Stifling Commerce

How the Department of Commerce smothers what it's supposed to promote


"I ran for office pledging to make our government leaner and smarter and more consumer friendly," President Barack Obama reminded a group of small businessmen at a January 2012 White House gathering.

You can see why the audience needed a refresher course. The president's two signature legislative accomplishments, the Affordable Care Act and the Dodd-Frank financial reform, had heaped unprecedented amounts of regulation onto the business sector at a time when full-time jobs were scarcer than they'd been in three decades. So to bolster his economic bona fides, Obama was now advocating greater executive-branch power to make the federal bureaucracy more responsive to business concerns. "Let me be clear," he vowed. "I will only use this authority for reforms that result in more efficiency, better service, and a leaner government."

The target of Obama's tweaking that day was the Department of Commerce, the century-old rectangular behemoth on Constitution Avenue. Currently headed by the wealthy Chicago businesswoman Penny Pritzker, whose family fortune derives from the Hyatt hotel chain, Commerce's mission is to "promote job creation and improved living standards for all Americans by creating an infrastructure that promotes economic growth, technological competitiveness, and sustainable development." Yet even the president recognizes that Commerce, like many other federal agencies at the nexus of the government and the private sector, has often been better at promoting its own bewildering bureaucratic growth.

"Right now, there are six departments and agencies focused primarily on business and trade in the federal government," Obama said. "In this case, six is not better than one. Sometimes more is better; this is not one of those cases, because it produces redundancy and inefficiency. With the authority that I'm requesting today, we could consolidate them all into one department, with one website, one phone number, one mission: helping American businesses succeed. That's a big idea."

It may have been a big idea, but with a Republican-controlled House of Representatives, Obama's expanded consolidation authority was a non-starter. That didn't stop him from floating a proposal, just over a week before Election Day, to create a brand new cabinet-level position-the secretary of business-presumably to tidy up the current byzantine sprawl that includes such non-commercial agencies as the National Oceanic and Atmospheric Administration (NOAA) and the Census Bureau.

After winning re-election handily, the president brought up the business secretary idea a few more times, but it ran up against the same unfriendly legislative math. The lesson is clear: You can campaign against the Department of Commerce, you can complain periodically about its activities and results, but even proposals for cosmetic surgery on the 42,000-employee agency are likely dead on arrival. And eliminating the thing altogether is not on the agenda of anyone near the levers of power.

From T.R. to Hoover to Byzantium

The best thing that you can say about the Department of Commerce is that it's small by Washington standards. The department's budget of $8 billion in fiscal year 2012 was just a thirteenth the size of Labor, which itself is a fraction of the Treasury ($443 billion) and Defense ($655 billion).

But there's small, and then there's small. Facebook, whose 2013 revenue ($7.9 billion) was essentially the same as Commerce's budget, managed to earn that money with a fifth the number of employees. eBay has a slightly smaller workforce than the department, but double the revenue and a much more convincing story to tell about enabling commerce between individual citizens. The Department of Commerce is physically massive, organizationally obscure, and technologically tethered not to the 21st-century Internet but to the early-20th-century Progressive Era.

In 1903, President Theodore Roosevelt inaugurated the Department of Commerce and Labor as part of his reform crusade. Within five months, the bureaucracy grew from one official, the secretary, to an impressive 10,125 employees around the nation. The labor component was hived off into its own department in 1913.

The newly single Department of Commerce was not entirely sure what to do with itself until 1921, when the energetic politician Herbert Hoover became secretary. Prior to Hoover's tenure, the post was seen as something of a joke-the department's vanity history of itself, From Lighthouses to Laserbeams, confesses right there in the title that one of Commerce's most important duties was managing lighthouses.

"Hoover saw the post as grander: an opportunity to show the country what it could do if it had a national engineer," Amity Shlaes reports in The Forgotten Man, her recent history of Franklin Roosevelt. "When the recession hit, he urged President Warren Harding to host a conference with business and labor on creating employment. The idea was that Washington could encourage business, and perhaps the states and labor, to work together to make the economy grow."

