Dr. Rodgers' testimony: Declaration of Independence: End Corporate Welfare | Cypress Semiconductor
Dr. Rodgers' testimony: Declaration of Independence: End Corporate Welfare
- Two hundred twenty one years ago, American colonists declared independence: to be free and to pursue their interests in free markets with limited government. Real Americans hated taxes. They listed as a cause for rebellion in the Declaration of Independence: "for taxing us without our consent." Their new constitution limited government and banned personal income taxes. The Revolution produced the American Dream, during which the common man became better off more quickly than any other time in history. For our first 200 years, from 1776 to 1976, America’s per capita income grew at the rate of 458% per century, versus the 3% per century growth rate of the pre- American world.
- Now, the American dream--that every generation will enjoy a higher standard of living--is threatened. Since 1976, the GDP per capita growth rate has steadily declined from 2.5% per year to 1.5% per year, and we hear people say, "America needs a raise." In 1913, the 16th Amendment legalized a federal income tax with a levy of 1% of GDP. Today, the American Dream is being eroded by the ever-increasing burden of federal, state, and local taxes, which consume a whopping 35% of our national output. Although we are at peace and without a Cold War, our government is currently spending at a higher rate than the peak 30%-of-GDP rate of World War I, and nearing the record 50%-of-GDP rate of World War II ! There is a broad consensus that government spending must be cut.
- Eliminating "corporate welfare" should be a priority in government spending reduction. The risks are minimal. Savings could reach $275 billion over five years. And there is a moral imperative: We should not be asking our senior citizens to tighten their belts while our government is literally subsidizing the sale of Chardonnay to the French.
- The current pork-barrel system of taxing and spending (read: wealth confiscation and centrally controlled redistribution) creates a downward economic spiral. With corporate taxes so high, companies must lobby for givebacks to remain competitive. Congress is consequently put under extreme pressure to "bring home the pork" to home-state corporations, some of which are political contributors. Payouts to those corporations then pressure the government to raise taxes, which, in turn, stimulates corporations to invent new subsidies, sometimes creatively labeled "government investments" or "governmentindustry partnerships." "Government-industry partnership," is Washington-speak that means Americans will be compelled to pay for some silly program like the ATP proposal to re-bioengineer cotton, making the cotton fibers more like polyester. We should choose to break out of this downward economic spiral by ending corporate welfare now.
Technology subsidies to corporations are sold using technobabble to camouflage unjustifiable investments, which typically fall into four categories:
- Subsidizing the rich: Sematech. We gave $800 million over an eight-year period to 14 electronics companies that currently make more than $800 million in profit every month--and they don’t even have to pay it back.
- Competing unfairly with private industry: the ATP video compression project. C-Cube Microsystems was venture funded in Silicon Valley and lost money for years before its video compression technology took off. C-Cube woke up one day and found a $1.2-billion-dollar rival entering its market with government funding. C-Cube’s investors paid full fare.
- Spending that provides no benefit: Gallium arsenide wafers in space. Vitesse Semiconductor in Camarillo, California, makes some of the world’s fastest chips using an exotic semiconductor called gallium arsenide. Vitesse sees no value whatsoever in the $500-million NASA plan to make gallium arsenide chips in space.
- Spending that hurts the intended beneficiary: European semiconductor subsidies. The European Union put a tariff on semiconductor chips to protect its fledgling chip industry. Now, the EU is removing this tariff, but not before higher chip prices decimated its computer industry. Meanwhile, European chip companies lost market share anyway.
- Taxes to fund government boondoggles come from two sources: from the rich who can afford to pay excess taxes, and from working people whose lives are less well off when the government takes their money. It is immoral and un-American to take money away from people who are just making ends meet in order to subsidize corporations--or anything else. Taxing the rich to fund poorly managed government programs is simply a self-destructive decision: It does nothing more than move money and investment decisions away from proven moneymakers (read: job producers) to Washington amateurs. In both cases, Americans lose.
- One common rationalization for corporate welfare is that Japan and Europe subsidize their corporations, compelling U.S. corporate subsidies in order to remain competitive. The rationalization is totally false. Objectively viewed, Japan’s programs have been consistent losers. Western Europe’s socialized economies are among the least healthy on the planet, second only to the 100%-socialist disasters in Eastern Europe. The choice to take money from citizens to pursue the government’s "good ideas" is pure and simple socialism, which has been consistently self-destructive to the economies of those countries pursuing it to any degree. The damage falls on a gray scale ranging from America’s first income-taxless society to the near-100% wealth control of the collapsed Soviet state. Our current taxes total 35% of GDP, in the middle of the gray scale.
- The best way to shut down corporate welfare is to have a "yes" or "no" vote on a package of corporate subsidies identified for elimination by an independent commission, as we did in the most recent military downsizing. Silicon Valley CEOs would support a fair package proposal to cut corporate subsidies, as attested by a list of names in an appendix to this report. The commission mechanism allows Congress to avoid the lose-lose proposition of voting either for more corporate welfare or against a subsidy to a home-state corporation.
