It’s true that flat-panel displays will be a part of future weapons systems-everything from displays in tanks to, possibly, handheld mapping devices for soldiers-and that there are now no major U.S. suppliers. Japanese companies control about 95 percent of the $5.6 billion world market, which is forecast to grow to $14 billion by 2000, according to Stanford Resources Inc., a research firm. The Japanese haven’t cooperated on defense projects, says the Pentagon. The remedy, then, is to create a new U.S. industry that would exist mainly to serve civilian markets.
This is novel. Previously, the Defense Department has financed civilian research and development in the hope that military applications might result; and obviously, it also has supported defense contractors directly. But it has never before invoked “dual use” technologies-that is, technologies that have civilian and defense applications-as the reason to subsidize an entire nondefense industry. it would do this through subsidies that, though granted for R&D, would require companies to build commercial factories. In practice, they’re production subsidies.
No one denies that these factories would aim primarily at civilian markets. Consider the numbers. Between 1995 and 2000, the Pentagon may buy 15,000 flat displays annually. By contrast, world production of displays now totals 33 million units and should rise to 84 million units by 2000, says Stanford Resources. The U.S. market is about 6.5 million units. Defense needs, then, account for about two tenths of 1 percent of U.S. demand in units, though in dollar value the military displays-which cost more because they have to be customized for combat conditions-might represent 1 to 3 percent of sales.
The White House is plainly eager to use the Pentagon as a vehicle for “technology policy” (That’s the newest variant of “industrial policy.”) Not surprisingly, the first suggestion for a flat-panel program came from Laura Tyson, chairwoman of the Council of Economic Advisers, who raised it with White House economic adviser Robert Rubin, according to a Business Week story that Tyson confirms. Rubin then urged the Pentagon, which had been financing R&D in display technology, to study the matter.
Technology policy is politically seductive because it appeals to raw nationalism and Americans’ faith in gadgetry. The lesson isn’t lost on Commerce Secretary Ronald Brown, former chairman of the Democratic Party. He’s sharply expanded Commerce’s Advanced Technology Program that subsidizes projects involving, for instance, advanced materials or computer software. In 1990, the ATP spent $10 million. For 1995, Brown wants to spend $451 million on the way to $744 million by 1997.
Unfortunately, the popular appeal of technology policy rests on two widespread misconceptions.
The first is that a few “critical” technologies determine living standards and global economic success. “It’s a totally wrong notion,” says science specialist Bruce Smith of the Brookings Institution. What matters is a complex mix of many technologies, management practices, work habits, culture and government policies that is too intricate to control. Technology is only one influence. Consider a simple example: airlines. Americans and Europeans fly the same jets; yet, U.S. carriers are vastly more efficient (in 1989, they handled twice as many passengers with only 25 percent more workers).
The second myth is that Japan successfully practices technology policy and that we must follow suit or be shut out of high-tech industries. True, some Japanese industries have benefited from government aid; so have some U. S. industries. But in general, Japanese government support for R&D is less than ours, reports economist Gary Saxonhouse. Less than 2 percent of nondefense business R&D is financed by government in Japan compared with 22 percent in the United States. And some recent Japanese technology projects have failed badly: notably, high-definition TV.
The point is that, in encouraging new commercial technologies, it’s hard for government to improve consistently on the “market,” which is simply many companies trying many things until someone discovers what works best. This does not mean that all government projects will flop. But on average, they will waste money, fall prey to political pressure and distort competition. Sadly, business groups don’t oppose these boondoggles on principle, because no one wants to offend the White House needlessly and companies that might benefit will “take the money if government is dumb enough to give it away,” as one lobbyist says.
The potential harm goes beyond waste. If America expands its freewheeling subsidies, other countries may do likewise. Indeed, the Clinton administration had global trade rules modified to permit bigger subsidies. Now, the Pentagon is creating a mechanism to transform alleged R&D subsidies into subsidies to build commercial factories. Perversely, this may make it harder for many U.S. companies to plan their investments, because they won’t know whether foreign competitors may be subsidized.
None of this means the Pentagon should ignore flat-panel displays; they are an important technology with military uses. But the response should be less extravagant and more patient. Some U.S. firms are beginning or expanding production; in the future, foreign companies are likely to establish U.S. plants. And in any case, today’s tiny U.S. production capacity is still large enough to meet the Pentagon’s small needs many times over in an emergency. The situation, in short, is not as desperate as the Pentagon says. The rush to create a commercial industry suggests, as Brookings’ Smith puts it, that “they almost forget that the Defense Department has a defense mission.”
