Uncle Sam Shouldn’t Toss Money Into R

Should the federal government use taxpayers’ money to develop new technologies? Should the government subsidize potential economic winners to encourage their development? Does ideology prevent the Bush Administration from adopting an industrial policy that could strengthen American industry?

One of my colleagues who writes in this space says that only stubborn, ideological belief explains why the government does not invest in priority industries such as consumer electronics, microchips and others. The usual cry about losing the technological race is followed by a common but fallacious argument: The economy is not the pure model of the textbooks; government now has a large influence on the economy, so it is only a matter of straightening out the priorities. Subsidies for new technology can be paid for by reducing wasteful government spending for agriculture, housing and defense.

I don’t know whether to laugh or sigh. Anyone can come up with a list of priorities and assume a government with infinite wisdom that wants to do good things because they are right. Doesn’t it beg the question to leave the matter there? How will a government--specifically our government--avoid the waste, the bureaucracy and the costly mistakes that characterize many (but not all) government programs? How does it avoid the pressures from voters and interest groups that are part of the political process in our democracy? What is the government’s record on previous priority programs?

President Lyndon B. Johnson declared war on poverty 25 years ago. As Charles Murray showed so well in his book “Losing Ground: American Social Policy 1950-1980,” the poverty rate declined much faster before than after the so-called war began. Largely as a result of Murray’s book, experts debate whether most of the billions of dollars spent in the war did more harm than good. The fact that the experts do not agree on the answer says a lot.

President Richard M. Nixon declared war on cancer. Billions of dollars later, experts debate whether the increased spending contributed much to reduce the death rate from cancer. Some reductions in the death rate have occurred, but many are the result of earlier detection and greater public awareness. Perhaps there will be a great payoff in the future, but at the very least it is unclear, after almost 20 years, whether the public has received a return on its investment.

Are more examples needed to illustrate that shifting responsibility for investment, research or spending decisions to government is not a sure-fire way to pick winners and avoid losers? Vocal interest groups managed to increase spending for AIDS research without any evidence that the money taken from other types of spending--including private spending--added to society’s wealth or well-being. There is nothing unusual about that decision. Public passions and fads often become public spending priorities in a democracy.

Is it ideology or evidence that tells us that government is failing at some of its traditional tasks? Public education, once considered an outstanding success, is now widely regarded as failing to train a generation in basic skills. Protection of citizens and their property against crime, one of the earliest functions of government, is far below the standards achieved a generation ago.

Is it ideology that tells us that government involvement in agriculture and the thrift industry has produced a costly mess? After 1985, the government paid farmers to kill more than 1 million cows and remove millions of acres from production. Government programs raise prices to consumers, then give food stamps to part of the population to offset some of the price increases caused by these policies. Rep. Dick Armey (R-Tex.) estimates that the total cost of these programs is about $20 billion a year in taxes and $10 billion in higher prices. This is a pittance compared to the thrift bailout, now estimated at $150 billion to $200 billion and rising. Here the record of government management is atrocious. They allowed the cost of the bailout to rise from about $5 billion in 1982 despite frequent warnings about the mounting costs from both inside and outside the government.

Is there any reason to believe that increasing government responsibility for research, development, investment and output will more likely produce startling or even adequate return instead of failures such as those in education, crime, agriculture and elsewhere? Certainly, there are examples of governments making good decisions, even better decisions than the marketplace. The reason is not hard to find. A barrel of monkeys will type all the words in Shakespeare if they are given enough time and paper. The issue is not whether the government has made good decisions at times. The issue is whether government has some special ability or expertise to manage research or investment.

Government has no comparative advantage in making decisions about research, development and investment. It is not that government officials are less smart or knowledgeable. There are three more fundamental reasons.

First, people are more careful about the risks that they take when they get the rewards and pay for the losses. Closing down the losers and continuing to finance the potential winners requires tough judgments about what will be a winner or a loser, often in highly uncertain situations. There is no road map. Errors come from both sides: too much caution or too little. Government has no advantage, and many disadvantages, in making decisions of this kind.

Second, many complain that the private sector is overly concerned about short-term results. Despite frequent repetition, it is far from certain that this claim is true of all or even most industry. But, shifting decisions to government is not the way to lengthen decision horizons. Government is tied to the election cycle--the need to show or claim quick results in time for the next election. Government is also more prone than private investors to choose costly programs such as sending people to Mars or throwing additional resources into losing projects to avoid reporting failures.

Third, it is a mistake to centralize research in a government laboratory or in a consortium such as Sematech (to do research on semiconductors) or in the proposed Technology Corp. of America (to invest in new technologies) and other such schemes. The great strength of America’s research institutions, including research universities and private laboratories, comes from competition and diversification. Competition to be the first to make a new discovery is spurred by the knowledge that someone at another university has read the same technical papers and may be working on the same approach. Competition helps to maintain premier research institutions among America’s valuable assets. Diversification means that independent researchers, driven by competition, explore alternative technologies and alternative ideas leading to many different developments. Scientific meetings, competition for space in leading journals and competition for research funds, including government funds, weed out less attractive ideas.

Decisions about research, development and investment in new technologies are by their nature highly uncertain. Successful strategies in such cases almost always include pursuit of many different opportunities. One great source of strength in the present system is the diversity that comes from competition.

Does the system work perfectly? Of course not. Does the private sector always make the right choices? Of course not. But more than ideology is behind the Bush Administration’s conclusion that the present system works better than having government choose winners, losers and areas of research.