Public Money for Public Institutions

6/29/21

Largely motivated to enhance US competitiveness with China, the Senate passed the Endless Frontier Act earlier this month. If signed into law, that bill would invest about $250 billion over the next five years in scientific research. The vote was 68–32 in support of the legislation. More recently, just this week the House passed its bill on science funding by a voice vote. This legislation provided funding for the Department of Energy to improve the competitiveness of the US by supporting research and development in a host of science and engineering disciplines. Given the partisanship currently in place in Congress, this bipartisan level of support for both of these bills looks like a remarkable departure from what seems to have become the norm.

So what’s not to like?

I don’t have any disagreement as to the need to dedicate resources toward scientific research, but I’m uneasy about how these funds will be allocated and who gets what. I’m particularly critical of the Senate’s earmarking of $52 billion for subsidies that will benefit US Semiconductor firms. We’re talking about Intel, Nvidia, Texas Instruments, Micron Technologies, Analog Devices and others. These mentioned firms are the top five suppliers of Semiconductors in the U.S. All are domiciled here. Of them, Intel has the largest market capitalization at $242 billion; and Analog Devices has the smallest market cap at $36 billion. These are rich companies. Is this where Federal subsidies should be directed?

I get nervous whenever I hear public policy makers talk about the need for investment with public funds. Infrastructure is a good example. Irrespective of your definition of what would constitute appropriate infrastructure expenditures, at this point in time we seem to be in a position where the country may have reached a consensus that our existing infrastructure needs shoring up and at least some of what may likely not have traditionally been thought of as infrastructure may legitimately belong under that umbrella. Irrespective of where you might fall on the continuum of spending options, we’re still talking about the prospect of spending a large pot of money.

My basic philosophy as to how this money should be spent is that, ideally, public funds should go to public institutions. I appreciate that in the real world, this underlying principle is probably unrealistic and maybe even a little short-sighted; and in that light, expanding the pool of recipients to include non-profit, public service entities (e.g., colleges, universities, and research institutes, etc.) seems wholly understandable and appropriate. Providing subsidies to private companies, on the other hand, crosses a line that I think deserves to be respected.

It’s one thing for the government to support businesses and industries by purchasing their goods and services. It’s quite another for the government to provide subsidies to these companies, where public funds substitute for private funds in underwriting the cost of doing business. In this latter situation, the primary beneficiaries of the subsidies are the company owners and shareholders. If the government is going to subsidize these expenditures, it should do so with the expectation of a payback — not as grants.

The treatment of the semiconductor industry is a prime example of too much money being misdirected. This policy fails on a number of counts: (1) The policy ignores the corrective force of the market that will inevitably foster a supply response. The market signals have already been given. The resulting price adjustments that could reasonably be expected would likely be sufficient to mitigate the current shortages, over time. (2) Subsidies to private companies should generally be viewed as an unnecessary and undesirable form of corporate welfare. In my mind, if necessary at all, such welfare should be restricted to those firms that lack the capacity to sustain themselves — which doesn’t at all seem to be the situation for firms in the semiconductor space. (3) This Senate bill has the thumbprint of money well spent by the Semiconductor industry’s lobbyists.

As a rule, I’d like Congress to check itself whenever responding to the pressures of any special interest group. Public money can be directed to research foundations or educational institutions earmarked for research to benefit whatever sector the Congress deems deserving, but direct funding for private companies should be off the table.

Kawaller holds a Ph.D. in economics from Purdue University.