By: James Sherk

9 July 2003 A Case Study in Corporate Welfare Spending: The Advanced Technology Program.

Christ informed Pilate that his "kingdom is not of this world," and nothing in either the gospels or the writings of the apostles suggests that Christ calls believers to use the power of the state to evangelize the world. However, American Christians live in a democracy, where the government is chosen by and responsible to the people. In the United States, Christians as well as non-believers elect the politicians who direct the actions of the secular government. In this environment, Christians have a responsibility to learn and educate themselves about the issues facing America, even if those issues do not directly relate to Christ's teachings. Participating in the civil society, Christians should be aware of and support policies that strengthen the United States and benefit the American people, and oppose policies that do not.

One such policy that Christians, along with all Americans, should learn about and oppose is corporate welfare. The Federal government spends approximately ninety billion dollars a year on these programs, and each dollar that the government spends is one dollar that private citizens do not. Every time that the government spends tax dollars on a program, it consumes resources and decreases the resources available for individuals to use to build their businesses and plan their own lives. In this time of terror and recession, with the budget deficit exceeding $400 billion, neither the Federal government nor the American people cannot afford these expensive and unnecessary handouts.

The ATP - an American Industrial Policy
The Advanced Technology Program, or ATP, is one of the government's least justifiable programs, a veritable case study of corporate welfare at its worst. Congress created the ATP in 1998, when Japanese style industrial policies, where the government directs investment towards favored businesses and technologies, seemed to point the way to economic prosperity. Of course, government directed expenditures frequently flow to the politically well connected, not the soundest investments, and the Japanese economy has since collapsed. Nonetheless, Congress continues to fund the ATP despite the fact that few Americans today seriously believe that industrial policies and government-business "partnerships" represent sound economic policies.

At a cost of $150 million a year, the ATP provides grants to selected American corporations to commercialize potentially profitable technologies. This isn't pure research, but rather using taxpayer dollars to convert already existing technologies into saleable commercial products. The American people have generously provided U.S. corporations with almost two billion dollars in grants since the program's inception.

The ATP awards grants to any firm that applies and whose proposals pass the internal evaluations. Whatever the intent of the program's creators, in the real world this results in firms either taking government money and spending it on projects they intended launch anyway, or investing in risky projects that they deemed unlikely to succeed, but which they were willing to spend someone else's money on in the hope that it might pan out. In either case the ATP uses the taxpayer's dollars poorly.

Public Losses, Private Gains
There is no reason that the taxpayers should have their earnings forcibly taxed away to fund the research and development budgets of large corporations. In fact, most ATP grants go to projects that the market would fund anyway - the Advanced Technology Program's largely replaces private investment with government grants. The General Accounting Office found that over half of all investment proposals that the ATP rejected at the final review stage were subsequently funded by private investments. Of course corporations gladly allow the government to subsidize their R & D budgets, but this does not make it good policy. ATP grants go to private firms - if the project succeeds then the corporation's shareholders get to keep the profits. If the project fails, then the taxpayers have covered the losses. Since private firms gain all the profit when they successfully commercialize technologies, they should be required to do their own work and put their own dollars at risk. It makes no sense to tax every American to benefit a relatively small number of private firms.

Fortune 500 Subsidies
The firms receiving ATP subsidies certainly have the resources to invest their own money, if they find the projects worthwhile. Not only does the ATP subsidize corporate research, it subsidizes research by the largest firms in America. Over forty percent of all ATP grants have gone to just forty Fortune 500 companies, with a collective one trillion dollars in revenue in 2002. Half of this funding went to just five firms. The largest recipient was IBM, which, despite earning over five billion dollars in profit in 2002, raked in $127 million in ATP grants over the past decade and a half. The sole effect of ATP subsidies to these Fortune 500 companies has been to transfer hundreds of millions of dollars from the government to corporate shareholders. Any Christian should find a program that redistributes wealth from poor and middle class taxpayers to wealthy executives and shareholders highly offensive.

Inherently Duplicative Research
The ATP does not even fund original research. The GAO and other independent audits have discovered that most ATP funding goes to research projects that duplicate the efforts of the private sector. In many cases the ATP awards grants to develop technology when hundreds, or even thousands, of patents for similar technologies have already been filed by the patent office. As the GAO reported, the problem of redundant research remains an inherent problem with the ATP for two reasons. First, to avoid conflicts of interest in awarding subsidies, ATP applications are reviewed by individuals with little knowledge of current research in the field. This largely eliminates the possibility of ATP employees awarding grants to colleagues or former employers, but also prevents them from identifying projects that duplicate current research. Secondly, virtually all private firms keep information about their R & D efforts private, in order to avoid informing their competitors about their progress until the products are ready to be produced and marketed. Since the ATP has no way of knowing what proprietary research the private sector conducts, it cannot avoid providing grants that replicate ongoing private sector research. The economic benefit of providing billions of taxpayer dollars to subsidize corporate research that already takes place in the status quo does not exist.

