by Gary Shapiro
The simple fact is that bureaucrats don’t know what will be successful and what won’t. The U.S. government has poured billions into ethanol subsidies, and yet ethanol remains a terrible alternative fuel. The U.S. government subsidy policy is also viewed worldwide as causing huge increases in food prices and contributing to massive starvation. But with the farm lobby in Washington, combined with well-intentioned but misguided environmentalists, we are going to have ethanol subsidies for the foreseeable future.
THE RUSH TO SPEND MONEY
Much of the nearly $1 trillion in “stimulus” money went to various industrial investments. In this case, the government quickly decided that it was worth borrowing taxpayer funds to invest strategically in certain industries. Why no one stopped to ask how it could be strategic to rush through billions of dollars in investments, without hearings, consideration of alternatives, objective standards, or anything resembling a reasonable process, seems like a terrible business strategy. Rather the billions were committed without regard to process but with a large regard to politics and contributions. One major industry lobbyist told me that he was amazed that Congress had given his industry billions of dollars—everything he had asked for!
That’s what happens when politicians make decisions interfering with the competitive free marketplace: Politics trumps economics.
If there is any doubt as to whether this hurried strategy makes sense, consider the funding obtained by one company from the stimulus package. From this government generosity, one struggling electric car company, Tesla, received $465 million in loans backed by the federal government. Created in 2003 in Palo Alto, California, Tesla had undergone internal management changes but had promised delivery of an electric family sedan for $57,400 (reduced by federal tax credits to American buyers to $49,900). Tesla claimed in mid-2010 that over 2,000 of these cars had been pre-ordered.
The New York Times reported in July 2010 that the ambitious claims for the car’s performance had yet to be proven with a prototype model. Indeed, if the performance claims were true, some wondered why government funding was even necessary. But the owners and early backers were enthusiastic. Not surprisingly, many of the funders also provided political funding to Democratic politicians. According to the SEC, Tesla produces fifteen cars per week— hardly a winning business model.
The process of the funding and the amount of funding can and will result in massive amounts of wasted taxpayer dollars. I will never forget a meeting I had in 2009 with a senior government official whose responsibility was to oversee billions in stimulus spending on broadband use. Under the stimulus package, he had to assess the population and then dole out funding to “underserved” areas. Consistent with this charge, he had quickly entered separate contracts with entities in each state and had committed over $100 million in government funding for contracts with state entities. In the summer of 2009, after making this $100-million commitment, he met with executives from a company that could have easily gathered this information and given it to the government for a tiny fraction of the $100 million the government was spending.
The official was at first thrilled to see how easily the data was available and told me that it was the “most important” meeting he’d had as a government official. But I guess he soon realized that he could not get out of paying those $100 million in contracts. Over $100 million in taxpayer money was wasted simply because of a rush to spend. All this money went to groups each seeking their own piece of the government pie and each using registered or unregistered lobbyists.
LOBBYING FOR AMERICA
Our nation’s capital is overrun with lobbyists, and most are seeking special favors or money from government. I gave some statistics about D.C. lobbyists and lawyers at the beginning of this book, but they bear repeating here. More than 10,000 lobbyists are formally registered to lobby the federal government (and this certainly understates the number who lobby but do not meet the 20 percent lobbying threshold before formal filing is required). Interest groups—including unions, businesses, and the AARP—reported spending $3.5 billion to influence the federal government in 2009, and likely a higher amount will be reported for 2010.
American Bar Association statistics reveal that the number of “active, resident” lawyers in Washington, D.C., jumped from 46,689 in 2008 to 48,456 in 2009. This is the second highest increase in the nation, with only New York adding more lawyers. Washington, D.C., has one lawyer for every twelve citizens!
Why the large increase in lawyers and lobbying? Because the more government gets involved in business, the more protections businesses need to save them from government. The Obama Administration and Congress have been legislating and regulating to a degree never seen before in most of our lives. This has fueled the Washington economy. And the Washington boom will continue as the federal government hires thousands of new employees to meet the mandates of the health care and financial “reform” bills.
Business owners who create jobs are frustrated. They don’t understand why Washington is making life more difficult for them. They are perplexed with new requirements, like the health-care law mandating that every business must report to the IRS any information on any purchase exceeding $600. They see all sorts of federal payroll taxes rising, and they don’t understand why American corporate taxes are the second highest in the developed world.
National business leaders agree that industry has been hurt by the well-meaning efforts of the federal government to help the economy. Heap on threats of tax increases, new rules, an increasingly restrictive union agenda, and a protectionist environment, and you get job creators who view the federal government’s recent activism as harmful. An anti–free market and anti-employer environment has industries looking at overseas investments for growth. Business executives from large and small companies view the United States as an increasingly hostile place to do business.
