Declan McCullagh

Big Bucks for Small Technology

Declan McCullagh*
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"As the nascent world of nanotechnology develops, we have a chance to see how the political process steers research in political ways that need not parallel scientific goals."
The U.S. government is spending big money on small technology.

Federal funding for nanotechnology, the science of manipulating matter at the atomic and molecular level, is increasing dramatically. At a time when budgets other than homeland security are shrinking or remaining constant, nanotech spending is set to double over a three-year period. In 2001, the National Nanotechnology Initiative received $422 million, and President Bush is asking for $847 million for the 2004 fiscal year. About a third of that money would go to the National Science Foundation, a third to the Defense Department, and the remainder to the Department of Energy and other agencies. The U.S. government is spending big money on small technology.

The term nanotechnology refers to working with materials in the 1- to 100-nanometer range, a process that could create useful new substances, aid in medicine, and accelerate computers. A nanometer is a billionth of a meter, which is about a hundred-thousandth of the diameter of a human hair, or a mere 10 times the diameter of a hydrogen atom. Nanotechnology's proponents hope to revolutionize the way manufacturing works. Instead of grinding, milling, and sawing materials in inefficient, top-down processes, materials would be manipulated at the molecular level instead.

Zyvex, a nanotech startup, describes the concept this way: "If we rearrange the atoms in coal we can make diamond. If we rearrange the atoms in sand—and add a few other trace elements—we can make computer chips. If we rearrange the atoms in dirt, water and air we can make potatoes." Silicon Valley is experimenting with silicon nanowires and carbon nanotubes, two structures that could eventually replace standard transistors on chips. First-generation nano-products already on the market include the stain-resistant fabric used in Lee Performance Khakis and Advanced Powder Technologies' ZinClear, a transparent sunscreen that offers better UV protection than zinc oxide.

Nanotechnology may prove to be a remarkable technology that changes the way we live our lives. But that is not a certainty, and therein lies the first problem with the explosive growth in federal funding of nanotech. Governments' track record in guessing what technologies will be worthwhile is hardly perfect.

Take the telling example of Japan's Ministry of International Trade and Industry. MITI's research and development efforts over the last two decades are marked by bets on the wrong technology and sponsorship of projects with unrealistic expectations. Its highly-touted Fifth Generation Computer project was intended to leapfrog the rest of the world in high-speed computing and artificial intelligence through adopting the PROLOG programming language. Then Japan's computer makers balked at the prospect of participating in what they viewed as a project merely of academic interest. The Fifth Generation program eventually died without meeting MITI's stated goals.

The United States veered in a similar direction in the 1980s with Sematech, the government-created chip making consortium. Sematech was born of fears that Japanese manufacturers would crush their American rivals, a prediction that—given the state of that country's economy today—seems terribly alarmist. Over an eight-year period, taxpayers gave about $800 million to 14 electronic companies that made about $800 million in combined profits every month.

Sematech was a boondoggle. San Jose-based Cypress Semiconductor, for instance, was not a member of the consortium. "We at Cypress were actually prevented from getting access to a state-of-the-art piece of wafer-making equipment because Sematech had signed a contract with a company preventing all non-Sematech members in the United States semiconductor industry from getting access," Cypress CEO T.J. Rodgers says. "So here we had money taken from the taxpayer to 'save' the American semiconductor industry from the Japanese being used by a few companies who lobbied well to attack the rest of the American semiconductor industry, including my company. It was a disaster."

Some government-funded research has led to benefits. The Internet began life as a Department of Defense project. The space program has given us Teflon and Tang. The National Institutes of Health has helped us understand disease.

The best case for a government subsidy of R&D is to fund vital research that the private sector would fail to do on its own. Proponents of government nanotech funding argue that, as in other "basic research" areas, corporations have only short-term profit horizons. They say that government must pay for basic research because that's not profitable—only applied research is.

This point has some validity, but there are two counter-arguments. First, private sources will pay for basic research. It may not be at the level that all researchers would prefer, but if it can lead to applied research results, the private sector will still do some of it. Second, nanotechnology includes a mix of early-stage research and late-stage research. Intel's latest generation of microprocessors likely qualifies as nanotechnology, but should Uncle Sam pay for the development of a hypothetical Pentium VI? Third, by having private funders, you avoid the public choice problems.

Real-world subsidies rarely, if ever, follow the ideal found in economics textbooks. Instead, government-funded R&D in the real world is subject to the lobbying and rent-seeking that takes place whenever government dangles money. As the nascent world of nanotechnology develops, we have a chance to see how the political process steers research in political ways that need not parallel scientific goals.

Bureaucrats, special interest groups, and members of Congress have strong incentives to channel nanotech funds to politically popular recipients or into trendy research areas that may or may not have legitimate scientific value. This has already lent itself to pork-barrel politics, as illustrated by a March 2002 speech by House Science Committee Chairman Sherwood Boehlert (R-NY) delivered in New York City. In it, Boehlert pledged to steer a disproportionate amount of cash to businesses and universities in his home state. "I will do everything in my power to ensure that nanotechnology research gets the funding it deserves," Boehlert said. "I will do everything possible to see that a significant portion of that research takes place right here in New York state."

Without the traditional yardstick of profit and loss, there is no straightforward way to measure what is a wise course of spending. Rational economic calculations tend to be replaced by the routine of a guaranteed budget increase every year. Money often goes to favored or well-connected groups, and controversial but promising research may be ignored. Replacing market decisions with ones made on Capitol Hill could lead to highly-politicized results and inefficient allocation of nanotech funds.

