Subsidies and How the Government Can Fix Them

What do 18th century fur trappers, the Transcontinental Railroad, the airplane and the Agricultural Adjustment Act of 1933 have in common? They were all disasters. Why? Government money. The fact of the matter is that the United States federal government is terrible at subsidizing innovation.

The AAA, which failed to alleviate the Great Depression, is just another example of federal incompetence when it comes to handing out subsidies.

In the 1700′s, the Feds decided to subsidize fur trappers in the western part of the United States to prevent Canadian trappers from encroaching and making money off of animals on American land. The result was catastrophic, as the American trappers essentially pocketed all the money and British trappers continued to encroach anyway. The Americans of that generation said “WOW! That was dumb. Never do that again.”

That lasted until the 1860′s when President Lincoln (yes, he had his flaws) thought that there was an absolute need for a transcontinental railroad. He took the government $60 million into debt (at that time that was the entire national debt, which was why they called it the good ol’ days) and built a railroad that was crooked, had grade problems, and functioned poorly. It took hardworking immigrants and no federal funding to finally build a successful transcontinental railroad that crossed from St. Paul to Seattle.

The airplane began with a similar subsidized story of horror. The federal government decided that they didn’t want the Europeans to get ahead of them in the arena of flight. So they picked the most intelligent and honored man of the time, Langley, and told him “here’s some money, build an airplane.” As you know, he did not invent the airplane. $50,000 and a year later, Langley had nothing to show. He said that he had “almost perfected his launching device” and needed even more money to complete it. Then, several days later, two bike builders from Ohio took off and flew at Kitty Hawk, North Carolina without a cent of government aid.

The Agricultural Adjustment Act (AAA) of ‘33 is a similar story. The logic behind literally paying farmers to produce less food was that they would supposedly raise prices and increase purchasing power. This had the opposite effect, increasing starvation and deepening the Great Depression.

From the 1700′s to Solyndra, the number of failed subsidies is way too vast to ignore. Why are these government handouts always such a mess? This is because subsidies work in very few and very specific circumstances. The Manhattan Project was a good example. It was a matter of paramount urgency because we could very well be speaking German or Japanese had this project not happened. It was also very secretive. Even Truman didn’t know the full details on the program until he was President. Furthermore, it was tightly controlled. Instead of hiring multiple private contractors to do the work, the Manhattan Project operated as a single entity under a government microscope to ensure competence.

In short, we need to change the way we subsidize, so that America ends up with something successful like Google X or the Manhattan Project instead of a disaster like Solyndra. The main problem with subsidies currently is that there is no incentive for the subsidized individual or group to complete the task given to them. One possible fix is the “Dollar on a Fishhook” method. Here’s how it works: the government contracts many private companies to accomplish a certain task. The more successful they are, the more of a subsidy they get until the first person who effectively accomplishes the task is rewarded with a cash prize. This solves the “lack of incentive” problem and allows for some federal aid to be given for researching very new technologies that are too expensive to be marketable. Keep in mind, the government has always pioneered very new technologies for the private sector to subsequently improve on, like spaceflight. Since private companies have become involved in spaceflight, launches now cost a fraction of what they used to under NASA. A similar situation will happen with antibiotics in several years.

Subsidies should be used with caution, and should only be applied to bleeding edge technology endeavours that are necessary for the United States to remain the foremost center of innovation and knowledge in the world. Every misguided subsidy, no matter how small, takes its toll on the economy. If federally subsidized projects are run like the Manhattan Project combined with Google X in small numbers (this is key), they can be employed effectively. Until this fix is implemented, these handouts will continue waste billions of taxpayer dollars.


Dr. Burton Folsom, The Conservative Forum of Silicon Valley

SLAC Public Lectures 2014

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