CORPORATE WELFARE VS. THE AMERICAN DREAM
Our forefathers hated taxes. They viewed them as confiscation of individual wealth. They threatened rebellion over the Stamp Act of 1765--a British invention to raise money from the colonies by requiring a tax stamp on documents. They threw the tea into the harbor in 1773, rather than paying taxes on it. And they listed as a cause for rebellion in the Declaration of Independence: "for imposing taxes on us without our consent." The Constitution turned on its head the basic premise of all prior world governments. In other countries, the king, or other sovereign, owned the land, the citizens, their property, and their wealth. People were allowed to own property and to have rights only through the grace of the king, sometimes in a formal agreement such as the Magna Carta. The American Constitution created a bottom-up country by ensuring the people’s right to be free: they owned themselves, their intellectual and physical property, and their money. The markets were to be free and the new government was to be given only limited, enumerated powers. Those powers not enumerated were specifically reserved for the people. The new government made it unconstitutional to levy an income tax on individuals. The Real Americans who founded our country wanted "the government off of our backs and out of our pockets," to use a Reagan phrase.
This first-ever, morally profound decision to organize a country "by the people, of the people, and for the people" led to the most rapid improvement in the well being of the common man in history. During our first 220 years, the gross domestic product (GDP) per capita of Americans grew from $60 per person in 1776 (equivalent to $919 in 1996 dollars) to $28,540 per person in 1996. Personal income per capita in 1996 was $24,296, or 85% of GDP per capita--most of GDP per capita falls through to personal income. GDP per capita grew at an unprecedented rate of 458% per century from 1776-1996, effectively doubling every 40 years. It took mankind 30,000 years to reach $919 per year, while America catapulted its citizens from $919 to $28,540 in just 220 years.
The doubling of income every 40 years gave rise to the American Dream--the expectation that every new generation in America would be better off than the prior generation. Something special happened in America in 1776: When the common people decided to stop serving government and to mandate government to serve, they prospered as never before.
The first Americans would have scoffed--or rebelled--if the government had proposed to tax them to "stimulate the economy" by "investing" taxpayer dollars in "government-industry partnerships." That type of language, Washington-speak, is the very un-American language of confiscated wealth, weakness, and usurped freedom. Ultimately, if we don’t change--it will be the language of defeat. A closer examination of GDP per capita over the last 20 years, from 1976 to 1996, shows a slow down.
The American Dream, the engine of our prosperity has not stopped, but it is slowing down. We continue to hear that the working man is not getting better off and that "America needs a raise." How do we get back on track?
CUT GOVERNMENT SPENDING
One important factor slowing the American economy is the ever-increasing consumption of our national wealth by government. In 1913, the 16th Amendment lifted the constitutional ban on federal income taxes. The first federal income taxes were modest in both scope and magnitude.
During the last 80 years, every aspect of the federal income tax system has grown much more rapidly than the economy. In 1994, the personal per capita federal income tax levy of $2,622 reached 12% of the $22,104 personal income of Americans. The combination of federal, state, and local taxes now supports spending which consumes a whopping 35% of GDP. Our government is currently consuming a higher percentage of our gross domestic product than the 29% spending peak of World War I!
Despite this rapid increase in tax collections, the government spent money even faster, piling up in addition a national debt of $4.7 trillion dollars by 1994, over $18,000 for every American. The interest payments on the national debt now amount to two-thirds of the entire budget of the Defense Department. It’s time to cut back.
CUT CORPORATE WELFARE
I believe we ought to eliminate immediately most corporate subsidies, so-called "corporate welfare," which amounts to about $65 billion a year. The electronics industry would be unscathed if it lost all of its subsidies, although a few individual companies might be hurt. (Of course, it would be precisely those CEOs who would travel to Washington to make "end of the world" speeches.)
When U.S. airlines were deregulated, removing subsidies in the form of higher fares, the industry got healthier, weak competitors were absorbed by better-managed companies, and airfare became affordable for the first time to many Americans. The airline industry is healthier and better off without subsidies.
There is also a moral imperative regarding corporate welfare: unjustifiable subsidies, such as those to promote the sales of wine and oranges in Europe, should be eliminated completely before the discussion turns to asking senior citizens to endure cuts in Social Security and medicare.
Our current pork-barrel system of taxing and spending has created a vicious downward economic spiral that will be difficult to break. If two corporations are taxed at a rate of 37% (my company’s current total tax rate), but one of them receives a subsidy equivalent to a 10%-point rebate, the subsidized company will enjoy visibly higher profitability, higher share price, and an enhanced ability to raise funds at a lower cost. Consequently, companies must compete for government subsidies whenever those subsidies make a competitive difference. Even though this is my seventh trip to Congress to oppose corporate subsidies, I would without hesitation pursue any important subsidies offered to my company, because it is my obligation to our shareholders to do my best for them, including obtaining any available low-cost funding. A company that failed to do so would be as foolish as an individual who refused to take income tax deductions because of a strong belief in a flat tax.
The spiral continues as corporations build lobbying organizations to pressure Congress to "deliver the pork" to home-state corporations, which are often political contributors. As Congress succeeds in rewarding home-district corporations with their "fair share of the government pie," the pressure falls right back onto the government to raise the revenue to pay out all of those subsidies. The spiral is completed, as it was in 1993, when tax revenues are raised to pay the bills by hiking taxes on corporations which then seek new and creative subsidies to offset their higher tax rates.
We can use happy words like "government-industry partnership," and "effective representation" to describe the process, but the economics of the downward spiral is precisely socialism; that is, the mandated movement of money from individuals and companies to central government control.
