where is our government? part ii

Where is Our

Government? Part II

“The Socialization of

Risks and Rewards”

“Long before there were computers or the Internet,

scientists were unlocking the secrets of lasers,

semiconductors, and magnetic materials upon which

today’s advanced applications were built. This

enterprise was fueled in large part by Federal

investment in basic research that was necessary but

not necessarily profitable for the private sector to

undertake over the long term.”

www.fiscalintelligence.org

Where is our government? Part II

“The Socialization of Risks and Rewards”

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Once again, I find it essential to pose the question where is our government? Where is the goal-

oriented, innovative, risk-taking, and proactive government that we all enlist wishfully every four years?

The one that establishes the robust platform and infrastructure that enable companies, such as Apple,

Inc., Google, Microsoft, Biogen, Genentech, and many others, to flourish beyond their wild

imaginations. I do not want to give you the impression that I am naïve. We all know that the

government’s attention has shifted to the war on terror, which has proven to be very lucrative for the

few insiders at the expense of the many. It should not be a surprise to anyone that seven of the ten

wealthiest counties in America are in the Washington, D.C., metropolitan area. To tie these facts of

money and power together, my educated guess is that many of you are already familiar with the

following two concepts; the homeland-security-industrial complex and the counterterrorism bubble.

First, allow me to initiate this lively discussion with the following quote by the Office of Science and

Technology Policy, so that you can put things into perspective from the very beginning; “Long before

there were computers or the Internet, scientists were unlocking the secrets of lasers, semiconductors, and

magnetic materials upon which today’s advanced applications were built. This enterprise was fueled in

large part by Federal investment in basic research that was necessary but not necessarily profitable for the

private sector to undertake over the long term.”

I do understand that this is a difficult concept for many of you to grasp, simply because we have been

told time again that the creation of companies and the key technologies underlying them are the

bastion and business of the private sector, primarily venture capital firms. We have been led to believe

that the government is useless at the initial stage of development, particularly where research and

capital are crucial and the level of uncertainty is quite high, and that we are better off if the government

stays away from it altogether. I guess that we might have been placed on the incorrect track and/or

wrong path. Indeed, it is undeniable that the government has played an instrumental role in the

development of crucial sectors (e.g., the biotech/pharma sectors, information technology, and

nanotechnology, among many others) within our economy. What these sectors have in common is that

they touch our daily lives and are so pervasive in our social consciousness, that we oftentimes take

them for granted.



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It is highly recognized among the experts that it would have been impossible for us to accomplish as

much as a society if it were not for the research funded by the U.S. government. They are also acutely

aware that risk-taking is a collective endeavor involving, the State and private entities, with the

government taking the lead in many instances. If this has been the case and our policymakers in

Washington, D.C. are aware of that, then they are responsible for devising policies that ensure the

collective distribution of the returns - resulting from investments made in Research & Development

that later on led to successful ventures. This appears to be the missing link in the risk-return nexus that

is taking inequality to a level yet unseen in the U.S.

Once it is clearly understood that what we need to demand from our leaders in Washington, D.C. are

policies that lead to the democratization of risks and rewards, we can get closer to the outcomes that

will bridge the gap of inequality in America. This redistribution of risk and rewards could act as a

substitute or in lieu of what many experts in the subject have come to describe as the Universal Basic

Income. Undoubtedly, our taxpayers have invested a great deal in many successful companies in the

U.S. It is now time for these companies to take the baton in order of influence and usher America into a

new industrial era of innovation and progress. To facilitate this journey, private entities should work

alongside the government to ensure that not only capital owners (e.g., investors, shareholders, and

executives) benefit from the revenues being generated by decades of government-funded research, but

that these benefits trickle down to the society as a whole. Our politicians, therefore, are in a unique

position to make a difference in the lives of the average Americans. It will not be easy, but it is definitely

possible. My message to them is loud and clear: please do not refrain from doing what is right for

America at this crucial crossroads of great potential and opportunity.

I am sure that after reading the introduction to this paper you might still be asking yourself why the

government should fund research of highly risky ventures in the first place. You still embrace the belief

that government should stay away from them in order to protect the taxpayers’ funds. But, this would

be contrary to the widely held beliefs that the government has a significant role to play in ensuring that

the nation is innovating and remains competitive. A more compelling rationale would be that the

government does invest in risky ventures under the expectation that successful investments (i.e., the

commercialization of technology) might lead to an increase in the number of jobs that pay a living wage

or better, an increase in tax revenues, and/or increase of high-value goods and services. Those are



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some great objectives that explain the cost-effective measures of a long-term vision for a prosperous

America. However, when assessing the investment returns in this respect, our government has failed,

in light of that, the question that still remains unanswered is; why we aren’t holding the companies that

benefited the most from government-funded research to the same standard of social negligence.

