Science, Technology, and Public PolicyTools of Government

Howard E. McCurdy

The tools of government

• Direct grants and contracts financed through discretionary appropriations.

• Use of governmental assets• Regulation and rules• Tax expenditures• Loan guarantees• Public authorities and

government sponsored enterprises

• Insurance and tort liability• Purchase of service

contracting

Scientific advances and the development of new technologies can be expensive

• Manhattan Project: $2 billion (not counting the clean-up). In 1940 the total federal budget was $9 billion.

• Project Apollo: $25 billion (about $150 billion today)

• Human Genome Project: $3 billion

• Global Positioning Satellite system: $5 billion (DOD)

• Superconducting Super Collider: $8 billion (canceled)

National Ignition Facility Fusion Reactor

Another problem: the amount of money available for discretionary projects funded through annual appropriations

at all levels of government is dwindling rapidly.

The federal budget ($2.8 trillion FY 2007)

• Social entitlements 54%• National defense 18%• Interest on debt 9%• Discretionary 19%

Advances in science have historically depended upon discretionary appropriations (NASA, NIH, NSF, DOE).

A dollar spent on science and technology does not care whether it was raised through tax revenues or private

investment.

The “reinventing government” movement encouraged program advocates to seek partnerships with private entrepreneurs who had access to funds outside of the normal budgetary process.

“Backdoor spending” techniques create subsidies that have the same effect as a direct appropriation (except that no appropriation of funds need be immediately made).

How it works: the use of government assets encouraged the transcontinental railroad

• Government grants assets instead of funds.

• Congress passed the Pacific Railroad Act in 1862 (amended in 1864 to provide land grants).

• Federal government also provided subsidy bonds (government loans).

• Analysts estimate that the land grants attracted capital by increasing the rate of return to investors by 1 to 5 percent.

Private entrepreneurs completed the transcontinental railroad at Promontory Summit, Utah, on May 10, 1869.

A modern application: global positioning system

• GPS equipment a $10 billion per year industry.

• System relies upon a constellation of 24 satellites completed in 1993.– Cost of satellites: $ 5 billion

– Cost of modernization: $10 billion (2016)

– Operating cost: $250 to $500 million per year

• Cost of signal to users: zero.• Value of subsidy to industry:

priceless.

Could the technique be applied to the Moon?

• General Mining Act of 1872 allowed prospectors to claim ownership of minerals by staking and reporting.

• Miners formed local associations to enforce claims prior to the Act.

• Agreement Governing the Activities of States on the Moon (1984) identify natural resources as a “common heritage.”

• Land speculators already selling property on the Moon (starting at $25).

Regulations can create value(the technique is as old as the Republic)

• Congress established the first cabotage law in 1817.

• Other laws require a proportion of government cargoes bound for foreign ports to be carried on U.S. flagged ships.

• Worth nearly one-half billion dollars per year (1950-1970).

• Joined with tax deferrals for owners who invest profits in new equipment (effectively interest free loans).

Governmental regulatory powers were used to advance telephone and air flight technologies

• Regulations can be used to encourage as well as restrict activity.

• Kingsbury Commitment (1913) established AT&T as a government sanctioned monopoly regulated by the FCC (divestment ordered in 1984).

• Civil Aeronautics Act (1938) required airlines to obtain certificates for routes and establish uniform rates (repealed in 1978 by the Airline Deregulation Act).

Tax expenditures

• A tax expenditure is deduction from the individual or corporate income tax.

• Unites the liberal hope for larger government with the conservative desire for lower taxes.

• Value of tax expenditures estimated conservatively at $1.5 trillion annually.

Tax expenditures have been used to promote energy technology

• Percentage depletion allowance allows oil and coal companies to treat part of the resource value of assets drawn from the ground as tax exempt.– 15 percent for oil and

gas– 5 percent for coal

Loan guarantees

• Federal government bonds are backed by the “full faith and credit” of the government—that is, all of its tax revenues.

• The federal government can extend its “full faith and credit” to private loans as well.

