In the wake of the 2009 elections — really, ever since the stimulus plan passed early last year — a pair of conflicting narratives has dominated the U.S. politico-media landscape. Though told in many ways and forms, the double-story actually boils down to a simple either/or proposition:
President Obama is an able, courageous leader who’s trying to accomplish, all at once, many difficult, fundamental changes needed to keep America the world’s leading economy.
President Obama is a silver-tongued, overambitious politician who is stealthily extending the federal government into the private sector, strangling American innovation and bankrupting the Treasury.
This kind of two-headed narrative is well suited to the context-averse 24/7 news cycle of the early 21st century. Most any policy can be analyzed through these opposed monocles, and harried journalists don’t have to worry about the difficult business of weighing the truthfulness of either proposition. When the administration proposes to do something, reporters can just call a recognizable Democrat, who’ll suggest Obama is the green FDR, and then get a corresponding Republican on the line to imply the president is an overambitious Jimmy Carter, only more socialistic.
I’d like to suggest a different point of view, one that plays against both off-the-shelf narratives: Though it seems ambitious, the Obama agenda — the simultaneous remaking of the country’s health, energy, transportation and education sectors — is actually a bare minimum of what is needed for the U.S. to continue as the world’s indispensable economy. The problem isn’t that the agenda represents socialistic overreach; it’s that accomplishing the minimum retooling needed to correct decades of economic slide requires a wide-ranging competence that U.S. government has previously been able to muster only in fits and starts, usually during major wars and only in deep partnership with business. The administration isn’t reaching too far; it’s just relying too much on a clumsy federal bureaucracy, and too little on the nimble entrepreneurs and financiers who will stage a green revolution, if it occurs.
In February, shortly after the president signed a $787 billion stimulus package into law, New York Times columnist Thomas Friedman argued against additional bailouts to prop up creaky carmakers General Motors and Chrysler, and for investing the money in companies with a brighter future. “You want to spend $20 billion of taxpayer money creating jobs? Fine,” Friedman wrote. “Call up the top 20 venture capital firms in America, which are short of cash today because their partners — university endowments and pension funds — are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20 percent of the investors’ upside and keep 80 percent for themselves.”
I think Friedman an accomplished opinionist and thinker, but after reading Josh Lerner’s new book, Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do about It, I think Friedman only half right. Startup companies developing new technologies need to be at the heart of plans for creating the “green” boom the U.S. needs to help transform it into a 21st-century economic superpower. But as practice has shown, successful government investment in innovation is rare and a much more complicated process than just throwing money to the VCs.
A professor at Harvard Business School and an expert in both finance and entrepreneurial management, Lerner has studied governmental attempts to spur entrepreneurship around the world. He’s no free-market ideologue — in fact, he describes government interventions that have helped spur innovation, notably in Israel and Singapore, in laudatory terms. But he has documented an impressive array of failed governmental efforts to spur entrepreneurial activity, many of them in the U.S. “The sad truth,” Lerner told me in a phone interview, “is that if you want to find best practices [in government support of entrepreneurship], you have to look outside the U.S.”
The shining example of innovation in recent U.S. economic history is, of course, Silicon Valley, which has a libertarian, keep-the-government-out-of-our-way ethos that is not entirely true to history. Many of the valley’s seminal electronics firms were fed by government spending during World War I and II, and a variety of government interventions — including regulatory changes that allowed pension fund investment — helped create the venture capital industry that has fed the technological revolution centered in the San Francisco Bay and Boston areas.
But for every Hewlett-Packard — nurtured with government contracts during World War II — there is a long and dark history of incompetence (and worse) surrounding government entrepreneurial-development programs. Perhaps it’s just my affinity for black humor, but for me, Lerner’s accounts of government investments gone awry make some of the best reading in a book that’s remarkably accessible, given its heavy grounding in research. In Kansas, for example, a state mandate that the public employees’ retirement system invest in local businesses led to $65 million in loans to a local S&L that was quickly seized as insolvent, a loan to the creators of “an uncompleted Hungarian film about a man-eating bear chasing a rock-and-roll band” and a $40 million loan — to the retirement system’s own chairman!
I could fill paragraphs and pages with the follies of government programs to support entrepreneurship, from billions wasted in France’s attempts to jump-start its high-tech sector to an Australian program that aimed to create incubators for high-tech firms but wound up spending the bulk of the money on managers for the incubators. Lerner’s point isn’t that government intervention is destined to fail. To get bang for its innovation buck, he argues, government needs to thread an economic development needle, first setting the table for entrepreneurs and venture capitalists with a whole variety of indirect initiatives that include support for basic research, entrepreneur training and tax laws that encourage venture capital formation and limit liability for early-stage business investors. And when it does come time to provide direct support to startup firms — or, better, the VCs and other investment experts that fund them, a la Friedman’s suggestion — Lerner counsels that the government take special care. Whenever the government passes money directly to business or the supporters of business, politics can and does intervene, and money meant to grow new industries gets passed out on the basis of legislative districts or campaign contributions rather than business potential, and the incentives turn. VCs and startups stop trying to create a great company and start focusing on prying ever more money from the government.