Certainly, it is because of the public’s tax dollars that these companies had a chance to grow, and quite

unfortunately, they do not appear to be doing much to execute upon their side of the deal.

According to a report published by the National Academy of Science in 2005 entitled “Rising Above the

Gathering Storm”, state interventions were the necessary and key enablers for repositioning the

nation as a leader of progress and innovation capabilities. Here I’d like to share the report’s opening

statement, which highlights the importance of federal involvement in fostering the growth of our

nation:

“The prosperity the United States enjoys today is due in no small part to investments the nation has

made in research and development at universities, corporations, and national laboratories over the

last 50 years.”

This is clear evidence for our continuous need to maintain the involvement of the government in

funding the nation’s institutions, but also a call to the profitable beneficiaries, and particularly

corporations, to pay it forward and invest portion of their own revenue in ventures that will enable the

United States to remain competitive for years to come. Indeed, the same approach that we apply to

risks should be applied to returns as well. They both should be seen as a collective effort, however, what

we keep coming across way too often is the socialization of risks and the privatization of rewards.



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The iEcosystem brought to you by the

U.S. Government

Let’s now turn our attention to a sector that has changed all of our lives significantly over the last

twenty years, the IT sector. Many people would like to believe that this sector was the creation of a few

genius computer geeks and highly entrepreneurial individuals working from their garage in Silicon

Valley, and this is not too far- fetched. But, the reality is that the U.S. government (particularly the

military) plays a vital role in the development of the key technologies in which the entire sector is

based. I know this is a difficult concept to grasp for many, because we have hardly read or heard

anywhere about the true role of government involvement in establishing the game-changing tech-

sector, but I am determined to present evidence that shows you otherwise. Although I will do my best

to analyze Apple, Inc. (a.k.a. Apple Computer, Inc.) closely, many other organizations in the high-tech

sector have benefited as much from government-funded research as Apple, Inc.

Have you given any thought to the role the government has played in the creation of all the gadgets

that we have grown so dependent on and love so much? It is true to say that the government did not

manufacture any hardware and/or gadget on its own, but no one can deny the fact that its resources

and influence were instrumental in the underlying popular technologies that have made consumer

products smart and ubiquitous. Please examine closely the diagram below developed by the Office of

Science and Technology Policy (OSTP) in 2006. This visual will certainly help you understand where I

am coming from exactly. You might want to pay close attention to the information within the squares,

which indicates what entity was responsible for funding key development projects under the term

“Basic research foundation”.



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The diagram above shows us the key technologies that made the iPod a viable, feasible, and a beloved

product, but more importantly, it shows which government agencies (i.e., DOE, DARPA, NIH, DoD, and

Army Research Office) were behind funding the necessary research that lead to the product’s

production.

I have no intention of minimizing the tremendous role that Steve Jobs and his team played in bringing

this phenomenal product to the consumer market. They were instrumental in making the research a

commercially viable one. This is crucial, as it encourages the scientists behind the scenes to conduct

even more research, because they were inspired by the successes of the prior results. Mr. Job was a

visionary and an integrator capable of pushing the envelope of what was possible when integrating the

intelligence and insight generated by government-funded research. This ability alone enabled Apple,



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Inc. to generate $183 million in global sales in 2014. When we compare this number with the revenues

generated by Apple Computers in 2005 $13.9 million - the difference is a substantial one (see diagram

below).

This clearly indicates that a crucial element to Apple’s later success must have come about from

technical improvements due to research, and it certainly paid off handsomely for Apple’s executives,

shareholders, and investors. The best way to summarize how all these points I brought up relate to each

other is to say that the U.S. government had the foresight of the evolution of the electronics and

communication fields in the 1960s and 70s, and that Apple, Inc. creatively pioneer the field of consumer

electronics.

This paradigm of commercialization technology for consumer benefits has also been the case of other

companies in the high-tech sector, such as Google. The basic research for the algorithm on which

Google’s search infrastructure is based on was funded by the National Science Foundation – a

government body that has benefited enormously from taxpayers-funded research. Why is it, then, that

it is refusing to contribute back on the same lines? You might be asking yourself what do I mean by

that? It is clear that Apple has brought to us all beautifully designed and functioning products on which

we all depend, and I am more than willing to give the company credit for that. But, let’s not forget why

the U.S. government is so willing to entertain the idea of entering into uncharted territory that

represents the innovation space. The reasons are quite clear; to increase the number of jobs that pay a

livable wage or better, to increase tax revenues, and/or increase the high-value goods and services.

