Government can play important roles in advancing the creation of knowledge. In fact, investing in basic research is a considerably underdeveloped area in this regard. Applied research is also appropriate if it is on generic technologies or where clear criteria are met for spending on specific technologies. However, that should not spill over into areas where the technology is close to commercialization and the private sector has the incentives to bring it to market.
What might be called technological home runs are appropriate for government R&D because the private sector is unlikely to invest in things such as space based solar power or fusion technologies. Where government gets into areas that are the domain of the private sector, unintended consequences, such a moral hazard do more damage than good.
It is, as Advanced Research Projects Agency-Energy (ARPA-E) Director Arun Majumdar notes, important to “invest in game-changing ideas that will build the technological infrastructure for a new energy economy.” Yet, a sticking point arises in the in defining what constitutes “game changing ideas?” If they are the technological home runs that makes sense but is that where ARPA-E is investing? If not, it may be substituting taxpayer dollars for private capital. If private markets are not forthcoming with capital, that failure should be a large red flag and warning to the government.
The history of government energy research and development (R&D) is rich in lessons that government officials rarely seem to learn. ARPA-E represents an attempt to take a model for technology development that has been a great success for the Department of Defense and apply it to energy. It, like past industrial policy attempts, is failing and will fail. DOE’s R&D program needs a radical overhaul, and ARPA-E should be relegated to the history of well meaning but flawed ideas.
According to the project’s website<http://www.darpa.mil/our_work/>, DARPA’s mission involves applying:
multi-disciplinary approaches to both advance knowledge through basic research and create innovative technologies that address current practical problems through applied research …. As the DOD’s primary innovation engine, DARPA undertakes projects that are finite in duration but create lasting revolutionary change.
DARPA has been successful because it has a known customer—DOD—that has a clear set of needs. The same is not true with ARPA-E. DOE bureaucrats who run its R&D program have no special knowledge of the commercial processes and internal feedback mechanisms needed to take a concept to commercial viability and profitability. And no one should be surprised by that reality.
The skills, temperament, and response to incentives that make for success in government service are not the same as those that produce innovation and successful products in the private sector. But the biggest difference is knowledge of the customer, customer needs, and market driven feedback.
If the advocates and funders of ARPA-E had done their homework, they would have concluded that what looks promising in theory will fail in practice. It is hard to believe that they were ignorant of this history, which is unambiguous—unambiguously negative. The cynicism produced by a rich history of failed energy R&D attempts over the past 40 years being ignored leads to a conclusion that the DARPA model for advanced energy R&D is just another Trojan Horse to hide political cronyism and budget games.
Three years ago, former Obama National Economic Committee chairman Larry Summers was brutally frank in making the point that the “government is a crappy venture capitalist.” While he was specifically referring to loan guarantees to organizations like Solyndra, his message had a broader application.
Last week, Stanford Professor and former chair of the Council of Economic Advisors wrote<http://online.wsj.com/article/SB10001424052970204883304577221630318169656.html> in The Wall Street Journal about Washington’s knack for picking losers. He made the following points:
Mr. Obama is spending immense sums for subsidies to particular industries and technologies, almost $40 billion for clean-energy programs alone (some, appropriately, for pre-competitive generic technology.) Yet a large number of prominent venture-capital funds are devoted to alternative-energy providers. They should be competing with each other and with the technologies they seek to replace—not for government handouts.
The argument is often advanced that government support is needed to nurture infant technologies and get through the “Valley of Death” where risk and uncertainty dries up the availability of capital. Both rationales leave much to be desired. The private sector has a long record of bringing new technologies to market and is routinely faced with its own internal “Valley of Death.” Somehow, they know how to manage risk and how use champions, sponsors, and gatekeepers to advance technologies that meet consumer needs. When they fail, as they often do, they deal with their boards and shareholders, not Congressional Committees who seek to punish any failure.