At one extreme, when all of the assets (save those of the black market) are controlled by central government planners, we have pure, Soviet-style socialism. At the other extreme, when income taxes are illegal, we have American-style capitalism, circa 1776. That is a black-and-white representation. Today, Americans live in a gray world where the government takes and controls 35% of the country’s yearly production. Western Europe’s economies are more socialist than ours, and they show it. They have slow growth rates and unemployment rates so high that they would limit any American presidency to one term. And, of course, the socialist disasters of Eastern Europe make even the ailing Western Europe economies look great.
Sometimes, it is difficult to see the obvious big picture because of incremental thinking. An increased tax of only a nickel a day per American supports a $5 billion-per-year subsidy. With easy money and companies promising breakthroughs in health care, pollution control, or electronics for "only" a few billion dollars, government often makes the wrong choice. The road to socialism is paved with nickels--trillions of them--each taken from Americans with the greatest good intent.
The synopses of ATP programs dazzle us with possibilities: "next-generation video compression," "high-definition television (HDTV) studio," "new generation laser-based welding," "less polluting, more cost efficient painting process," "super-hard coatings of boron nitride," and so forth. All of these ostensibly compelling and cost-effective requests for corporate subsidies beg the big question: "If you are General Motors, with annual sales of $160 billion, and $20 billion in the bank, why don’t you fund this great XYZ idea yourself, and patent it?" GM is prevalent in the ATP programs, but don’t overlook Ford, Chrysler, General Electric, AT&T, IBM, Black and Decker, Honeywell, 3M, U.S. Steel, duPont, RCA, Phillips, MCI, Goodyear, Amoco, Kodak, Polaroid, Xerox, Caterpillar, Westinghouse, and Time Warner--apparently, Bugs Bunny needs the taxpayers’ money.
All of these great corporations with all of their great ideas and big bucks somehow need nickels from the American taxpayer to bring their ideas to market.
There are two reasons for the apparent dilemma. First, some of the projects are worthy and the big companies are simply looking for a tax rebate to get value from their extensive lobbying groups. The second reason is risk avoidance--companies want the government to help fund their long-shot projects.
I believe that the "high-risk" argument used by the Commerce Department is usually just an excuse for making poor investments. Breakthrough ideas often involve great risk; that is, a significant chance for failure. The important evaluation is really not about risk, but about return on investment (ROI). Risky ideas can be great, if they offer huge returns. It is like gambling: A bet that has only a 1-in-10 chance is very risky, but it is a big winner if its pays 100-to-1. Conversely, a bet that wins 9 times out of 10 has very low risk, but is not worth making if it pays back only even odds. In Silicon Valley, we have become rich (San Jose has the highest per capita income in the United States) by making many very risky bets, some of which turned out to be colossal winners, like the microprocessor chip. No company in Silicon Valley has ever had the size or assets of General Motors, yet most of us have taken big risks--to get even bigger returns. Analyzing ROI rather than risk shows which poor investments get foisted off on the government: the ones which have high risk and an ordinary return. The mentality of investing "free" government money is straightforward: "We would never invest our corporate money on this Edsel of a project, but if the government invests in it, great. If the Edsel succeeds, it will be a nice business; if not, we have not lost anything."
Medium return/high-risk investments are sold to the government using technobabble. Let me give you an example. Most of you are lawyers, and I have a Ph.D. in transistor physics. On Monday, I could convince you that there is a national imperative to build "gallium arsenide wafers in the near-perfect vacuum of space to achieve near-perfect tetrahedral crystals with very high electron mobility." I would convince you with a modified form of the classic "Russian missile gap" argument, which worked so well for the Defense Department during the Cold War. I would paint a picture of a potentially catastrophic technical threat, with which our foreign competitors could wipe out an entire American industry segment. You would support the project. (As a matter of fact, you did, as I will discuss later.)
Meanwhile, on Tuesday, I could come back and tell you that my original technology calculations were in error, and that a more refined version of an existing technology--indium antimonide--could save the day.
And, as a test of my skills of persuasion, I might come back on Wednesday to turn you around again based on recently published "new data." Given that I were a credible scientist from a credible corporation, you would have no choice but to agree. And don’t think that your technical experts could help you deal with me--they are the ones my company didn’t hire.
I would not even have to be dishonest or a cynic in order to mislead you. I spend many working hours exercising my skills as an engineer/businessman to figure out which one in 10 of the ideas presented to me are worthy investments for our shareholders. I often say "no" to well-meaning engineers in our company who are convinced that their high-risk/medium-return idea is really a medium-risk/high-return idea. Indeed, most Silicon Valley entrepreneurs don’t start new companies to become techno-millionaires, but to prove their old bosses wrong, to show that their great ideas were misjudged. I founded Cypress Semiconductor Corporation 14 years ago precisely for that reason. Making difficult technology decisions professionally is what Silicon Valley is about. Whenever a dollar is transferred from San Jose to Washington, its chances of being invested in something important diminish greatly.
So far we have discussed two unjustifiable forms of corporate welfare, subsidies to the rich, tax rebates for research and development that would have been done anyway, and spending for no benefit, funding low ROI programs that will never pay off. There are two other common categories: spending that actually harms the beneficiary and unfair government competition against private industry.
