Business Subsidies

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Chris Edwards and Tad DeHaven

February 2009

Overview
Technology Innovation Program
Manufacturing Extension Partnership
Minority Business Development Agency
Fisheries Subsidies
General Problems with Business Subsidies
 

Overview

The mission of the Department of Commerce is to "foster, promote, and develop the foreign and domestic commerce" of the United States. To the extent that this mission includes promoting free trade, removing interstate trade restraints, and reducing barriers to investment, the department's mission makes economic sense. Indeed, some of the department's efforts to reduce trade barriers are laudatory.1

However, a number of Commerce programs subsidize particular companies and activities, which distorts the economy and increases tax burdens. The department's business subsidies are not huge—a few hundred million dollars annually—but this "corporate welfare" should be eliminated nonetheless. The following sections describe some of the department's business subsidy programs, and concludes with a summary of the general problems with such corporate welfare.
 

Technology Innovation Program

The Technology Innovation Program (TIP) was created by the America Competes Act of 2007. The program replaced the previous Advanced Technology Program (ATP) and it costs taxpayers about $70 million annually. TIP provides grants to small and medium-sized companies to "support, promote, and accelerate innovation in the United State through high-risk, high-reward research in areas of critical national need."2

The idea that government subsidies are needed to support "high-risk, high-reward" investments does not hold water. The private sector undertakes risky projects all the time. Consider the growing interest in private space travel spurred by the 2004 launch of SpaceShipOne, the world's first private manned space flight.3 That flight was funded by Microsoft co-founder Paul Allen, and other wealthy entrepreneurs have launched their own space projects, including PayPal's Elon Musk, Virgin Group's Richard Branson, and hotel developer Robert Bigelow. These ventures may succeed or they may fail, but they suggest that no innovation that has a big potential payoff is too risky for private entrepreneurs to explore.

TIP's promise of investing in risky but "high reward" projects is certainly overconfident. With fast-changing technology markets, no one knows whether risky ventures will end up being "high reward" or being flops. Even the smartest venture capitalists end up investing in many duds, but at least the costs of those failures are borne by private investors. With TIP, the costs of failed investments are borne involuntarily by taxpayers.

The idea that government should act like a venture capitalist, through programs such as TIP, is fraught with contradictions. TIP is supposed to give grants to worthy companies that cannot find private funding, but why should the government fund activities that have been rejected by private investors? If a project is too risky for venture capitalists, then it is too risky for federal taxpayers as well.

Alternatively, it might be the case that programs such as TIP and ATP attract companies that have second-rate ideas and the companies know it, so they don't bother to look for private funding. A Government Accountability Office study suggested that this might often be the case, finding that most companies that applied for ATP grants had never even looked for private capital.4

Another possibility might be that some companies that seek federal funding could get private funding if they looked for it. The GAO suspected that many of the projects funded by ATP might otherwise have been funded privately.5 In this case, federal funding is simply duplicative of private sector financing.

The ATP was created in the 1980s, when there were concerns that the United States was lagging Japan in innovation. Many pundits thought that the wave of the future was central planning of technology through agencies such as Japan's MITI. But MITI turned out to be a big failure.6 Its computer ventures were a flop, and it infamously provided bad business advice to Honda and Sony. Japan's industrial success until the 1980s was the result of intense domestic competition—in automobiles, motorcycles, steel, and robotics, and other industries—not a result of government planning.

Experience in the United States, Japan, and Europe has shown that government subsidization of technology does not work.7 The good news is that government subsidies are not needed, because U.S. venture capital and angel investors pump $50 billion or more annually into innovative young firms.8 And there would be even more funding of private innovation if policymakers freed U.S. capital markets from excessive tax and regulatory burdens.9
 

Manufacturing Extension Partnership

The Department of Commerce spends about $90 million annually on the Manufacturing Extension Partnership. The MEP is a nationwide network of extension centers that provide technical and managerial assistance to small and medium-sized firms. Federal funds pay for one-third of the costs of MEP centers, with the balance of costs being paid by state and local governments and the private sector. About 24 percent of federal MEP funding goes toward federal administration and about 76 percent goes to the extension centers.10

Like the TIP program, MEP originated from concerns about U.S. competitiveness in the 1980s. The original MEP legislation intended federal funding to be temporary and end after six years, and more recently the George W. Bush administration argued that it was time for federal funding to end.11 However, federal funding for MEP survives and the Competes Act of 2007 added a new MEP grant for businesses "to solve new or emerging manufacturing problems."12

MEP's strategy to disseminate ideas about new production techniques is duplicative of mechanisms already in place in private markets. For example, engineers and scientists often move back and forth between firms, which spreads knowledge of the latest techniques throughout the economy. Similarly, entrepreneurial people often leave established companies to launch their own start-up firms, and they carry technical knowledge with them.

Can the MEP do any better than such market mechanisms? A GAO survey of firms utilizing the MEP program found that the majority had a favorable view of the services provided. However, those firms that had paid fees for MEP assistance were far less likely to be as positive as those that did not.13 That suggests that MEP services are not particularly valuable to many users.