Between Hoover's ascension to secretary and his departure in August 1928 to run for president, the department would vacuum up governmental organizations in a bid to increase its influence. In 1925, Commerce snatched the Bureau of Mines and the Patent Office from the Department of the Interior. The following year saw the creation of an Aeronautics Division at Commerce, a precursor to the Federal Aviation Administration. And a short-lived Radio Division was created in 1927.

Hoover did not forget where he came from after moving to the Oval Office. Among his first actions as commander in chief was to lay the cornerstone of the Department of Commerce building (now the Herbert C. Hoover building) using the very trowel George Washington used to lay the cornerstone of the Capitol. The building, which was constructed between 1929 and 1932 and cost $17.5 million to build ("over $2,000,000 more than the Louisiana purchase," From Lighthouses to Laserbeams brags), was then the biggest office building in the world.

It's a good thing they left room to grow: By 1969, Commerce had 25,400 employees; by 1972, after President Richard Nixon set about monkeying with the economy, the number had climbed to 35,000. Today, that figure is more than 7,000 higher.

Such size requires heavy maintenance fees. The department is asking for $14.8 million in FY 2014 to complete phase four of renovations and modernizations to the Hoover building-this after $5 million spent in each of the previous two years. Then there's the $16 million that agency bureaucrats seek to update their financial management software because, in their own words, it is "neither a Financial System Integration Office certified system nor is it Section 508 compliant. Additionally, system limitations require Commerce to undertake a highly manual and inefficient process that involves compiling multiple data sources to provide reports requested by the Congressional Appropriations Committees. The stability and reliability of the system is questionable as the design is almost 25 years old."

As Obama joked when announcing his Commerce reorganization plans, some of the decisions that led to this bureaucratic growth were less than honorable. Why did the weather-measuring NOAA wind up in the department after a Richard Nixon-led restructuring in 1970? "It had something to do with President Nixon being unhappy with his Interior Secretary for criticizing him about the Vietnam War," Obama said, with a chuckle. "And so he decided not to put NOAA in what would have been a more sensible place."

The Crony Capitalism Factory

The reactions to Obama's proposal ranged from indifference to outright hostility. The union that represents employees at NOAA, for instance, did not appreciate being the butt of a joke. "Whomever is advising the president on this issue is ignorant of the mission and history of the National Weather Service," Richard Hirn, general counsel and legislative director of the National Weather Service Employees Organization, huffed to The Washington Post.

Outsiders were more concerned about the agencies that would be added to the Commerce Department in the reorganization, such as the Office of the U.S. Trade Representative (USTR). Critics worried that housing the USTR, which has historically been more interested in trade liberalization, inside Commerce, which has historically been more interested in enforcing trade deals (by sanctioning the products of other nations and enforcing "anti-dumping" laws), would be disastrous for one of the few government agencies truly interested in making markets more free.

"These are people who are more foreign service oriented, people more committed to diplomacy," says Daniel Ikenson, the director of Cato Institute's Herbert A. Stiefel Center for Trade Policy Studies. They are unused to, and uncomfortable with, being used as law enforcement agents-a problem that would likely grow under the president's proposed reorganization. "When Obama was elected, he staffed USTR with people more committed to enforcement than liberalization," Ikenson said.

Bruce Bartlett, noted Republican apostate, writing in The New York Times, was even more blunt in his assessment: "To effectively abolish the Office of the Trade Representative is a dreadful idea. It is a small agency; there are no efficiency gains to be realized by making it another bureau within Commerce. And no matter what promises are made to guarantee its independence, placing the Office of the Trade Representative within Commerce will inevitably politicize the office."

Rather than adding to and subtracting from the Commerce Department in an effort to centralize government, a number of Republicans have suggested something people on the right typically suggest in situations like these: Why don't we just get rid of the Commerce Department altogether?

Former congressman Ron Paul has long argued for the elimination of Commerce, an idea he reiterated in his last presidential campaign. Paul was not alone: Commerce was one of three departments Rick Perry campaigned on eliminating, and one of two he could actually remember wanting to get rid of when asked at a primary debate.

