After the Budget Deal, How Government Can Support Market Creation, Cheaply

This blog first appeared as Steve Wunker's piece for Forbes

By Steve Wunker
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This week’s budget deal will be bad news for some pioneers of new markets. Companies that rely on government subsidies for their survival had better look fast for a Plan B.  Some firms received a temporary reprieve due to the way these subsidies are frequently structured as tax credits which weren’t impacted in this first round of budget cuts, but don’t count on an industry like renewable energy preserving the more than $5 billion it currently receives in subsidy funding.  (The larger sums spent on subsidizing existing industries like fossil fuels are a separate issue). When the choice comes down to a priority immediately affecting millions of voters versus, say, scattershot funding of the placement of solar cells (including in dark Northern climates) we can assume which program will win.

Yet even with steep budget cuts government can still do more to support new industries, at a relatively trivial cost. There seems to be an emerging consensus that funding basic research should remain a government priority, and the steep cuts to discretionary spending pushed through this past Spring largely spared the science budget.  This funding supports exactly the type of long-term, speculative research that leads to new markets but which will not be financed by the private sector.   The government spends about $8 billion a year on basic research into physical science, engineering, and math, and this comparatively tiny funding (which is nearly half the national total and has been flat for decades) can yield big economic dividends.

There are also even cheaper, equally apolitical ways that government can support the creation of new markets.  Consider what European governments did to support the nascent mobile telephony industry in the 1980s.  The governments agreed on a common standard for digital communications, and to enable it they freed a common bloc of spectrum across the continent.  As a result, the European standard (GSM) fast became dominant in the mobile industry, enabling manufacturers to produce telecom infrastructure at low cost and reducing the risk for network operators and consumers to buy the new equipment.  This is a classic way to foster markets – allow multiple players to compete on a level playing field, simplify initial adoption of a solution, reduce customers’ fears of being locked into any given supplier, and thereby facilitate customers’ upgrading to newer systems.  Standards may retard progress if they come too prematurely, but ultimately they can super-charge growth.  Smart grid technology is ripe today for more expeditious standard-setting.  Government could also standardize and streamline the process for obtaining permits to install renewable energy systems.

In mobile telephony, the U.S. followed a different approach sometimes called “let a thousand flowers bloom.”  Different blocs of spectrum were auctioned in different cities, with no common technical standard.  As a result networks became a patchwork quilt of spectrum that was tricky to use effectively.  New standards emerged such as CDMA that had some technical superiorities, but because of their lower sales volume and domination by a single supplier they had high costs.  Incompatibilities between networks led to a long delay in enabling text messaging from one network to another.  As a result, for years the U.S. lagged behind Europe in mobile phone usage, and even today our poor call quality and frequently dropped calls can be blamed in part on this regulatory hodge-podge.

Government is also uniquely suited to publishing the data that can enable new markets to form.  The National Weather Service provides data that is essential for crop protection, traffic planning, and tourism.  These efforts are starting to inspire analogous programs in other fields.  In healthcare, the Chief Technology Officer of the Department of Health and Human Services has promoted an initiative called “Data Liberación” that enables public but previously-inaccessible information on local healthcare provision to support the creation of dozens of potential new markets.

These programs lack sizzle, but they can have a real impact.  Even in the current gridlock, these efforts could be ramped up.  They are a matter of practical facilitation of business, not political philosophy.  And they happen to cost very little.