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”
1
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.

2
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

3
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.

4
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”.

5
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,

6
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

7
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

8
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.

9
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.

10
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 BigThing
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

11
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

12
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

13
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
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