SEMATECH: A SUBSIDY TO THE RICH
By 1986, the Japanese were starting to take over the semiconductor industry, once dominated by American companies. The Semiconductor Industry Association lobbied for a $500-million subsidy called Sematech, a technical consortium. They used the classic arguments to justify Sematech: "critical industry," "Japan has subsidies/we need subsidies," and "jobs will be lost." Sematech was funded, and my company inquired about joining, but the 14 Sematech charter members (12 of the 14 were billion-dollar-plus corporations) effectively excluded us and America’s other 100- plus small semiconductor companies by using the mechanism of a $1-million yearly minimum membership fee. Although Sematech was sold to Congress as a consortium open to all companies willing to pay dues of 1% of sales, the $1 million minimum meant that a $20-million semiconductor company actually had to pay 5% of sales. Big companies got a break, paying maximum yearly dues of $15 million. Consequently, for a $3-billion semiconductor company, the dues amounted to 0.5% of sales--10 times lower than the dues paid by the small companies. That is why so few companies joined Sematech, even though it had $500 million to spread around.
My battles with Sematech started when our engineers were denied access to an advanced piece of wafer-making equipment called a "chemical mechanical polisher" (CMP) machine manufactured by an Arizona company then named Westech. Sematech contracted Westech to develop the CMP machine and asked that the machine be held off the market and offered to Sematech members only for one year. The president of Westech assured me that the equipment would be on the open market and that there was no deal between his company and Sematech, but Cypress was denied access to that critical piece of wafer-making equipment, which could have differentiated between winners and losers in the next-generation technology. It was at that point I became a vocal critic of Sematech, the "government-industry partnership" that attacked all competitors, including American corporations like mine. There were rumors about other Sematech deals with equipment manufacturers, but Sematech assured me that there were no "hold-back" equipment contracts. It turns out that there really were contracts to hold back new equipment. I should say that Sematech’s new president, Bill Spencer, ended that practice voluntarily.
Several years later, I agreed to become an expert witness in a trial in Austin, Texas, in which Travis County sued Sematech for failure to pay local road and school taxes. Sematech had claimed on its tax exemption form that it was a "charity." I used my position as a witness to subpoena documentation from them, requesting any contracts between Sematech and the manufacturers of wafer-making equipment, including Westech and others, as well as any contracts between Sematech and its own members. Sematech’s lawyers were fast asleep, and provided me with a six-inch stack of contracts, including precisely the contract between Sematech and Westech Corporation to develop and manufacture a "chemical-mechanical polisher," which was to be sold to Sematech members only "for a period of one year after the point of normal product introduction." There were also other hold-back contracts. A bonus of the fishing expedition: Sematech had also granted development contracts to its own members, casting doubt on the fairness of the 50-50 "partnership" between its members and the government.
The behavior of the Sematech members was neither illegal nor unethical. Sematech asked for and received an antitrust exemption at its formation. It used the combined resources of its members and the government to create a competitive advantage, and it did a good job of keeping its secrets away from its competitors. Sematech did what rational people do when the government gives them free money and an exemption from the rules.
A few years ago, Sematech announced that it was not going to accept the last $200 million of its second $500 million grant. Based on my discussions with Sematech leaders, I know that they desired to be independent of government restrictions and not to accept government subsidies when their industry was doing better financially. Consequently, Sematech’s budget was cut in half, yet its performance remained essentially unchanged. Bill Spencer changed Sematech from an expensive 800-employee manufacturing organization to a leaner research center and information clearinghouse that relies more on the manufacturing resources of its members. I believe that if Sematech had been formed as a private consortium with a smaller budget, it would have come to its current, more efficient model of operation much more quickly. But with government money, an organization can afford to be inefficient.
To be fair to Sematech, I should note that the abuses I have mentioned are more than five years old and that the new regime at Sematech is doing a good job. Sematech’s initial membership of 14 has now dwindled to 10, but the consortium appears to provide value to those remaining companies--it simply never should have been funded by the taxpayer. Sematech falls into the "subsidies for the rich" category because its members include Intel, Motorola, Digital Equipment Corporation, IBM, AT&T, Texas Instruments, Advanced Micro Devices, Rockwell, and National Semiconductor. These companies make enough profit every month to pay back the government’s eight-year, $800-million investment. At the very least, Sematech should have been funded by a loan, not a gift from the taxpayer.
Jerry Sanders, for 28 years the CEO of Silicon Valley’s third biggest chip company, Advanced Micro Devices (AMD), is a board member of Sematech. He would disagree with a lot of what I’ve said. Also, it was his company that I left to start my company. He challenged me on that issue, too. Cypress and AMD are competitors who have disagreed in court--twice--on intellectual property issues. But, Jerry and I agree on one statement, the one he and I signed at the end of this testimony asking you to cut off corporate welfare. Other Silicon Valley CEOs have also signed up.
UNFAIR COMPETITION: THE ATP VIDEO COMPRESSION PROGRAM
Video compression is the technology that enables digital TV and small-dish satellites. Conventional television requires one satellite transponder per channel and a 10-foot dish to receive the weak analog signal. Digital TV signals are clearer, and 10 channels fit on one satellite transponder (think of the billions saved on the extra satellites that we will not need). The basic concept of video compression is that frame after frame, most TV pictures don’t change much. When Dan Rather presents the evening news, he moves, but the set behind him does not, begging the question of technologists: Why not just transmit the differences from frame to frame, rather than re-transmitting the entire picture? The concept is obvious and simple, but the mathematical algorithms and special-purpose computers required to implement it are decidedly not. The leader in video compression technology is C-Cube Microsystems Inc., a quarter-billiondollar Silicon Valley startup company, which has received an Emmy for its contribution to the television industry. C-Cube is the largest and most technologically potent company in a new industry that will reshape picture transmission not only in television, but also in computers and on the Internet.