Misplaced Incentives
Furthermore, the government rarely subsidizes economically worthwhile projects. It has become a truism to observe that few individuals spend other people's money with the same care that they spend their own. The level of care drops further when the government provides the money. Since ATP officials are government employees, they also benefit from civil service protections that make it virtually impossible to fire them. The commercial success or failure of an ATP project has no effect whatsoever on a federal bureaucrat's career. Since they lack scientific and business expertise, ATP managers also have a poor idea of what projects are likely to succeed. Unsurprisingly, career government bureaucrats who spend government money, without any penalty for squandering it, have very little incentive to fund worthwhile projects. Consequently, only one third of all ATP projects result in a profitable commercialization. The remaining two thirds are expensive failures. Private employees, knowing the marketplace and facing the threat of unemployment if they fail, invest far more wisely than government officials.

The Failed History of Accuwave Corp.
The history of Accuwave Corporation perfectly illustrates the problems that plague the Advanced Technology Program. In 1993 the ATP granted Accuwave two million dollars to develop wavelength division multiplexing (WDM) technology to increase the transmission capacity of fiber-optic cables. However, since the late 1980s private firms had expected fiber-optics to grow into a multi-billion dollar industry, which it subsequently did, and heavily invested their own funds in commercializing WDM technology. While the ATP subsidized Accuwave, Bell Labs (now Lucent), Ciena Corp., and Nortel Networks used private money to research alternate approaches. Even before the ATP grant, the government had issued multiple WDM related patents. The GAO found that between 1985 and 1999, the patent office issued in excess of 2,000 patents for WDM "components, systems, and concepts." The taxpayer subsidy to Accuwave wholly duplicated existing private research.

Accuwave, however, had a unique approach to developing WDM technology that involved volume holography, which was one of the reasons they received ATP funding. No other private firm seriously considered using their own money to explore volume holography as a method of developing WDM technology. This was because private companies had already tried and rejected volume holography in the seventies and eighties. All previous volume holography projects failed because of severe problems with signal loss and filter deterioration. No private firm or investor would fund another attempt to commercialize the technology. Instead, the government decided to do it for them. Despite the fact that both the technical and business reviewers who evaluated Accuwave's proposal believed that it would fail, senior ATP officials overrode their objections and awarded the grant in 1993.

At the same time the government invested taxpayer dollars in volume holography, Ciena Corp. pursued an alternative fiber-Bragg gratings approach. Founded in 1992, and spending $40 million in private venture capital, Ciena announced the successful development of a 16-wavelength WDM system in 1996. Accuwave, having unsurprisingly failed to make substantial progress with volume holography, having spent its entire ATP grant, and incapable of raising additional private capital, filed for bankruptcy shortly after Ciena's announcement. The two million dollar taxpayer investment in Accuwave achieved absolutely nothing.

The Lessons of the ATP
The Advanced Technology Program is not an isolated example of a failed corporate welfare program. Virtually all government officials lack the knowledge and the incentives to wisely invest the tax payer's money. Furthermore, even if an investment does succeed, private shareholders receive all the benefits, while all other taxpayers receive nothing. Corporate America has all the resources necessary to fund its own research and development. The forty Fortune 500 companies that have received 40% of all ATP grants had a collective one trillion dollars in revenue in 2002. This is typical of most corporate welfare programs - the government gives money to firms with plenty of their own money to spend. General Electric, Ford, Dow Chemical, IBM, and even Harley Davidson, receive millions in Federal funds despite the fact that they have more than enough money to prosper without handouts. If a business finds a proposal worthwhile, it can and should invest its own money into it. Since firms receive all the profits if a project succeeds, it is only fair that they put their own money at risk. In this era of mounting deficits, the government should not spend taxpayer resources to pad the corporate bottom line.

Sources

For information on the ATP investment in Accuwave, and information about how and why the ATP awards grants that duplicate private research, see "Advanced Technology Program: Inherent Factors in Selection Process Could Limit Identification of Similar Research," April 2000, the General Accounting Office.

Data on ATP grants to Fortune 500 companies comes from a Heritage Foundation analysis of data publicly available at: http://www.atp.nist.gov/eao/states/statepartners.htm

.