General Accounting Office audits have found that many ATP grantees charge "overhead costs" that exceed actual research expenses. The ATP grants clearly fall within Reich's definition of governmental "business subsidies that don't make sense." Some industry executives defend the ATP program, however, as a source of "risk-sharing" capital that enables them to undertake research that otherwise they would not be able to afford. T.J. Rodgers, CEO of San Jose, Calif.-based Cypress Semiconductor Corp., is, emphatically, not one of them. As a spokesman for a group of companies calling for an end to corporate welfare, Rodgers cites examples of the ATP's invidious effects. C-Cube Microsystems of Milpitas, Calif., a leader in video compression technology that made possible digital TV and small-dish satellites, lost money for years while its investors waited for the technology to catch on. The company's investors paid full fare, while C-Cube's $1.2 billion rival, LSI Logic, also of Milpitas, was being subsidized with ATP awards. The Commerce Department appears to have modeled ATP on the successes of America's venture capitalists--but with the handicap of bureaucrats trying to pick the winners and losers among high-tech projects. The "essential features of the ATP," as described on its Web site (http://www.atp.nist.gov), are virtually indistinguishable from those of venture capital firms: to "promote large economic benefits [and]...work as a partner with industry." We are told that "projects are selected on the basis of both technical and business merit" and that ATP provides "direct support to for-profit companies of all sizes." ATP even uses taxpayers' dollars to evaluate grantees' business plans. If they are thought to be deficient, "The ATP will contract with private firms to provide business development support to ATP-funded companies that need such assistance." Who would you prefer to make strategic decisions for your high-tech business--or one whose stock you own? Uncle Sam? Or experienced entrepreneurs, venture capitalists, and the marketplace? Just ask William Hewlett, David Packard, and Bill Gates. Henry I. Miller is a senior research fellow at the Hoover Institution and the author of Policy Controversy in Biotechnology: An Insider's View (Austin, Texas, R.G. Landes Co., 1997).

Bureaucrats as Venture Capitalists?

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