Those companies that do find MEP services valuable should be willing to pay for such help from private consultancies. Indeed, MEP's description of its own activities sounds like a business consultancy: "MEP will serve as business and technology advisors for manufacturers. MEP will work with manufacturers on the formation of key business strategies, development of focused business plans, and the evolution of growth initiatives that allow manufacturers to aggressively compete."14

That does not sound like something that the government should be doing. It suggests that the government is unfairly arming certain companies in order to do battle with other companies in the marketplace. Rather than playing favorites, the federal government ought to create an attractive environment of low taxes and light regulation so that all American businesses can "aggressively compete" in national and international markets.
 

Minority Business Development Agency

The Minority Business Development Agency was created in 1969 by an executive order issued by President Richard Nixon.15 The agency is supposed to provide management and technical services to minority-owned businesses, and its budget in fiscal 2008 was $29 million. It funds a nationwide network of Minority Business Development Centers, Native American Business Development Centers, and Minority Business Opportunity Centers. These centers are run by state and local governments and private organizations.

The essence of the MBDA is bureaucracy. Of the total budget in 2008 of $29 million, just $12 million went toward grants to the business centers.16 About $11 million went to wages and benefits for the MBDA's 100 employees, and $6 million went to headquarters administrative costs. The latter expense include large fees to Washington lobbyists and public relations experts, such Felix R. Sanchez, who has received $1.35 million from MBDA.17

MBDA grants go to groups such as the Los Angeles Urban League, the City of Birmingham, the Milken Institute, and Grijalva and Allen. The latter is a for-profit consulting firm that has received millions of dollars to manage business centers in Texas. The firm's website notes that "to be eligible for services you must be socially or economically disadvantaged. African Americans, Hispanic Americans, Asian Americans, Asian Indians, Pacific Islanders, and Native Americans automatically qualify."18

Yet organizations funded by the federal government have no business favoring people of some ethnic backgrounds over others. Agencies such as the MBDA have no place in the race-neutral government that Americans should strive for. Besides, even a brief review of the agency's spending reveals that most goes toward sustaining the agency's Washington bureaucracy and consulting contracts, and only a fraction trickles down to small businesses, minority or not. A recent report by the Department of Commerce Inspector General found that the MBDA's claims of running successful programs that helped businesses were generally not substantiated.19

Government programs are not the solution to increase minority entrepreneurship. A detailed survey by the National Federation of Independent Business found that most of the 10 "most severe problems" for small businesses were caused by government. Those included: "federal taxes", "property taxes", "tax complexity", "unreasonable regulations", "state taxes", and "workers' compensation costs."20 Thus, the government could greatly help all businesses, including minority businesses, if it simply got out of the way of productive entrepreneurs.
 

Fisheries Subsidies

The Department of Commerce National Marine Fisheries Service funds a variety of subsidies for the fishing and aquaculture industries. While most of the NMFS budget is for general science, it also promotes exports, gives operating assistance, and provides other direct benefits to businesses. The total annual NMFS budget is more than $700 million, but the cost of industry subsidies is some fraction of that.21 Here are some of the fisheries subsidies that should be ended:

  • Fisheries Finance Program: Provides about $28 million a year in financing for fishing vessels, shoreline facilities, and aquaculture facilities.22
  • Fisheries Disaster Assistance: Provides grants to fishing communities (including boat owners, operators, crew, and fish processors) that are affected by hurricanes, algae blooms, fishing restrictions, and other adverse events.
  • Fishing Capacity Reduction Programs: Subsidizes the buyback of fishing vessels and fishing permits to prevent overfishing.
  • Saltonstall-Kennedy Grant Program: Provides about $7 million a year to fund research into aspects of U.S. fisheries, such as one study to develop marketing strategies for Great Lakes cod.23
  • Pacific Coast Salmon Recovery. Provides about $70 million a year to state governments for salmon restoration projects. Federal involvement should be ended, as this activity could be best handled by the states that have salmon resources.
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General Problems with Business Subsidies

With massive deficits facing the federal government, policymakers should be looking for areas to cut the budget. Corporate welfare spending at the Department of Commerce and other agencies should be a prime target. Following are some general reasons why business subsidies should be cut.

Unconstitutional. The Constitution gives Congress the power to "regulate Commerce . . . among the several States." That provides the federal government the power to remove barriers to interstate trade, not to hand out money to particular commercial interests.

Taxpayer Cost. Corporate welfare at Commerce is only a small portion of business subsidies in the federal budget, but it nonetheless imposes an unfair burden on taxpayers.

Uneven Playing Field. By aiding some businesses, corporate subsidies put other businesses that do not gain political support at a disadvantage. U.S. businesses are generally overtaxed and overregulated, thus it rubs salt in the wound when certain favored firms get special subsidies from the government. Further, when the government gives favors to some businesses, it invites a feeding frenzy of other businesses to hire lobbyists and demand their own hand-outs.

