Not picking industries

I am a skeptic when it comes to government –– national, state and local –– picking industries –– either old ones to save or new ones to stimulate –– as an effective economic growth strategy.

Although it is true most of the folks I work with and respect don’t agree. They are far more representative of the broad bi-partisan consensus that government can and should identify key industries that if successful are thought to be particularly important to future economic growth and prosperity.

Two New York Times articles raise questions about the effectiveness of that consensus. Both worth reading. The first is a comprehensive story of the failed investment by the state of Rhode Island in a video game company started by retired baseball star Curt Shilling entitled Thrown for a curve in Rhode Island.

The article details how (1) the state  –– with broad bi-partisan support –– allocated new funds to more aggressively invest in businesses that supposedly could help transform the state’s economy, (2) a Republican Governor threw his weight behind the Shilling led enterprise and (3) a business-led state economic development agency made a large investment in the company. The result, as the Times reports:

“The tiny, struggling state issued $75 million in bonds so that Mr. Schilling’s company, called 38 Studios, could relocate to Providence and unleash the world’s next killer fantasy game. Ideas that seem plausible in our darkest moments often seem plainly flawed in hindsight, and you can probably see where all this is going. A little more than two years after Mr. Carcieri (the Governor) first talked to Mr. Schilling about 38 Studios — so named for his baseball uniform number — the company went bankrupt, blowing a sizable hole in the state’s already strained finances.”

This, of course, is an extreme case in a state picking winners. Both the risk it took to the state’s finances and the role that celebrity played in the investment. But the core reason for the failure is not that unique: its hard for government (or anyone else) to know what industries, technologies or companies/entrepreneurs are going to be tomorrow’s winners. (For example, here in Michigan no administration knew ––  or  should have been expected to –– that Michigan’s most successful start up in decades –– Quicken Loans  –– would be in the home lending industry.)

In a big picture column for the Times, Yale economist and co-creator of the Case-Shiller Home Price Indices (and the related business), Robert Shiller explores the role of government in stimulating entrepreneurial start ups. Which is at the top of most every public officials lists of what grows the economy. In the column entitled Why Innovation is Still Capitalism’s Star, Shiller argues that its culture, not government programs, that are the key to innovation and new companies. Shiller writes: “CAPITALISM is culture. To sustain it, laws and institutions are important, but the more fundamental role is played by the basic human spirit of independence and initiative.”

Shiller expresses skepticism for government program’s like President Obaman’s proposed innovation institutes, but does writes favorably about government funding for research awarded through a peer review process. Two very different approaches to spurring innovation and entrepreneurship. One narrowly focused on a small set of industries and/or businesses, the other focused on the broad development of new ideas and indirectly stimulating entrepreneurship. Seems like the latter is something government can and should do, the former not so much.

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