Level The Playing Field

Fox News ^ | August 29, 2002 | Rand Simberg

[NonZeroSum]

There was a story last week about the unaccountable accounting on the Air Force's Evolved Expendable Launch Vehicle

[NonZeroSum]

An interesting idea in a somewhat obscure policy area.

[NonZeroSum]

Space ping.

[gcruse]

Thanks for the ping.

[End The Hypocrisy]

Why offer contracts when one can offer PRIZES which reward actual RESULTS, while incentivizing competing companies to lower costs? That's the approach that Newt Gingrich advocates, as http://www.spaceprojects.com/prizes documents.

[Brett66]

I wonder what the chances are for some reform in this area? It's not really a partisan issue, it could be changed with a low-key vote in a commitee and wouldn't even make the news, but it would be a tremendous help.

[The_Victor]

If I’m reading this correctly, then the author is playing a subtle word game here. The key words in the article are this: "...independent research and development reimbursements..."
The government is reimbursing contractors for a portion of their IR&D expenses, if the technology is used in the contract. Truth be told, this is not a subsidy. It is reimbursement of already accrued expenses, which has been used to benefit the government contract. Whether you are for or against subsidies in aerospace research, let’s be sure we call this what it is.

[NonZeroSum]

If I’m reading this correctly, then the author is playing a subtle word game here. The key words in the article are this: "...independent research and development reimbursements..."

The government is reimbursing contractors for a portion of their IR&D expenses, if the technology is used in the contract. Truth be told, this is not a subsidy. It is reimbursement of already accrued expenses, which has been used to benefit the government contract. Whether you are for or against subsidies in aerospace research, let’s be sure we call this what it is.

Not so.

In fact, that's illegal. You cannot use IR&D to help perform an existing contract, and it is paid regardless of whether or not the technology developed with it is used in that, or any contract. It is totally discretionary on the part of the contractor what to spend it on (as long as it doesn't in fact support contract tasks, though it can be complementary).

I don't know how you are inferring this.

[The_Victor]

You wrote:In fact, that's illegal. You cannot use IR&D to help perform an existing contract, and it is paid regardless of whether or not the technology developed with it is used in that, or any contract. It is totally discretionary on the part of the contractor what to spend it on (as long as it doesn't in fact support contract tasks, though it can be complementary).

I don't know how you are inferring this.

Here is the statement that that supports my point:

IR&D (and its cousin, Bid and Proposal, or B&P) is money that the government gives to aerospace contractors as reimbursement for their expenses in either doing the basic research that they need to do in order to be responsive to projected government program needs, or to bid on government contracts.

What this means to me is that the government is reimbursing the IR&D costs for groundwork on the contracts. Since the author does not mention that this is illegal, then I must conclude that it is allowed. Otherwise the article would be about the justice department prosecuting the responsible parties.

Since this is reimbursment for IR&D costs, how the money is spent is by the contractor is irrelevant, since the contractor’s own money has already been spent.

[NonZeroSum]

That statement does not support your point. I still have no idea how you can come to that conclusion.

It just says that the government reimburses companies for any expenditures required to prepare themselves for government contracts. It doesn't say that they only get reimbursed for contracts that they actually win. It's just that if they don't win any contracts, that they'll get no reimbursement, because there will be no contract charges (of any kind) to add the costs on to.

[The_Victor]

Uhm... That was my point. It's not a subsidy if it is a reimbursment.

[NonZeroSum]

It's not a subsidy if it is a reimbursment.

??

Why in the world not? What do you think a subsidy is?

[The_Victor]

A subsidy is a grant with no specific expectations attached. A reimbursment is compensation for work after the fact. As I originally said, the author is playing a subtle word game, and the fact of the matter is the two words have distinct and different definitions.

[NonZeroSum]

You're the one playing word games. I'm not aware of anyone else who uses that definition for a subsidy. It's a new one on me.

A subsidy is simply an augmentation of resources by some source other than revenue from sales.

Reimbursement simply means that the company is being provided with money to compensate it for money that it spent. There is nothing in that inconsistent with the definition of subsidy, and in this case, it's the means by which the subsidy is provided.

By your bizarre definition of subsidy, things like the Export-Import Bank, or the Chrysler bail-out weren't subsidies. Is that really your position?

[The_Victor]

By your definition any government payment is a subsidy. Is that your position?

Webster's defines a subsidy as 1. Financial assistance granted by a government to an individual or business.

The above makes no requirement on outcomes, performance, or payback. This is not a reimbursement, and is in fact exactly what the government did when it bailed out Chrysler, a subsidy. The reimbursement is a completely different kind of payment with the expectation that money has been spent in advance.

The government is not subsidizing the aerospace industry when it reimburses contractor for IR&D expenses. And neither you nor Sandburg have adequately made the case otherwise.

[The_Victor]

Oops misread the author's name: Sandburg = Simberg (sorry).

[NonZeroSum]

No, not any government payment is a subsidy. Government payments to purchase actual products or services are not. But IR&D reimbursements have not quid pro quo--they are provided simply as a percentage of contract revenue, with no requirement that they do anything in particular (other than not directly support contracts). That's why it's called "discretionary" spending in the industry.

You can twist words all you want, but this constitutes a subsidy, relative to companies who don't have government contracts, making it more difficult for them to compete, because they have to spend their own money on R&D, not having access to the taxpayers'.

I don't understand why you are making such a big issue of this.

[The_Victor]

I simply stated that I disagree with the premise of the article that a reimbursement is the same thing as a subsidy. And as you stated, "Government payments to purchase actual products or services are not [a subsidy]." Well, a reimbursement is a payment for an actual service, in this case IR&D groundwork on the contract. I think the article is incorrect and the dictionary agrees with me.

[NonZeroSum]

No, it's not reimbursement for an actual service. I repeat, there is no quid pro quo. It is funding provided in the hopes that something useful might come of it, but there is no requirement for it to do so. It's like a MacArthur Grant. And to repeat, there is nothing incompatible between a reimbursement and a subsidy.

Even people in the industry agree that it's a subsidy. That's its purpose--to help ensure that the aerospace contractor community remains technically competitive with the overseas competition, and to be prepared to support general government needs, which it isn't always possible to anticipate.