Dr. Alex Balkanski, a brilliant mathematician and businessman, is C-Cube’s CEO. I am a member of its Board of Directors. Despite C-Cube’s leading technology, becoming a successful business in the video compression market has been a struggle. Changing the way pictures are transmitted in a government-regulated market is a prolonged task. The venture-funded company lost money for years while waiting for its technology to take off. Shortly after C-Cube started making a profit, we were shocked to find out that the government had funded one of our competitors. An ATP grant went to LSI Logic Corporation, one of America’s top-ten semiconductor companies, to help fund their effort in video compression. Perhaps LSI Logic intended to enter the video compression market anyway, so its R&D group did the heads-up thing by getting all available funds. LSI Logic’s CEO is Wilf Corrigan, a friend and competitor. Wilf Corrigan and I agree on ending corporate welfare, as his signature attests.
SPENDING FOR NO BENEFIT: GALLIUM ARSENIDE WAFERS IN SPACE
Gallium Arsenide (GaAs, pronounced "gas") is a semiconductor five to 10 times faster than silicon. GaAs chips are used to transmit data at very high speed on the so-called "electronic data superhighway." GaAs chips are capable of transmitting and receiving signals on a single fiberoptic cable at the rate of 10 billion bits per second, fast enough to transmit 250,000 typed pages of information per second.
The Space Vacuum Epitaxy Center (SVEC ) is billed as "a NASA center for the commercial development of space." It is funded to grow GaAs wafers on space shuttle flights using a process called epitaxy. NASA’s Wake Shield was designed to grow GaAs crystals behind a shield sweeping through space some 30 miles away from the contaminants surrounding the space shuttle. The theory: The vacuum in space is much better than the vacuum earthbound equipment can provide, thus offering the potential to grow more perfect crystals in space. (NASA’s technobabble is award winning: "molecular beam epitaxy" doing "ordered growth" in an "atom by atom manner" of "near theoretical" atomic quality in an "ultra-vacuum of 10-14 torr" as part of a "cost and time-efficient program" which "could be a model for future commercial space endeavors.")
The Wake Shield became one primary objective of five NASA missions. No one at SVEC would say exactly what the cost of the space wafer experiments was, but a ball-park estimate is $200 million per flight, shared among several experiments. The management of the Wake Shield claimed that although the initial wafers would be astronomically expensive, later production of GaAs wafers in space would cost only $10,000 per wafer, a number declared to be commercially viable. Congress bought off on SVEC, and at least two missions have been flown.
Dr. Lou Tomasetta, the CEO of Vitesse Semiconductor Corporation in Camarillo, California, studied at MIT. He is an expert in transistor physics, data communications, and GaAs integrated circuit manufacturing. I enjoy "tech talk" with Lou during our monthly meetings at Vitesse, where I am also a member of the board of directors. Neither Lou nor I can figure out why our government is making GaAs wafers in space. Lou calls the program a "solution looking for a problem." Vitesse is one of America’s Big Three GaAs companies. Given the possibility that Lou and I were missing something, I called Steve Sharp, a Silicon Valley friend of mine who moved to Oregon to run TriQuint Semiconductor, another of the Big Three. Steve said that he was buying GaAs wafers for $175 each, and that the very highest performance GaAs wafers sold for $1,000. He said that it would be very difficult to figure out how to make money on a $10,000 space wafer. His final comment was, "I tend to ignore this sort of request."
In response to criticisms I published in an industry publication, Electronic News, challenging the commercial value of the space wafers, the head of the SVEC project said the wafers "could be useful for technologies not yet developed" and then listed numerous commercial products including CD players and optic fibers that already are on the market, with technology derived from ordinary terrestrial wafers.
Maybe we are all missing something, but I think our government has taken several hundred million dollars from American taxpayers to subsidize an exotic technology manufactured in an exotic place for a super-high-tech industry that neither needs nor cares about the investment.
SPENDING THAT HURTS THE BENEFICIARY: EUR OPEAN SEMICONDUCTOR SUBSIDIES
Recently, countries with advanced electronic capabilities agreed to remove tariff barriers on a broad range of electronic products because they realize that high prices hurt everyone in the electronics industry.
In an industry where life depends on fast improvement, consider the effect of the tariff that the European Union placed on semiconductor chips imported into Europe. Currently, semiconductors comprise about 20% of worldwide electronic shipments. In other words, the average personal computer contains about 20% of its value in semiconductors. Put another way, for every $1 in semiconductor sales, there are $5 in computer or home electronics sales.
When the European Union decided to protect its fledgling semiconductor industry by imposing a stiff 14% tariff on imported chips, it also raised the price that the European computer industry had to pay for its most important raw material, chips. The EU policy to protect its small semiconductor industry had a devastating impact on its much larger computer industry. Europe’s largest computer company, Great Britain’s ICL had to sell a 50% stake to Fujitsu to stay afloat. Nixdorf, a prominent German computer company, was acquired by Siemens after a financial crisis. Italy’s Olivetti, Europe’s biggest PC producer, still sells PCs, but stopped manufacturing, triggering big layoffs. The market share of European computer companies as a group declined. And what happened to the fledgling European semiconductor industry while it was being protected? Its market share dropped from 10.2% to 5.4% from 1988 to 1996. In this case, government "help" damaged all parties concerned.
