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No government, no Web: Consumers benefit from subsidies for technological, medical research

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Opposing view: No government, no Web

Consumers benefit from subsidies for technological, medical research

By  Jared Bernstein

The passing of the great free market theorist Milton Friedman and the big problems of Airbus, a heavily subsidized European consortium, seem like a classic case of synchronicity — the occurrence of two seemingly random events that are subtly connected.

Friedman, a life-long enemy of government subsidies to business, would have predicted the difficulties the huge plane manufacturer is undergoing, including sagging market share, delayed production schedules, cost overruns and, as of last week, another in a series of complaints from Washington that Airbus is violating World Trade Organization rules against state subsidies.

And Freidman would have been right. European taxpayers are paying a high price to insulate Airbus from market discipline.

Nonetheless, it would be too easy to take the wrong message from all this.

First, residents of glass houses shouldn’t throw stones. Airbus executives have a point when they argue that Boeing also benefits from large subsidies, including tax breaks and defense contracts. And NASA has long funded private-sector aviation research and development. True, these public-sector bucks do not constitute the direct subsidies, known as “launch aid,” that Airbus receives for developing planes. Even so, money is fungible, and you can be sure that our subsidies allow our producers to engage in research and development that would not otherwise occur.

Which raises the second point: Such investments by governments to private firms are not only useful but also can be critically important to our welfare. New industries often need seed capital that is not forthcoming from financial markets, especially when large infrastructure needs mean steep start-up costs: Think of the Internet, which began as a Department of Defense project.

Because firms can’t recoup all the benefits of their R&D investments, they tend to under-invest. If government took a pure hands-off approach, there would be less money put into medicine, technology, aviation and most other cutting-edge fields.

Viewing Airbus’ struggles, it would be easy to conclude that government and business should never mix. In modern, hybrid economies, however, that’s a pipedream. As the Airbus example shows, getting that mix right isn’t easy. But we’ve still got to try.

Jared Bernstein is senior economist with the Economic Policy Institute in Washington, D.C.


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