• The practice provides a subsidy in the form of lower interest rates.

• Government may require collateral (such as stock).

• No money need be appropriated—unless the borrower defaults.

Along with land grants, research grants, and state subsidies, loan guarantees are responsible for the development of the modern research university.

• Higher Education Act established the modern system of student loans (1965).

• Congress established Sallie Mae to provide a secondary market for student loans (1972).

• Federal government guarantees loans against the possibility of default.

• Availability of loans creates a subsidy—the same effect as if the federal government gave cash directly to the universities.

Could tax expenditures and loan guarantees be used to develop wind power?

• Federal tax credits for energy conservation and alternatives are negated by the tax subsidy provided to petroleum producers.

• Wind industry provided new “rust belt” jobs until collapse of financial markets and recession halted orders for new turbines.

• Europe uses a combination of gasoline taxes and renewable-energy subsidies to encourage wind power.

• Would loan guarantees and price supports help?

Public authorities and government-sponsored enterprises

How many can you identify? (Answer on next slide.)

Public authorities allow investment in new technologies without direct appropriations.

• First U.S. public authority: Port Authority of New York and New Jersey (1921).

• A government agency in the form of a statutory corporation chartered by a legislative body and headed by a governing board that hires a general manager.

• Licensed to issue bonds and collect fees.

• Provides financial stability, low interest rates, and “business like” administration.

• Fell into disfavor during the Reagan “privatization” era.

Answer: Grand Coolie Dam, Dulles International Airport, Fannie Mae headquarters in D.C. Above: Port of Seattle.

Is the use of non-market mechanisms to encourage technological innovation wise?

Policy decisions to subsidize new technologies substitute political judgment for market discipline.

Public officials insist that subsidies are necessary to “build ahead of demand.”

Policies often have unforeseen consequences.

Economists are better than scientists at communicating policy implications of technological change.

The case of ethanol.Federal crop price supports encouraged farmers to purchase tractors during the Great Depression, raising US farm productivity.

Ethanol

• Congress passed “food to fuel” mandates in 2005 and 2007.

– Mandates 9 billion gallons renewable fuels (2008) growing to 36 billion (2022)

– Refineries required to blend ethanol into gasoline or use a cost/trading system

– Reenforced by existing crop price supports

• Twenty-five percent of US corn crop replaced 1 percent of oil consumption (2007).

• Most of the energy for producing ethanol comes from coal, which in combination with deforestation, increases global carbon emissions.

• US food prices rose twice the rate of inflation, outpacing investments in foreign food aid.

Government insurance and tort liability

• Government agencies are “self insured.”

• Government assumes the risk for catastrophic losses among private companies providing government services.

• Government establishes corporations that issue insurance for risky undertakings.– Overseas Private

Investment Corporation (1971)

Virgin Galactic SpaceShip Two

Would such a policy encourage the development of the private launch industry?

Purchase of Service Contracting

• NASA and Lockheed Martin jointly funded development of X-33.

• Utilized a titanium alloy thermal protection system, aerospike engine, and graphite-epoxy composite fuel tanks.

• Based on technology investment and expected government and private demand, Lockheed to raise private funds to build VentureStar.

• Cancelled by NASA in 2001.

Putting it all together: tools are usually used in combination to produce desired effects

The airline industry• Purchase of service

contracting (1925 Kelly Bill)

• Public authorities• Regulation and rules

(Civil Aeronautics Act)• Direct appropriations

(National Advisory Committee for Aeronautics)

• Loan guarantees after 9/11.

Boeing test pilot Tex Johnston barrel rolled the Boeing 707 prototype at the 1955 Gold Cup hydroplane races above company president Bill Allen, the SeaFair crowd, and a gathering of potential airline customers.

The tools of government summarized

• Direct grants and contracts financed through discretionary appropriations.

• Use of governmental assets• Regulation and rules• Tax expenditures• Loan guarantees• Public authorities and government sponsored

enterprises• Insurance and tort liability• Purchase of service contracting