As Lerner writes, there is no “unified field theory” that tells governments how to foster the rise of the Intels, Microsofts, Ciscos and Googles that fuel the growth of entire economies. He does provide evidence that programs in which the government does not itself choose recipients of funding, but places investments with investment firms that are required to provide matching private funds, are effective. In those programs, the discipline of the private market and the expertise of savvy investors make themselves felt, with venture capitalists sitting on startup boards of directors for years, scrutinizing progress, ruthlessly pulling the plug on losers and understanding that the time frame for grooming a big winner may be far longer than a four-year presidential term.
Which brings us back to the stimulus plan and the Obama agenda.
I edited a story in the mid-1990s about the glee with which state, regional and local officials greeted a decision by the Sumitomo Sitix Corp. to locate a $400 million silicon wafer plant in Phoenix. As originally submitted, the story noted that Sumitomo — which then had annual revenues of about $150 billion — would receive a variety of government incentives, including a reduction in real estate taxes. I told the writer of the piece to go find the nearest friendly MBA and ask him to calculate the future value of that tax break — that is, what the government could earn if it invested those tax revenues at a reasonable rate of interest over the 99-year life of the deal.
I think the writer was a bit surprised to discover that the government had given one of the largest firms in the world an $80 billion incentive to locate a manufacturing facility in Phoenix.
As stimulus funding actually gets spent around the country, news stories are popping up, highlighting cases of what looks like pork-barrel spending; the stories are often met with the explanation, “It’s a stimulus bill, stupid. The whole idea is to spend, even if that means paying people to dig potholes and fill them back in again.”
But there’s an $80 billion chunk of the stimulus plan that is meant not just to fight recession in a Keynesian way, but to remake the country’s energy and transportation sectors by encouraging high-tech entrepreneurship in alternative energy generation, electric batteries and vehicles, a “smart grid” that would allow increased use of solar and wind power, and a range of other efforts in innovation.
The aim of these investments — nothing less than a revolution that reduces dependence on foreign energy, battles climate change and grows a green manufacturing sector — is not, as the rightmost wing of the Republican Party would have it, statist overreach. It is a revolution that has to happen, unless Americans want their children to live as citizens of the British Empire, circa 1947.
Still, even at this early stage, the list of what is actually being done with stimulus funds in the name of encouraging entrepreneurship is worryingly scattered.
The investigative Web site ProPublica, which has devoted impressive resources to tracking the stimulus, notes, “projects for the ‘smart’ electricity grid, carbon dioxide capture and solar, wind, geothermal energy weren’t announced until October,” and so detailed spending reports weren’t available as I composed this column. But the government’s stimulus Web site, Recovery.gov, does link to Commerce Department press release after press release announcing funding for this and that high-tech incubator facility scattered across the country. The American University School of Communication’s Investigative Reporting Workshop has found that $849 million in government clean-energy grants handed out between the start of September and the end of October went to foreign wind-energy companies; sometimes, the grants paid for wind-generating facilities that already existed.
I doubt there is a single human who has a complete grasp on the massive list of “green” funding programs in the stimulus program, spread as they are across multiple federal agencies, much less how well each is designed in terms of its ability to spark innovation and entrepreneurship without funding films about rock band-chasing bears. But if there is one point that Lerner’s book and years of research seem to make — and he emphasized it when we spoke — it’s that “crash programs just lead to a lot of waste.” To my eye, a lot of the green part of the stimulus plan has “crash” wound into its DNA. It was, by definition, a program meant to immediately stimulate a collapsing economy first and worry about the future later.
When I asked him what he thought about the stimulus and its support of green entrepreneurship, Lerner acknowledged that some parts of the program gave “lip service” to the use of matching private funds in the grant-making process. All the same, he said, the stimulus plan includes the kinds of government handouts to particular companies that often turn into an influence game in which the best-connected — rather than the most-promising — firms get money. Calling the stimulus plan’s approach to entrepreneurship “problematic” and “very ad hoc,” Lerner said, “It seems to be an exact example of what not to do.”
This column should not be misinterpreted as an attack on the stimulus plan — which has saved the country from a financial disaster created by the seething incompetence of a preceding administration — or the administration’s support for a green revolution that’s long overdue. It is merely a reminder that in the annals of American economic progress, the names of innovative entrepreneurs and the gimlet-eyed financiers who find and back them are many and storied, and the names of assistant secretaries of some federal agency or other are very, very few.
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