In 1977 or so, I was one of a number of social scientists who got a freebie from the U.S. government: use of a portable teletype machine that would allow me to send messages to other social scientists over something called “ARPAnet” – the Defense Department’s Advanced Research Projects Agency computer network.
It looked sort of like the device to right. I could type out messages on a roll of paper and someone else on the “net” – whatever that was – could get my machine to type their answers back to me.
The purpose of the loan was to see if scientists could put this kind of communication systems to good use, to find out if this “electronic mailing” technology would accelerate scientific collaboration and discovery. Given the expense of the device, I was to share it with the professor next door, Ron Burt (now at the University of Chicago Business School). It turns out that I didn’t have much to write over the ARPAnet, but Ron did, so he mainly held on to the device.
Thus, I was a minuscule – and not too helpful – part of a federal project that eventuated in the “World Wide Web,” the Internet, online commerce like Amazon and Zappos, social networks like MySpace, and cute kitten videos on Youtube. Our tax dollars have paid off. But for whom?
Today, the Internet is worth an astronomical amount. One estimate is that online sales are worth about $130 billion a year these days – even in the Great Recession. If the taxpayers got back, say, five percent of that as a return for their development costs, it would pay for about half of the Department of the Treasury’s annual expenses. (The budget figures are from another byproduct of ARPAnet, Wikipedia.) Three of the Internet’s megafirms (Microsoft, Google, and Apple) recently declared a total of about $40 billion in net income last year. If the taxpayers’ venture capital share of just those three were, say, ten percent, that would almost pay for the Corps of Engineers. And, of course, there is far, far more value than that in the Internet – in, for example, the cost savings banks, insurance companies, law firms, and so on have been able to pocket by shifting from mailing paper to shooting electrons. Monetizing even a tiny fraction of those corporate savings would be a bonanza.
The Internet is only one of many cases of taxpayer money opening the way to extensive commercial development, going back at least as far as the development of the telegraph and as far forward as, say, the latest medical breakthroughs in federal labs and federally-financed university labs. (Just one percent of the annual drug sales in the United States would pay about a third of the costs of the EPA.) Many people complain of waste in the government, but here are wasted opportunities. What private investor would fund new product development and forgo any return on that investment?
Now some might say that these commercial interests on the web, like Facebook, eBay, and Bank of America, already pay for the development work in their corporate taxes. Hardly. First, their taxes largely pay for the routine services of government – defense, infrastructure, a legal system, and so on. Federal R&D gets a tiny share. Second, average American taxpayers pay the lion’s share of the federal budget. Individual income taxes bring in about 5 times what corporate taxes do. So, the businesses, from Internet and electronics through agribusiness and pharmaceuticals, that commercialize taxpayer-paid R&D are getting, if not a free ride, a highly-subsidized ride from Mr. and Ms. Taxpayer. Talk about free-loaders!
Those who would have the government run more like a business may have a point. Maybe we should get paid for all that capital we’ve invested.
(This blog was cross-posted on The Berkeley Blog on 11/22/2010.)
Update (January 23, 2011)
The January 22, 2011, New York Times reported that: “The Obama administration has become so concerned about the slowing pace of new drugs coming out of the pharmaceutical industry that officials have decided to start a billion-dollar government drug development center to help create medicines. . . . ‘None of this is intended to be competitive with the private sector,’ [NIH Director] Dr. Collins said. ‘The hope would be that any project that reaches the point of commercial appeal would be moved out of the academic support line and into the private sector.'” So, the question is, will the taxpayer get a percentage of the drug companies’ eventual profits after having provided the start-up R&D?
Update (March 5, 2012):
In an essay on whether the government is or is not a good “venture capitalist,” Ted Nordhaus and Michael Shellenberger provide a more detailed account of the many technical innovations that would not have come or would have been long delayed in coming if it were not for government investment (or monopoly power, as in the case of the old AT&T company). The marketplace of highly competitive firms undercuts serious investment in R&D.