When Apple’s performance is analyzed closely, one realizes that it has failed miserably on two

important fronts - tax revenues and job creation.

By now it is widely known that Apple has done everything it could to reduce its tax liability, and one

could say that like most businesses looking after their shareholders and profit margin, it is not any

different. And despite taking advantage of the tax loopholes that are widely available to profitable

(US$, millions)

Year Global Change Americas Change

2014 182,795 1212% 65232 890%

2005 13,931 6590



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businesses, Apple has gone above and beyond to navigate corporate tax havens in order to reduce its

tax liability even further. More on this story can be read in various publications, namely in the article

“How Apple Sidesteps Billions in Taxes” by The New York Times which describes all the strategies that

Apple had put in place in order to accomplish evading its legal dues. So, what about its other

negligence- that of creating jobs? Let’s review Apple’s role in tech employment.

Everyone knows that Apple has created a great deal of jobs in the high-tech sector, but it is likewise

known that the corporation has engaged in questionable practices in order to suppress salary and

restrict mobility of its employees. Why would a company that was essentially created on state-funded

research join forces with other competitors to ensure that all the companies pay the same salaries to

their high-tech staff? For instance, if an engineer was working at Apple but was interesting in now

working for Google, the idea is to pay the same salary to the employees regardless of which company

the individual ends up working with. If s/he was making US$120,000 at Apple, Inc. then Google was

going to pay the same salary in order to suppress salary and restrict mobility. “Court papers show that

in 2005, when Google sought to hire a group of Apple engineers, Steve Jobs, then Apple’s CEO,

threatened: “if you hire a single one of these people, that means war.’’ Not only did Google back down,

but Jobs even got Google to fire one of its recruiters for attempting to hire from Apple.” Don’t you think

that a company like Apple should be doing quite the opposite and encouraging its employees to

achieve their full potential income-wise and contribution-wise? My guess is that focus on profit

generation runs a successful company’s culture on everything else – community, contribution, and

social impact. If that were not the case, Apple would be cooperating with the government rather than

struggling against it. Collectively, a greater distribution of risks and rewards across our economic

sectors could take us far in reducing inequality, starting with companies who recognize their role and

function in the socioeconomic web. It is important to highlight that in 2012, Apple announced that it

has USD $98 billion available in cash, but even more astonishingly, that Timothy D. Cooks pocketed

$382 million ($376 million in stock awards) in his first two years as a CEO of Apple. The availability of

funds to reward its employees and value their stay has never been a problem for the company. This

reality simply corroborates what many expects keep communicating to us - that there is an

overconcentration of capital in the hands of capital owners (i.e., executives, stockholders, and

investors). The questions that remain unanswered until this point are: Shouldn’t the government do



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something to tilt this process toward benefitting average Americans? And, most importantly, do they

have the will to do so?

Returning to tax-related matters, it is even more confounding to discover that Apple is so determined

to reduce its tax liability, that even at the state level (California, - where it houses its headquarters) - it

refuses to pay its fair share. For instance, the company reported $2.5 billion in interest and dividends

that it earned in 2006 in Nevada rather than California just to avoid the capital gains tax. This is clearly

known in business as milking the cow, but when it comes to Apple, it is just doing “the smart thing” and

maximizing its shareholders’ value. And no wonder that this self-interest works at the expense of the

community. Then some people have the audacity of asking themselves how is it that there are so many

homeless people in San Francisco and people are quick to blame the government for not doing much

about it. It is time for us to start making greater connections. Perhaps if some services are not being

provided by our government, perhaps we should look elsewhere to see if someone is short-changing

the same government that we all love to complain about. I would like to share the following quote with

you; “The state of California’s infamously large level of debt would have been significantly reduced if

Apple had fully and accurately reported its US revenues in the state where a major portion of its

value (architecture, design, sales, marketing etc.) was created and achieved.” [1] And I will venture

to say that this is the case of many other companies, especially those concentrated in a specific

geography and sector, such as the high-tech companies of the Silicon Valley.

Before moving on, it is important to highlight that the U.S. government had been a supporter of Apple

Computer, Inc. since its inception. The government invested $500,000 right before its IPO – which

raised approximately $97 million dollars in 1980 - through a Small Business Investment Company (SBIC)

set up by the Small Business Administration (SBA) known as Continental Illinois Venture Corp. an

investor in small firms. The same government entity also provided funding to Intel and Compaq. And

we all know how the story turns out for those two companies.