THE HIDDEN COSTS OF TECHNOLOGY SUBSIDIES
If a tax of a nickel per day per American supports $5 billion in yearly subsidies, the whole $65 billion-per-year tab for corporate welfare can be viewed as a "mere" 65 cents per day per American. An obvious question comes to mind: "Wouldn’t you be willing to pay 65 cents a day to make America’s companies the most competitive in the world?" While I hope your answer to that question is "no," I would also like to point out that true cost of corporate welfare exceeds that cost by a lot. Consider the tax levy for corporate welfare as it applies to two groups, average Americans and rich Americans. That 65 cents per day is $237.25 per year, a nontrivial sum for the average American. That means less money in the pockets of families struggling to make ends meet: a bicycle not bought, a vacation not taken, or missing the monthly college fund payment. It is unconscionable and un-American that we would tax working families while we fund the dubious corporate subsidies I have reviewed.
On the other hand, it is much easier to talk about funding corporate welfare by eliminating those "tax loop holes for the rich" (who pay "only 50%" of their income to the government). I am an example of one of those rich people who can afford to pay more taxes. Although I came to California with only $700, I became a founder of a startup chip company which employs over 2,000 people. My personal wealth comes from the 2% of the shares of our company I still own, most of them held since our founding in 1983. The market value of our company is now $1.5 billion. Two percent of $1.5 billion is $30 million. I am rich. What does it matter if the government takes an extra million dollars from me in order to fund corporate welfare or other "good ideas"?
Like many Silicon Valley people who have created wealth, I consume very little of my net worth. I’m interested in transistors, companies and competition--not yachts and airplanes. Consequently, I invest almost all of the money I have earned right back in Silicon Valley. I have already described two of the companies that I not only invest in, but help to run as a board member. There are numerous other companies that I invest in because I know what they do and why it will make a difference. In aggregate, I hold shares in over 100 companies, almost all of them Silicon Valley high-technology companies whose names you would not recognize. When Congress and the President voted to raise my personal taxes in 1993, I paid the extra amount by selling some of those Silicon Valley stocks. That money then went to Washington to be "invested" in "government-industry partnerships" related to the "electronic data superhighway" (at least as the PR described it at that time).
The point is this: When government raises taxes on wealthy individuals, it is simply taking investment dollars from those individuals and moving them to Washington. Proven moneymakers and job creators lose control over the investment of their funds and unproven Washington amateurs take over. The real question for Americans is, "If you had to bet the creation of your job on investment from wealthy people in the private sector versus investment from the government, which would you choose?" The answer is obvious. Although it is good stump rhetoric to fume about "tax breaks for the rich," the fact is the average American loses out every time a dollar is taxed out of the private sector. If you really want to enhance the competitiveness of American corporations, cut the capital gains tax and let me invest my own money--I’m very much better at it than government is.
There is one final hidden cost of government interference in the free market: The inefficient use of human resources is the most devastating cost of all. All CEOs know one fundamental truth: that the human knowledge and energy collected in a company is what drives profit. It’s not assets, or factories, or cash, but people that separate one company from another. Consequently, in Silicon Valley, we fight titanic battles to woo employees in an area where unemployment is less than 2%. When Cypress was a startup company, we wooed numerous employees from Intel with the lure of a more prominent position (in a very much smaller company), and the potential wealth from stock options. Intel, now the largest semiconductor manufacturer, has counter-attacked in the Valley with a new campaign promising--in writing--a Hawaiian vacation as a sign-on bonus for working at Intel. Recently, when one of our competitors, Cirrus Logic, suffered a problem in the marketplace prompting layoffs, we hired an airplane to fly over Cirrus’s headquarters carrying a banner with the message that we had jobs open and listing our Internet address.
Corporate welfare can have a devastating effect in an environment like Silicon Valley. While companies are fighting with salary, stock, and promotions to woo the best and brightest, the government sometimes uses corporate welfare to prop up sick companies. Consider this hypothetical case: When the automobile industry was moving from mechanical carburetors to electronic fuel injectors, what if the government decided to "protect jobs" in the carburetor industry by subsidizing carburetor companies? With American fuel injector companies starving for the human talent, and Japanese competitors taking market share, the government would be spending money to keep people at the failing carburetor companies in order to "save jobs." Subsidizing losing companies traps people in dead-end jobs, prevents other companies from getting the talent they need, and gives our international competitors an advantage.
JAPAN AND EUROPE SUBSIDIZE, SO MUST WE
One of the most common--and erroneous--rationalizations for corporate welfare is a scare tactic: Foreign governments give out corporate welfare; America must do the same to remain competitive. Perhaps Europe is not an immediate threat, but what about Japan?
Sematech was formed at the height of the Japanese attack on the American semiconductor industry. The American semiconductor industry dominated its market, from its origin in the ‘60s, through the ‘70s. As late as 1982, America held a 57%-32% chip market share advantage over Japan. But in the ‘80s fortunes reversed, and by 1989 Japan actually took a 50%-37% lead. Clyde Prestowitz, a big fan of government subsidies, wrote the book Trading Places, and testified before Congress that Japan’s semiconductor subsidies, channeled through its Ministry of International Trade and Industry (MITI), were responsible for the defeat. Prestowitz declared that the American semiconductor industry was lost to the Japanese and pondered whether or not the American computer industry could survive (both assertions were wrong). In 1993, I debated Prestowitz at the Cato Institute, where he went so far as to declare that the semiconductor industry was created by defense spending. Nothing could have been further from the truth, yet Prestowitz was presented as an expert to justify subsidies to Silicon Valley, about which he knew very little.