Also in 2012, Chris Chocola, president of the Club for Growth, called for eliminating the department in The Hill. "President Obama and Congress should work together to eliminate the department completely and use the savings to pay down the debt," Chocola wrote. "The department has almost zero impact on actual commerce, job creation, or anyone's daily routine."

The Competitive Enterprise Institute (CEI) has been banging the same drum for years. "The Commerce Department does perform some legitimate roles, such as the constitutionally-mandated functions of the Census Bureau and the Patent Office and the NTIA's management of the government's use of the broadcasting spectrum," CEI Vice President Iain Murray wrote in The Washington Times in 2011. "Yet there is no reason all of these functions need to be bundled in a single, large Cabinet department. The above agencies should become independent-free from departmental bureaucracy."

One of free-marketeers' favorite targets at Commerce is its notorious Economic Development Administration (EDA). (See page 20 for one of these critiques from columnist Veronique de Rugy.) From Lighthouses to Laserbeams claims that this office "generates and preserves private sector jobs in economically depressed areas through the use of public works funds, business loans, loan guarantees, technical assistance, long-range economic planning, and economic research." In reality, it is the purest sort of crony capitalism.

"It's about as transparent a subsidy to further political agendas than anything I can think of," says former CEI policy analyst David Bier. State, local, and federal officials are all brought in to greenlight a given project, in part to create political cover. "The EDA has certain criteria: you have to create a certain amount of jobs and have a certain amount of investment lined up," Bier says. Such vagueness leads to a process that seems "pretty arbitrary."

"It's mainly construction jobs," Bier says. "You're talking about convention centers, stadiums, parks, local roads, that sort of thing. One-off projects, you get the funding, they do the project, and 10 years later the convention center is not being used. And then the remake is up for funding again because it's fallen into disrepair."

In a 2012 paper for CEI, Bier cited a convention center in Cedar Rapids, Iowa, that received a $35 million grant in 2011 from the EDA, the largest single grant in the agency's history. The city's own consultants projected in a January 2011 report that the project would lose more than a million dollars a year by its fifth year in operation: a small price to pay for economic growth, the city reasoned. "There's no evidence whatsoever that the EDA has done anything other than subsidize disaster projects and subsidize wasteful projects," Bier says. Instead of handouts from central planners, the better bet is to "let the market decide what sort of projects get funded in the first place."

This ribbon-cutting/press-release style of corruption is far from the only instance of crony capitalism in the Commerce Department. The International Trade Administration came under scrutiny during Bill Clinton's presidency for swapping access to trade missions for campaign dollars. Clinton and his friends understood that corporations would be more interested in introductions to foreign markets than sleepovers in the Lincoln Bedroom.

"Coveted slots on U.S. foreign trade missions generated a major fund-raising bonanza for the Democratic Party during President Clinton's first term, with the business leaders who were invited on such trips contributing $15 million to Democratic Party committees over the four-year period," The Boston Globe reported in 1997. "In 1995, the same year the White House began holding regular coffee meetings that raised millions of dollars, the Commerce Department dramatically increased its roster for overseas travel. That year, 264 business leaders went along on department-sponsored foreign trips-up from 54 in 1993. Contributions from those who went in 1995 increased four-fold from 1993."

Cronyism is not the only wasteful, economically destructive aspect of the Commerce Department. The Washington Times reported in April 2013 that the Commerce Department "has been charging other government agencies millions of dollars for reports that the other agencies could just as easily have gotten online, for free." The Government Accountability Office report the Times story was based on showed that three out of four reports Commerce was charging those other agencies for were freely available online.

Commerce doesn't have a great track record at finding ways to save money. Another GAO report found that the department did not perform a cost-benefit analysis on a quarter-billion dollar plan to increase broadband access in rural areas.

Every dollar grabbed up by the government in the form of taxation is a dollar that doesn't get spent on actual commerce. But misallocating resources is just one of many ways the Commerce Department is stifling the economy.