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The Orphan Drug Act

Thankfully, the IT sector has not been the only one benefiting from government-funded research. The

Bio/Pharma sector has gone a long way to not only advance basic and applied research, but also lobby

legislations that ensure that the sector is striving and not just surviving. How is it possible, then, to

allow a drug on the market that was developed by the National Institute of Health (NIH) to be priced at

$350,000 for a year’s dosage? Whose interests is research and pharmaceutical medicine really looking

after? Once again, this is a unique opportunity for our policymakers to intervene and act responsibly.

Which makes it even more perplexing that a legislation gives the government the right to sell

government-developed drugs at reasonable prices, but that the government has refused to exercise

this option. Instead, it chose to silently side with the monopoly of the big pharma.

The most important piece of legislation for the biotech/pharma sector is known as the 1983 Orphan

Drug Act (ODA). The act is loaded with tax incentives, clinical as well as R&D subsidies, fast-track drug

approval (this is huge in the pharma industry), and intellectual and marketing rights for products

developed for treating rare diseases. The sector clearly communicated to the government that without

those incentives, it was not going to be able to develop drugs (they were going to remain orphan) for

these conditions given the size of the market, which is calculated to be less than 200,000 people.

Hence, it could be said with certainty that the government spearheaded an entire industry that

otherwise would not have been able to exist. I can envision the skeptical readers already pointing out

that this is what the government is there for. Yes, but its foremost service is to the people. The ODA

has been instrumental for the growth of many companies in the biotech/big pharma industry, such as

Amgen, Biogen, Genentech, Novartis, Roche, and Johnson and Johnson. As I mentioned before, many

pharmaceutical companies were reluctant to enter into the rare disease market because of its size;

however, working together with rest of the medical industry, the pharma companies have been able to

generate a great deal of revenues in spite of the perceived shortcomings. For instance, Novartis

recorded $4.3 billion in global sales in 2010 for its leukemia drug known as Gleevec. Have they been

liable to share a portion of these profits with the federal government for the purpose of investing the

same back into R&D? I don’t think so.



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The following statement can contribute to further your understanding of the instrumental role that the

U.S. government played in the expansion of the pharmaceutical hegemony-in treating rare diseases:

“In fact, 59 per cent of total product revenues and 61 per cent of the product revenues of the six

leading dedicated biopharmaceutical firms come from orphan drug sales.” [1] Imagine for a moment

that these companies set aside a percentage of their revenues to invest in R&D in conjunction with the

U.S. government. The nation would most certainly reach a level of innovation unseen in this industry.

Don’t you think that the taxpayers should benefit from these revenues as well? After all, the entire

industry was created by research funded by the U.S. government, and this is exactly why our

representatives in Washington, D. C. should be more than willing to intervene on the behalf of their

taxpayers’ interest. It is critical to put into perspective that the top ten companies in the pharmaceutical

industry have made more profit than the rest of the Fortune 500 companies combined just in the last

ten years. Shouldn’t they be expected to invest a percentage of their own revenue in R&D rather than

depending more and more on the U.S. government for more handouts?

If you are still skeptical of the level of involvement of the U.S. government in the biotech/pharma

industry, I would be delighted to leave you with the following quote: “the BP industry has become big

business because of big government, and … remains highly dependent on big government to sustain

its commercial success.” [1]

Searching for the New Big Thing

There is yet another area in which the U.S. government-funded research has made huge strides toward

its development - the nanotechnology sector. It is quite a surprise to find out that the sector has not

been as successful as the IT and biotech sectors due to the skepticism of the private sector to invest in

its commercialization. Likewise, the private sector is under the impression that the government should

undertake and lead the commercialization of the sector.

The nanotechnology sector came about as the result of an effort launched by the U.S. government

during the Clinton Administration in the late 90s, and is known as the National Nanotechnology

Initiative (NNI). A total of 13 state agencies led by the National Science Foundation were involved in the



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effort alongside the National Institute of Health (NIH), the Defense Department and the Small Business

Innovation Research (SBIR) program. The government invested as much as $1.8 billion annually on this

effort. It was committed to finding the new big thing after its success in the biotech and the computer

revolution that were discussed previously. It is important to reiterate that this vision did not

materialize, because the private sector refused to partake in the risky effort.