I also debated Michael Maibach, the chief lobbyist for Intel Corporation, on public television in 1993. Maibach said that Sematech was needed to maintain the domestic supply of military chips. What if our military had to depend on Japan? It was another scare tactic used to justify corporate welfare. Even at its lowest point in 1989, America still manufactured 37% of the world’s $49.7- billion worth of chips. The military rationalization for corporate welfare sounded OK in Washington, but it had no rational basis. I reminded Mr. Maibach that my company, Cypress Semiconductor, shipped 20% of its production to the military and had chips in the F-14, F-15, F- 16, and F-18, as well as many of the guidance and weapons systems aboard those airplanes. My position was vindicated a few years later when Intel announced that it was voluntarily exiting the military-chip business, despite its Sematech subsidy. Cypress still ships a wide variety of chips to the military.
Did MITI subsidies to the Japanese semiconductor industry hurt our chip companies? Were Japanese companies sharing secret data in a way that would violate American antitrust laws? The answer to both questions is "no." In 1992, I convinced Dr. Yoshio Nishi to testify to that effect at a congressional hearing. Dr. Nishi, then the head of chip development at Hewlett Packard, had been head of the VLSI program at Toshiba, one of the few MITI-sponsored programs that seemed to work. The MITI VLSI program was targeted at entering the dynamic random access memory, or DRAM market, the biggest chip market in the world. Japan successfully entered that market en masse, causing Silicon Valley’s three largest companies, Intel, Advanced Micro Devices, and National Semiconductor, to abandon the DRAM market. Intel later acknowledged that it felt it could have weathered the storm, but chose to abandon DRAMs in order to put its full force behind microprocessor development. What a great decision that was! I was working in the memory group at Advanced Micro Devices at the time. We did exit the DRAM business because we could not make money in it. We felt at the time that Japan was dumping DRAM chips into the U.S., selling them below manufacturing cost. In retrospect, I believe now that Japan simply got better at manufacturing than us for a while and was able to produce the chips at extremely competitive costs. Charlie Sporck, then president of National Semiconductor, was the father of Sematech. Sporck used the DRAM failure as a rallying cry.
Dr. Nishi ran the Toshiba DRAM program, which was the most successful of the Japanese efforts. He testified that there was very little financial aid from MITI to the Japanese semiconductor industry, and also that the Japanese semiconductor companies--intense rivals-- never shared secret information, but only general "roadmap" information that allowed the companies to gauge the effectiveness of their programs and make sure they were headed in the right direction. Three important American semiconductor companies did remain in the DRAM race: Motorola, Texas Instruments, and then-startup Micron Technology in Boise, Idaho. TI now manufactures DRAMs in plants around the world, and Micron has grown to be a $3-billion company known to be able to outmanufacture any of its Japanese rivals. The domestic military chip supply was never in danger, and MITI had very little to do with the Japanese success in the mid ‘80s. Superbly managed Japanese companies simply beat us--for a while.
The tables have now turned. America again leads Japan in semiconductor market share. Intel’s decision to focus on the microprocessor business, combined with its excellent execution, have propelled it to become the No. 1 semiconductor company in the world. American semiconductor manufacturing capability has caught up to Japan’s. Our focus on designing innovative chips has proven to be more important than Japan’s focus on grinding out commodity chips at very low cost. Many of the American semiconductor companies that were very small startups at the time of Sematech’s formation, my company, Altera, Xilinx, Linear Technology, Maxim, Micron Technology, LSI Logic, and VLSI Technology are now substantial semiconductor corporations with revenues from $500 million to $3 billion. These companies manufacture a dazzling variety of products. We all export to Japan. The innovativeness and resilience of the American semiconductor industry enabled it to react to the attack--and win.
Although the MITI VLSI program was successful, the fact is that MITI has also wasted huge amounts of money and has many more failures than successes. For example, MITI’s highdefinition television (HDTV) program spent $1 billion to define and dominate the next-generation HDTV. Some American executives immediately appealed to Congress to get their corresponding piece of corporate welfare. The realities: 1) the U.S. won the High Definition Television (HDTV) race with a superior digital design, and 2) the only digital TV deployed today is not that burdensome, FCC-approved HDTV system, but a digital enhancement of ordinary television. (Prediction: I have a 2000-line, super-enhanced TV in my house that qualifies as "HDTV," but uses a normal TV input signal. That system will be deployed commercially, and the expensive new HDTV being pushed on a reluctant industry by the FCC will stall; no wonder CBS and NBC want ATP grants to build the first HDTV station.) MITI caused Japanese taxpayers (who live in homes with half the square feet per person of Americans) to lose $1 billion on its HDTV boondoggle.
TRON was a nickname for a Japanese advanced, fifth-generation computer partially funded by MITI that threatened to wipe out the U.S. computer industry. It turned out to be a loser, and the U.S. computer industry remains dominant. MITI support to the Japanese aircraft and biotech industries has also produced no tangible results.