Consider the debate over global warming. Richard Lindzen, the Alfred P. Sloan professor of meteorology at MIT, warned Congress in 1996 that researchers who relied on hefty government grants had strong incentives to exaggerate the potential problem. "A major source of support was seen as depending on the perpetuation of an issue rather than on a focused attempt to solve basic questions in a prioritized manner," Lindzen said. "Politicization contributed to this by establishing that agreement as to the possibility of crisis constituted public virtue, while scientific questioning was frowned upon to put it mildly." Myron Ebell, who specializes in science policy at the Competitive Enterprise Institute in Washington, says it's a problem plaguing government-funded R&D in general. "The only way to get the attention of the federal government is to create a big problem," Ebell told me. "As soon as the scientific community learned the answers, there's zero money. If there isn't a problem, they don't get the money."

Government funding of nanotech research also tends to lead to increased government control. That has happened in other areas, for example when Congress linked highway funding to drinking ages and required schools and libraries receiving federal funds to install Internet filtering software. In August 2001, President Bush signed a controversial executive order limiting federal funding for cloning research to about 60 existing stem cell lines.

It's too early to predict what might happen in the case of nanotechnology, but early signals indicate Congress is eager to tie strings to funding. A bill introduced by Sen. Ron Wyden (D-Or.) would "ensure that philosophical, ethical, and other societal concerns will be considered alongside the development of nanotechnology." Last week, a House committee added an amendment to a nanotech funding bill that would require an evaluation of the racial diversity of organizations applying for nano-funding. During a presentation last year at a Foresight Institute conference, a former national security advisor for Vice President Al Gore predicted increased control. "These guys talking here act as though the government is not part of their lives," said Leon Fuerth, now a professor of international affairs at George Washington University. "They may wish it weren't, but it is. As we approach the issues they debated here today, they had better believe that those issues will be debated by the whole country."

Among groups that benefit from nanotech spending, we're starting to see a lot of unhealthy jockeying for position and rent-seeking going on. Rent seeking is obtaining wealth or power through government action. In general, it grants special interests short-term gains at the expense of the long-term economic health of a society.

To bolster its rent-seeking abilities, the Nanobusiness Alliance trade group signed up former House Speaker Newt Gingrich as its chairman and Rep. Robert Walker, former House Science committee chairman, and former Transportation Secretary Rodney Slater as advisors. Corporations that hand over up to $25,000 a year to the alliance can be part of all "legislative tours at no charge" and receive "free access to legislative" lists of key members of Congress and their aides. Alliance members include both startups and the billion-dollar firms Lockheed Martin, Agfa, Gateway, and GE.

If these CEOs viewed nanotech research as too risky to fund themselves, there might be more justification for government dollars. Instead, private investment is flourishing. According to a statement from the Nanobusiness Alliance: "Some of the world's largest companies, including IBM, Motorola, Hewlett Packard, Lucent, Hitachi, Mitsubishi, NEC, Corning, Dow Chemical and 3M have launched significant nanotech initiatives through their own venture capital funds or as a direct result of their own R&D."

A venture capital company devoted exclusively to nanotech, Lux Capital, already exists. Lux Capital estimates that from 1995 to 2000, the number of news articles referencing nanotechnology jumped sixfold, and a billion dollars of venture capital flowed into the nanotech industry last year. A recent report from the firm said companies "are increasingly conducting pure or basic research to keep competitive... Private spending on pure research is supposed to surpass public spending in the next year. Other firms turn to partnerships with academia, essentially outsourcing R&D initiatives."

Evidently, basic research in the case of nanotechnology can be funded privately. While a firm may not be able to capitalize on all the benefits of basic research it pays for itself, CEOs seem to believe that a sufficient understanding of the fundamentals leads to applications that can be profitable.

A CNET Investor article from last year said that IBM, Intel and HP—which as of last week have a combined market capitalization of $320 billion— are the front-runners in nanotech research. The article said: "Nantero—founded a year ago by three graduates of Harvard, two with chemistry Ph.D.s—received so much attention it has had to turn down venture capital... Other start-ups are also hot on the trail. According to Merrill Lynch, start-ups to watch include Coatue, Molecular Electronics, Nanosphere, ZettaCore and Zyvex." This is a description of a vibrant and growing industry that recognizes the potential of early-stage research into nanotechnology and is eager to fund it.

Even government officials who argue for more federal spending recognize that the potential payoff for private investors is tremendous. Phillip J. Bond, technology undersecretary at the Commerce Department, predicted in an April 2003 speech that the global market for nano-products would reach $1 trillion by 2015. Bond added: "I for one would bet this is an underestimation. The accelerating rate of the accumulation of knowledge fueled by IT and the collaborative engine of the Internet lead me to conclude that models of the past cannot predict the rate of future advances."

Bond's argument proves too much. If the potential payoff for private investors—$1 trillion is one-tenth of America's current GDP—is so huge, the justification for the government's nanotech research spending should be that much smaller.


* Declan McCullagh is a journalist, programmer, and photographer. He lives and works in Washington, DC. His email address is declan@well.com.

For more articles by Declan McCullagh, see the Archive. To comment on this essay, see the EconLog article "Nanotech Research Funding."
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