The lack of business confidence, investment, and job creation are not surprising given how our political leaders have demonized the very businesses whose investment, profits, and growth create jobs. The word “corporate” is too often combined with the word “greed.” Profits are considered evil or excessive. The “free market” has shifted from a positive description of the American economic system to a pejorative. The “invisible hand” of the free market is being replaced entirely by a visible hand of what politicians think a market should look like.
Our American edge in entrepreneurial activity and innovation is threatened by our own government. New burdens and taxes are being added without considering real business and job creation implications.
GOOD GOVERNMENT
Government’s role in innovation is important, but limited. At best, it adjusts the legal framework to allow new innovations to flourish; at worst, it puts up roadblocks to protect older industries. For example, in 1996 Jim Gilmore, a bright, principled Jeffersonian conservative, was elected Virginia’s governor based on a simple eightletter promise: “No Car Tax.” Although he kept his promise to cut the much-hated tax on cars, his bigger achievement is that he made Virginia the leader in fostering innovation by creating a legal framework for business to be done over the Internet.
Virginia’s legal revolution was engineered by Don Upson, whom Governor Gilmore installed as Virginia’s (and the world’s) first Secretary of Technology. Don had a vision. With a background working for technology companies and for a congressional committee focused on making government work better, Don believed that the Internet fundamentally changed everything, but that Internet innovation was constrained by old laws requiring hard copies and signatures to do business.
To help lay the groundwork for a technology-friendly state, Don created a bipartisan commission charged with finding ways for Virginia to embrace the Internet and innovation. The commission included visionary and respected legislators from both parties as well as leading tech luminaries like AOL founder Steve Case. It also included well-known Indian immigrant entrepreneur Sudhakar Shenoy. While serving on the commission, I met an
d befriended Sudhakar and became convinced that we needed more great Americans like him. Patriotic, effusive, and brilliant, Sudhakar’s IT company employed hundreds of Americans. He always had business ideas, and he relished connecting people and supporting local charities.
With Don’s vision and the inspired leadership of the prestigious group of business leaders, the commission agreed to propose changes to Virginia law that allowed the Internet to grow and serve as a basis for transacting business. For example, e-mail could serve as legal notice, electronic signatures could be valid, and exchange of electronic copies could create a binding contract.
The state legislature quickly turned these proposals into law, and others noticed. Egyptian president Hosni Mubarak made a special trip to Virginia to learn about the state’s approach to the Internet. I was honored to explain to him the perspective from the consumer technology industry. We also visited Egypt and other countries to discuss Virginia’s unique focus on the Internet as a business enabler.
The Virginia experience taught me that a bipartisan effort with industry participation can move innovation forward. No special handouts or competitive advantage—simply a diversity of citizens and smart legislators helping move forward a basic government function, a legal framework to create and enforce contracts. With the strategy and vision of real leaders like Don Upson, government moved quickly into the Internet Age. Don is a true hero of technology.
Government has a role to play in helping America’s innovative companies. It’s a specific role that should not be focused on picking winners and losers. Innovation, like water, will find its own level, if it’s allowed to flourish. Here are some specific suggestions:
Clarify the ambiguous “monopolization” antitrust standards. The EU is determined to gain a competitive advantage over the United States by suing successful American tech companies. The federal government should resist these efforts and not be complicit in destroying our companies. Establishing a more coherent “monopoly” antitrust standard will help clarify when and where the U.S. government should be protecting U.S. companies. Indeed, Edwin S. Rockefeller, the former chairman of the American Bar Association’s section of antitrust law, recently suggested that antitrust is “unsound as economics” and “gives government officials the power to interfere whimsically with freedom of contract, frequently on behalf of losers.”68
Defend American companies internationally as a matter of national interest. When the EU props up Airbus to gain an advantage over Boeing, the U.S. government should be the first objector. I’m not against our government or our companies handing out contracts to foreign companies—if it’s a better price and a better product, that’s the way the game is played. What I’m against is when our government does nothing, or actively participates, when a foreign government gives its companies a competitive advantage.
Change visa and citizenship policies so leading American companies can employ the world’s best and brightest here in America. I discussed the importance of changing our immigration laws in a previous chapter, but I can’t stress enough how invaluable bringing foreign talent is to American innovation. Immigrants build companies, they add to our economic growth, and they are an integral part of our innovation strategy. We need to refine the laws so that, instead of “outsourcing” our talent, we are bringing it here. As it is, our rules today encourage U.S. companies to open up foreign facilities.
14
Innovation Requires a National Energy Policy
OUR ADDICTION
By now, I hope that my policy prescriptions to promote and advance innovation will inoculate us from charges of arguing for expansive government, “living” constitutional theory, and redistribution of wealth. In other words, I believe in smaller government and a return to constitutional principles of liberty, but that does not mean we cannot view our current energy consumption as dangerous and create a national strategy to discover alternative fuel sources. This isn’t about ideology. It’s about securing our energy future, and that future is with less oil imported from overseas.
