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By Michael S. Lubell, APS Director of Public Affairs
The science advocacy industry that APS helped start in Washington 20 years ago is no longer delivering the high returns it once did. Rising above the noise of hyper-partisanship, political sniping, and electoral campaigns that never end has become a daunting task, even for the best messengers delivering the best messages. Couple that challenge with science’s almost total reliance on a dwindling discretionary slice of the federal spending pie — projected to shrink to 25 percent of total spending by 2040, from 62 percent in 1970 and 36 percent today — and you have gloom if not doom in your future.
We have come to a critical juncture: Either we develop new arguments and new strategies to persuade Congress and the White House that current budget policies will knock the United States off its high perch on the innovation pyramid, or we look beyond the annual appropriations process to fund long-term research. If you spend just a few days suffering in the fetid political climate in Washington as I do, you will quickly concede that we need a dramatically new approach to funding research.
We must become innovators ourselves. And we must think big. An American Research Investment Fund, run as a private-public partnership, could be the answer. Here is how it might happen, how it might work, and how it might be just what scientists, politicos, wonks, and business leaders are looking for.
First a few facts: Today, the federal government spends about $50 billion per year on basic research, accounting for 55 percent of the U.S total expenditure. Academic and other nonprofit institutions, combined with state and local governments, account for slightly less than 25 percent, while industry contributes about 20 percent.
It wasn’t always that way. Half a century ago industry was a major player in the research game. Think of Bell Labs, Xerox, IBM, GE, GTE, GM, Kodak — the list is long. But with each passing decade, one American industrial giant after another bailed out of long-term research, basic or applied.
It’s not that they believed they no longer needed the benefits of research. They well knew, and they still know, that research is fundamental to the future of any high-tech enterprise. So, why did they abandon their commitment to their powerhouse in-house laboratories?
Thomas Friedman has written extensively about one of the motivations: the IT revolution that has driven globalization. Two of his bestsellers, “The World Is Flat,” first published in 2005, and “Hot, Flat, and Crowded,” published in 2008, are must-reads for anyone looking for a window onto the 21st century high-tech landscape. In such a brave new world, it is simply easier for American companies to find and buy the rights to new discoveries wherever they are made.
But there is another motivation for American companies to shed their research laboratories, eviscerate their research budgets, and disband their research teams. Changes in how corporate executives receive their compensation and how Wall Street conducts its business have removed almost all the incentives for long-term industrial commitments.
In 1960, stockholders held an average stock for eight years. Today, with the reduced costs of electronic trading and the proliferation of hedge funds, the average holding time is a mere four months. Today, in response to stockholder demands, companies compensate executives mainly with bonuses based on stock performance, and with options that allow them to buy their company’s stock at a future date at a fixed “strike” price, often only a year or two after they receive the options. The more the share price rises, the more the option is worth.
The result of such incentives is that American corporations use fully 80 percent of their annual profits to buy back their stock with the explicit goal of boosting the price of a share. For a Fortune 500 CEO with an average tenure of only 4.6 years, spending money on research that doesn’t contribute to the bottom line in two years or less is simply not rewarding.
Corporations want the benefits of research and the discoveries that emanate from it, but unless the rules change, they won’t pay for it — unless they’re forced to. And now could be the time to make them do it.
Members of both political parties recognize that corporate tax rules are patently unfair. They benefit global companies that can take advantage of loopholes to reduce their taxes dramatically, while requiring most other companies and small businesses to pay the full 35 percent federal rate. Comprehensive corporate tax reform is in the Washington air. It would most likely reduce the tax rate and plug loopholes, keeping the legislation revenue-neutral.
Part of a likely reform package would be a sweetener to repatriate the more than $2 trillion currently stashed overseas by global American corporations — eight high-tech companies, among them Apple, Google, and Microsoft, account for more than a fifth of the total — and not subject to federal taxation so long as the money remains offshore. With interest rates low, American companies such as Apple have been happy to use their overseas holdings as collateral for loans to buy back stock or for other domestic purposes. But as rates rise, such tactics will become increasingly less attractive.
A 5 percent to 10 percent tax on repatriated money could generate a one-time capitalization of $100 billion to $200 billion for a self-sustaining research investment fund, generating an annual usable investment income of $4 billion to $8 billion. Private directors, drawn from the science and technology community, the finance community, industry, and labor, would largely control the operation of the fund. But representatives of selected federal science agencies would provide a public nexus.
Describing in detail how the fund would operate requires more space than this column permits. Suffice it to say, it would contain safeguards to prevent appropriators from gaming the system; it could provide matching funds to encourage appropriators to boost science budgets; it would rely on agencies to provide prioritized lists of peer-reviewed projects; it could provide seed money for major initiatives and projects; it could allocate funds to long-term applied research for which neither industry nor government has any appetite; and it could develop strategies to increase its endowment.
Will it be easy to establish a research investment fund? No. Could it happen? Possibly. Do we need it? Absolutely yes.
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