My expectation is that after reading this paper you will become much better informed about the

massive investments made by the U.S. government and become acutely aware of its involvement in the

development of the technologies that you and I rely on and enjoy so much. The core idea is for you to

shift your views about the U.S. government ever so slightly. We all know that the government is far

from perfect and that it could certainly be better -and this is something we must strive for every day.

But there is no doubt that our government does have a significant impact in providing us with all the

necessary technologies and pharmaceutical products that have a significant impact on society today

and for many years to come. We should give the government the credit that it deserves and encourage

it to continue investing in research and development and new promising sectors of the future that will

create a better world for us all. But in order to level the playing field and to have enough to go around,

we need to appeal to our representatives in Washington, D.C. to contractually stipulate that the

companies they support must share a percentage of their revenue with the government that assisted

them in order to maintain a level of development and competitiveness that restores and/or reimagines

our place on the global stage.

I understand that you might be skeptical about this proposition, given the reputation our politicians

have earned in delivering unfulfilled promises. However, there are many ideas around the world that

they can certainly evaluate and that don’t seem so far-fetched. A neat one that comes to mind is the

State Investment Bank. For instance, in 2013, the Brazilian State Development Bank (BSDB) generated

14.5% in return on equity (ROE). The return is broken into two parts; a percentage is retained and

placed into a technology fund (FUNTEC), and another goes to support social and cultural projects which

benefit the society as whole. I just want to clarify that this concept is not only limited to developing

countries, but also developed countries - such as Germany, which has been very successful with a State

Investment Bank initiative of its own. Can you imagine if Google would have been required to return a

percentage of its income stream to the National Science Foundation (NSF) - the agency responsible for



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funding its algorithm? This would have made a huge difference in furthering the scope of innovation in

the tech field. It could have even helped to create many more ventures as successful as Google and

Apple.

Nowadays, our elected leaders do have a rare opportunity to give back to their constituents, and, at the

same time, keep their relationships open with the business community. The corporations are lobbying

our leaders in Washington, D.C. to allow them to repatriate the profits they do have sitting abroad to

America. This represents a perfect occasion for the politicians to demand that they invest a portion of

their revenues in the innovation space, which historically speaking has not been the case, in conjunction

with the U.S. government. The politicians should ask the corporations to give back their fair share.

That’s all. Doing so can propel the U.S. into an industrious and productive era, impacting everyone in

society.

I strongly believe and support the ideas behind individualism, but our nation is calling us to unite behind

collectivism for a moment. After all, we have all benefited greatly from the government’s investment in

the innovation space, and it is time for the most able beneficiaries to give something back. In my

humble opinion, this should not be a choice for many of us, but a legal obligation. We still have time to

prevent what appears to be a race to the bottom. The question then is if we are willing to stand aside

and watch the U.S. become what is known to mathematicians as a “negative-sum game”? It is

becoming more clear that if our representatives do not insert the “re-investment” clause in the

legislation – Tax Repatriation Holiday- most of the money, once it is repatriated, will end up being used

for shares buybacks benefiting only a few at the top rather than the many. It is important to highlight

here that between 1934 and 1982, the Securities and Exchange Commission regarded stock buybacks

as potential vehicles for stock manipulation and fraud.

What we need to do is to demand that our government be smarter, inclusive, and more assertive in

collecting the rewards ultimately belonging to the taxpayers and reinvesting them back into the

society. I do understand that next to Google and/or Apple, the government ‘brand’ does not sound so

appealing, but our blind trust in companies and visceral mistrust of the government is a palpable and

painful reality that has to change. The socialization of risks and rewards should be a reality for all



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players shaping our society rather than just a pipe dream of a few. This can only make us stronger,

wiser, and even more prosperous, leading to a far more equitable society.

I would like to take this opportunity to impart some wisdom to all my readers by sharing another

insightful quote on this topic;

“In Karl Polanski’s epic book, The Great Transformation (1944), he argued the State created – pushing,

not only nudging- the most ‘capitalist’ of all markets, the ‘national markets’ (while local and

international ones have pre-dated capitalism). The capitalist economy will always be subordinate to

the State and subject to its changes. Thus, rather than relying on the false dream that ‘markets’ will

run the world optimally for us ‘if we just left them alone’, policymakers must learn how to efficiently

use the tools and means to shape and create markets—making things happen that otherwise would

not. And making sure those things are things we need.” [1]

There is no doubt that politicians have their work cut out for them. They might have to change and/or

re-imagine the way they go about executing policies by imagining the future consequences of their

actions. Are they up to the challenge? It remains to be seen.

Happy reading,

www.fiscalintelligence.org

REFERENCES

where is our government? part ii

Economy & Finance