MITI focuses on 13 Japanese industries. The four areas of heaviest emphasis are textiles, mining, basic metals and chemicals. Despite that, these areas ranked lowly--13th, 12th, 10th, and 9th, respectively, in growth rate among the 13 industries. In response to the theory that MITI was not trying for growth in those industries, but simply subsidizing declining industries to ease their pain, Harvard economist David Weinstein stated, "But if that is true, that makes Japanese industrial policy very like its French and American counterparts over the past four decades-- politically driven, favor-based, [and] non-helpful to the nation’s overall economic functioning."
As I testified before Congress in 1995, "Corporate welfare does not work anywhere in the world. It does not work because it penalizes a country’s winners with excess taxes in order to fund that country’s losers with inefficiently run government programs . "They’ve got subsidies; we need subsidies," is exactly wrong. America will be much more competitive on a relative basis if we allow the nations with whom we compete to squander their taxpayers’ money, while we encourage our companies to win without subsidies. It’s like the Olympics: there comes the day when an athlete must walk alone into the arena of competition. The government cannot lift the weights and run the miles that are required to be a champion--only an individual can."
The fact is that in western Europe or Japan, the choice to take money from citizens to pursue the "good ideas" of government has been consistently self destructive to their economies. Socialism does not work. Socialism is immoral. We should abandon socialist programs like corporate welfare.
BARRIERS TO PROGRESS: THE SYSTEM AND LOBBYISTS
One of the biggest barriers to eliminating the corporate welfare drain is the pork barrel system itself: members of Congress are put in a lose-lose situation forced to choose between voting down a significant subsidy for a home-state corporation, or voting to continue corporate welfare. Congress recently faced the same situation in the downsizing of the military. Individual senators were very reluctant to vote to close down major bases in their home state, yet everyone agreed that the Soviet collapse provided a great opportunity to reduce spending. The solution--to appoint an independent panel to collect military cuts into a single bill for a "yes" or "no" vote without amendments--turned out to be a winner. It got the job done, and even in California where we were hit very hard by military downsizing, most of us believe that we are all better off. We should follow the same procedure with corporate welfare.
Prior to traveling here, I polled a few CEO friends of mine in Silicon Valley to see if they would support a statement saying that they would support cuts to corporate welfare, even if it meant cuts in government funding to their companies. Most agreed, and their statement is attached as an appendix to this testimony. As a general rule, Silicon Valley CEOs like smaller governments and lower taxes, and are willing to forego subsidies to achieve those goals. CEOs would much rather make money with healthy companies in a healthy economy than receive welfare from the government.
I believe that the popular impression that CEOs cling strongly to their corporate welfare is completely inaccurate and stems from two sources: 1) a few CEOs who receive massive subsidies and do fight for them, and 2) industry lobbyists who are out of touch with their constituencies.
I have testified before the Senate and House against corporate welfare since 1989. In my 1995 testimony before a House Subcommittee, my opponent was a lobbyist from the American Electronics Association (AEA). His testimony started with, "We represent 10,000 corporations..." What struck me was that my company was a member of AEA, and that we were paying this man to argue against me! The AEA was out of touch with the Silicon Valley CEOs I know, and absolutely misrepresented my position. Furthermore, the AEA had never polled me to determine whether or not our company wanted them to lobby for maintaining Commerce Department subsidies. The AEA started as a Silicon Valley-based electronics organization. Now, like many other lobbying organizations, it has moved to Washington and been co-opted by the pork-barrel process. One unspoken assumption behind the AEA seems to be, "Our job is to bring home the pork for electronics companies." Although many of us agree with tactical positions taken by the AEA on workplace or technical issues, I know that there is no consensus support for pork-barrel politics among high-tech CEOs. When I returned to California after that meeting, I asked why we had joined the AEA. The answer was that our membership was solicited by mail, the dues were low, and we simply signed up in order to get information. I fired the AEA; we are no longer members.
We are members of the National Association of Manufacturers (NAM). I testified earlier that I do not believe the American taxpayer should be compelled to subsidize the sale of American products overseas. The most recent cover story of the NAM Briefing newsletter is entitled, "NAM Report Proves Export Financing is Critical to Job Creation." NAM favors taxing people to subsidize exports. They argue that the Japanese, French, and Spanish do it, and we must also in order to be competitive. In other words, they are using every tired argument debunked in this testimony to justify their favored form of corporate welfare. I am going to fire NAM as soon as I get home.
Our government did best for its people when it stayed near its founding principles of free markets, limited government, and enlightened self interest. It did better economically and it did better morally.
Unfortunately, starting with the 16th Amendment, and then the New Deal in the 1930s, we have drifted toward socialism. The government now controls 35% of America’s output. That makes us all poorer and less free.
The reasons for government taking one-third of what Americans produce are couched in Washington-speak and technobabble and do not stand up to scrutiny. The words rationalize the workings of a system in which taxing and spending drive us in a downward economic spiral.
We are at a cross-roads where we can choose to seize the opportunity to leave epithets like "pork barrel" and "corporate welfare" behind us and return to the high ground.
American business has always been ready to lead. By 1800, America had more corporations than all of Europe, combined. We can help revitalize the American Dream. Stop taking money from Americans for socialist subsidies--companies do not need or want that kind of money. Capitalists make money from customers who voluntarily trade their money for the higher value we provide them.
We declare independence from the corporate welfare state. The difference between it and free market capitalism is the difference between taking and giving, immorality and morality, poverty and wealth. Make the right choice, end corporate welfare.