Government Is a Poor Decisionmaker. Private entrepreneurs and investors put careful thought into new ventures because they risk their own money. Many private investments don't work out, but at least they help markets figure out what will ultimately work. By contrast, government policymakers have little incentive to ensure that spending projects succeed because they are not risking their own money and they are virtually never fired.

Corruption. Corporate welfare generates an unhealthy relationship between businesses and the government. The more tentacles the government has into the economy, the more lobbying activity will be generated. The more subsidies it hands out, the more pressure lawmakers will be under to create new subsidies. As the ranks of lobbyists grow, more economic decisions will be made based on politics, more resources will be misallocated, and the nation's standard of living will be reduced.

Weakening of Private Sector. Corporate welfare draws talented people away from productive private pursuits and into wasteful political activities. When companies start chasing after hand-outs from Washington, they lose focus on generating returns in the private marketplace. Companies receiving subsidies become weaker and less efficient, and they take on riskier and more wasteful projects. Enron Corporation, for example, sought and received large federal subsidies to invest in risky and dubious foreign projects that ended up crashing to the ground.

Duplicative of Private Activities. Many federal subsidy programs attempt to duplicate activities that are already provided in private markets. The Commerce TIP program, for example, funds risky technology ventures, but that makes no sense because America has private investment markets that specialize in funding innovative technologies.

Picking Winners Doesn't Work. Over the decades, many federal initiatives have aimed to fund new technologies in energy, computers, and other industries. But the complexity of markets has made most of the government's efforts a failure. As noted, the experience of most industrial countries in trying to centrally plan innovation has been dismal.

In sum, the United States was a great economic power long before Commerce started handing out business subsidies. Its greatest economic successes, such as Silicon Valley's technology industry, were based on individual entrepreneurial achievement, not federal subsidies. Federal subsidies should be ended, and America should revive its entrepreneurial tradition by cutting taxes, regulations, and other barriers to growing businesses.


1 For example, the department has been critical of U.S. sugar trade barriers. See U.S. Department of Commerce, International Trade Administration, "Employment Changes in U.S. Food Manufacturing: The Impact of Sugar Prices," February 2006.

2 America Competes Act, Public Law 110-69, Section 28, August 9, 2007.

3 William Booth, "Starship Private Enterprise," Washington Post, June 22, 2004, p. A1.

4 Government Accountability Office, "Measuring Performance: The Advanced Technology Program and Private-Sector Funding," GAO/RECD-96-47, January 1996, p. 3.

5 Government Accountability Office, "Advanced Technology Program: Inherent Factors in Selection Process Are Likely to Limit Identification of Similar Technology," GAO-05-759T, May 2005, pp. 2, 3.

6 For a discussion, see Chris Edwards, "Entrepreneurs Creating the New Economy," U.S. Congress, Joint Economic Committee, November 2000.

7 For a discussion, see Chris Edwards, "Entrepreneurs Creating the New Economy," U.S. Congress, Joint Economic Committee, November 2000.

8 For venture capital data, see National Venture Capital Association at www.nvca.org.

9 Michael Malone, "Washington is Killing Silicon Valley," op-ed, Wall Street Journal, December 21, 2008.

10 This is a rough estimate based on TIP and MEP combined. See Budget of the United States Government, Fiscal Year 2009, Appendix (Washington: Government Printing Office, 2008), p. 229

11Budget of the United States Government, Fiscal Year 2009, Appendix (Washington: Government Printing Office, 2008), p. 229.

12 America Competes Act, Public Law 110-69, August 9, 2007.

13 Government Accountability Office, "Manufacturing Extension Programs: Manufacturers' Views About Delivery and Impact of Services," GAO/GGD-96-75, March 1996, p. 7.

14 Department of Commerce, Hollings Manufacturing Extension Partnership, "Next Generation Strategic Plan," March 3, 2006, p. 4.

15 For background information on the MBDA, see Dean Kotlowski, "Black Power-Nixon Style: The Nixon Administration and Minority Business Enterprise," Business History Review 72, no. 3 (1998): 409-445.

16Budget of the United States Government, Fiscal Year 2009, Appendix (Washington: Government Printing Office, 2008), p. 216. This figure is budget authority, not outlays.

17 Search in www.usaspending.gov.

19 See U.S. Department of Commerce, Inspector General, "Value of MBDA Performance Measures is Undermined by Inappropriate Combining of Program Results and Unreliable Performance Data From MBOC Program," FSD-17252-5-0001, September 2005.

20 National Federation of Independent Businesses, "Small Business Problems and Priorities," June 2008, www.nfib.com/object/2008problemspriorities.html.

21 NMFS spending details can be found at www.nmfs.noaa.gov/mb/budget.

22Budget of the United States Government, Fiscal Year 2009, Appendix (Washington: Government Printing Office, 2008), pp. 217-223.

23 Saltonstall-Kennedy reports are at www.nmfs.noaa.gov/mb/financial_services/skhome.htm.

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