Patently Problematic

Visitors to the Smithsonian American Art Museum were recently given the chance to traipse through the valley of American ingenuity via an exhibit titled "Inventing a Better Mousetrap," on display from November 2011 to November 2013. It was a timely reminder of a different regulatory age: Between 1790 and 1880, inventors were required to submit a model with patent applications. The resulting doohickeys and whatsits were then displayed in the patent office, per the Patent Act of 1836. According to From Lighthouses to Laserbeams, this turned the Patent Office into "a major tourist attraction in Washington, D.C."

The collection of oddities at the Smithsonian provided an idea why. Mockups of artificial legs sit next to toy wrestlers, which abut an extension ladder-all common enough now, but marvelous to the 19th century D.C. tourist. The Smithsonian exhibit, and the hardware/model requirement in general, can also help us understand the dangers of software patents, and why the Commerce Department's Patent and Trademark Office (PTO) should be more reticent in awarding patents on digital files.

Protecting the rights of inventors to profit from their inventions for a limited time, after which anyone can profit from them, encourages innovation. But software is already protected under copyright laws: That's why you aren't allowed to buy a video game for $60, burn a hundred copies, and sell them for $10 each. Software patents take the protection a step further, by allowing creators to claim overly broad protections for relatively obvious uses of technology. Think back to the model requirement: How could one create a model for software without showing the hardware also in use? Lines of code do not a model make. And lines of code are not all that much different from lyrics in a song-which are copyrightable, but not patentable.

These patents are extremely lucrative even though they do little to encourage innovation. In January 2013, Ars Technica detailed the efforts of Project Paperless-a mysterious company that, ironically, seemed to exist only on paper-which took to suing (and threatening to sue) businesses that used the email functionality of scanners to send themselves and others scanned documents. Writing in National Review in January 2011, Timothy B. Lee chronicled the rise and fall and rise again of a tech startup called DataTreasury, which realized it could use a patent on electronic check-clearing to shake down the nation's banks for hundreds of millions of dollars. Entire businesses, including the multi-billion dollar Intellectual Ventures, have been built solely to amass patents and then license them out-or sue those who unwittingly violate the patent-holder's rights.

"Intellectual Ventures and the scan-email trolls are the kind of people who could drive me to vigilante justice," a friend who studies and writes about innovation says in an email. He asked for anonymity because "the email scan guys in particular are thuggish enough to sue as a way to harass people they perceive as threatening them, even if it's clearly a joking expression of frustration."

These businesses derive much of their income from lawsuits and threats thereof. They are commonly referred to as "patent trolls," which Lee defined as "a company that has no products of its own but earns a living by filing patent-infringement suits." The resulting economic harm is no trivial matter: A 2012 study from a pair of Boston University School of Law professors estimates that patent trolls cost the American economy $29 billion in 2011 alone. A 2011 study out of Boston University suggested that between 1990 and 2010 the economic damage has amounted to a half-trillion dollars.

Lee is cautious not to lay the blame entirely on the PTO. "The job that the patent officer has is hard," he says, noting that the bureaucrats have only a few hours to examine each patent and that multiple similar patents could have been filed at the same time. The real culprit, in Lee's eyes, is a rogue court system that has virtually ignored Supreme Court precedent about what types of software are and are not patentable. The patent office is just an accomplice.

But accomplices still share some of the blame. A 2013 study by the University of Richmond's Chris Cotropia and Cecil Quillen and the independent researcher Ogden Webster found that the Obama administration significantly relaxed its standards for awarding patents.

University of San Diego economist Shawn Miller suggested in a 2012 working paper that "28 percent of all patents would be found at least partially invalid if litigated" and that "software, business method and licensing firm-owned patents possess significantly higher innovation-based invalidity rates." More patents mean more lawsuits, which in turn mean more deadweight loss and money sucked out of the economy.

The Commerce Department houses bureaus that play several constitutionally mandated roles -the issuing of patents among them. Getting rid of it altogether would not mean getting rid of many of its component parts. But splitting off the required departments, and protecting other, more useful, organizations from its pernicious influence, would be an economic boon and an easy way to cut billions from the budget. It would also demonstrate a commitment to actually shrinking the size of government, a notion that has long been absent in the corridors of Washington.