Brian Riedl
Grover M. Hermann Fellow in Federal Budgetary Affairs

Before the

Homeland Security and Government Affairs Committee,
United States Senate
Washington, D.C.

May 26, 2005

My name is Brian Riedl. I am the Grover M. Hermann Fellow in Federal Budgetary Affairs at The Heritage Foundation. The views I express in this testimony are my own, and should not be construed as representing any official position of The Heritage Foundation.

Federal spending now tops $22,000 per household, the highest inflation-adjusted total since World War II, and $5,000 per household more than in 2001. Budget deficits topping $400 billion are forecast as far as the eye can see. Given the nation's budgetary challenges, the Advanced Technology Program (ATP) remains one of the least justifiable programs. The President and the House of Representatives both support ATP's abolition. The Senate should join them.

ATP was created in 1988, supposedly to provide research and development grants to help small businesses develop profitable technologies. In reality, ATP funnels taxpayer dollars to Fortune 500 companies. Between 1990 and 2004, 35 percent of all ATP funding was granted to Fortune 500 companies. Among the recipients:

• IBM has received $127 million;
• General Electric has received $91 million;
• General Motors has received $79 million; and
• Motorola and 3M have each received $44 million.

All in all, 39 Fortune 500 companies have received a total of $732 million in ATP subsidies. Mr. Chairman, this is the kind of spending that outrages taxpayers. At a time when the federal budget is deep in the red, there is no justification for taxing waitresses in Tulsa, or cashiers in Flint, in order to lavish hundreds of millions of dollars on Fortune 500 companies.

ATP's defenders claim that these subsidies generate greater technological innovation. They point out all the technologies on the market that ATP funded. Of course, ATP grants have funded some successful products. But the key question is whether the market would have produced those products even without ATP. Both economic theory and practice say, "Yes."

ATP does not fund basic science research. Rather, it funds the commercialization of research so that businesses can profit from it. Basic economic theory states that profit-seeking companies have every incentive to fund profitable R&D themselves. If these projects are as promising as claimed, the companies should have no problem convincing their shareholders to fund the projects, or tapping into the $150 billion that private investors annually spend on R&D. The 39 Fortune 500 companies that have received ATP funds report a combined $1.4 trillion in annual revenues. To suggest they cannot afford their own research and development is baseless. Yes, ATP partially funded HDTV and flat-panel televisions, but if they hadn't, a line of investors and businesses surely would have.

The economic argument that ATP merely subsidizes existing R&D is also backed up by surveys of ATP participants. Although the program is supposed to be a "financier of last resort" for companies that have exhausted all other options, a survey shows that 65 percent of ATP applicants never bothered to seek any private funding before going to the government. And among the near-winners who claimed that ATP was their final hope, 50 percent suddenly found private funding soon after their ATP application was rejected. Among the other 50 percent who did not secure private funding, many either didn't bother to look or decided to continue playing the ATP lottery for years to come.

Not only is ATP a give-away for wealthy companies that merely subsidizes existing research, but evidence shows that Uncle Sam is a poor investor. Only 1 out of every 3 ATP projects ever brings a new product to the market. One reason for this abysmal track record is that ATP officials to try minimize conflicts of interest by seeking outside grant reviewers with little or no knowledge of the technology markets. And even if they sought market knowledge, most private companies in these markets conceal their research agendas, leaving ATP officials to guess where the market openings are. This blindness results in grants for projects that either duplicate existing private research, or are doomed to fail. Consequently, ATP has granted money for technologies that had already been developed, patented, and marketed by other companies years earlier. It has granted money to projects that have been discredited by their entire industry. Simply put, investors have better knowledge and more skill investing than government officials.

In conclusion, technological advancement is vitally important to the nation's economy. Yet when governments try to pick the market's winners and losers by micromanaging technological innovation, the results will always disappoint. ATP subsidizes Fortune 500 companies that already have the money and incentive to fund their own profitable projects. Too many companies see ATP as an ATM machine to finance projects they would never spend their own money on. With federal spending growing uncontrollably, ATP should be the first target for lawmakers seeking savings.