The fact is, many of our international challenges stem from what President Bush called “our addiction to oil.” Now, we should always bring a level of skepticism when politicians start talking about ending our addiction to oil. If memory serves, the line was first raised in the Carter Administration, when I was a young man, and I’m still filling my car with petroleum-based fuel. It’s a tired cliché, but we made it to the moon in a third of the time that has passed since President Carter talked about getting the nation off oil.
In the ensuing years, we’ve had to endure various attempts to get rid of our addiction. Of course, none have worked. We’ve had attempts to promote electric, ethanol, and solar power, to name but a few. These aren’t “pet rock”–style technologies, but they have had thirty years to prove themselves and have come up short. Which isn’t to say that they aren’t the future. But the reason they haven’t worked is because we haven’t had a firm strategy and a committed government to make them work.
This requires more than government subsidies. Subsidies are what you give when you’re pretty sure what you’re subsidizing isn’t a real industry. It’s like our ethanol subsidies. But the further we get toward the critical moment when the world’s oil resources dwindle and oil prices increase, the further we get to America’s fall. Our energy needs require oil. The United States consumes more than twice as much oil as the next most consuming nation (China). When the spigot runs dry, we will be in a world of hurt. We have mistakenly come to assume that we’ll figure out something when it’s urgent. As Winston Churchill once supposedly remarked (insultingly, but also approvingly), “You can always count on Americans to do the right thing—after they’ve tried everything else.”
Now this might be true. But we seem to have taken Sir Winston’s summation too much to heart. As Americans, we like to think that, in the end, we’ll figure it out. We have before; we will again. As much as our history bears this out, we should also consider the exceptions to the rule. Slavery? We had eighty years to figure that out, and when we finally got around to it, we nearly destroyed ourselves. Our position before World War II? We were dangerously ill prepared to fight a technologically advanced enemy, never mind two at the same time. We know the end, so it’s hard to appreciate just how precarious our situation was in early 1942. We had no serviceable Navy (destroyed at Pearl Harbor), we had terrible tanks, and we could barely muster a decent army (read about our travails in Northern Africa).
In both cases, we prevailed, but by the skin of our teeth. As Wellington said of Waterloo, it was a close run thing. I think we’d rather have not fought the Civil War to end slavery nor seen so many American lives lost in World War II before we figured out how to fight a war.
In any case, we are nearing the point in our energy needs where doing nothing is no longer acceptable. Our concern with the Middle East is in part a result of our dependence on its largest export. If you don’t agree, ask yourself why we aren’t as concerned with the devastation of Africa. The whole continent is destroying itself, yet somehow Africa’s concerns aren’t in our national interest. Now it’s not just the United States that is obsessed with the Middle East; the rest of the civilized world depends on the oil as well. But that’s why it’s our time to lead.
The reality is that our dependence on foreign oil is an economic concern, it’s a national security concern, and it’s an innovation concern. We must cut our reliance on overseas oil for at least three reasons: economics, foreign policy, and innovation.
The first reason is economic. Every dollar we spend on overseas oil is a dollar of outflow not supporting American business or jobs. This outflow of currency without creation of U.S. jobs is harmful to our nation. Like the newspaper industry, the oil consumption industry uses an outmoded business model. Technologically speaking, it’s inefficient to find, produce, and deliver oil, especially when we know how to get energy by more direct, if not economic, means.
Second, our reliance on imported oil
affects our foreign policy. It’s come to the point where this assertion is no longer a partisan issue. In his 2008 bid for the presidency, John McCain railed against our dependence on overseas oil. Congressional Republicans rail against it today. No one thinks that to have an economy entirely dependent on a volatile region of the world is good policy. It’s like having your supply source at the edge of Niagara Falls.
The third reason is for innovation. In a previous chapter, I mentioned the atomic bomb and the moon shot policies of the United States. Of course, I mentioned them as exceptions to the rule that government can’t promote innovation. But I also said that both those attempts were done in times of national crisis, and that helped spur a very rare successful collusion of government and the private sector. We are in such a moment with energy today. With a national commitment to rid ourselves of oil dependency, the private sector can and will find alternatives. But we need to be smart about it.
Relying on fuel-efficiency mandates on car companies and unrealistic assumptions about renewable sources of energy is not a strategy. It’s a halfhearted attempt by politicians to prop up a donor industry or generate good headlines. It’s uncoordinated, it’s unsophisticated, and it’s unrealistic. Putting pressure on American companies, such as with cap-and-trade mandates, is a recipe for disaster. It punishes instead of promotes.
However, we can eliminate reliance on overseas oil by 2025 by taking concrete steps:
The president must challenge Americans. This is the man-on-the-moon challenge that Kennedy issued. We need a deadline, and we need a national plan to get us there, with measurable deliverables and consequences for failure. The president should follow up by announcing that each state’s oil usage will be measured and that those with the highest percentage drops will be recognized and rewarded