Michigan Gov. Jennifer Granholm
proposes saddling state taxpayers with $2 billion in new debt to fund research
in commercially speculative technologies. California voters have authorized $3
billion in debt for government-financed embryonic and adult stem cell research.
Washington’s new governor wants to borrow $1 billion to develop nanotechnology.
Similar proposals are rattling around in other states.
question for supporters of state-run investments in risky businesses: "What are
the consequences for government employees if they do a lousy job selecting which
entities receive the money?"
are a private individual who judges poorly on an investment, the consequences
are severe: You lose your own money. If a mutual fund company invests other
people’s money poorly, its managers know that customers may sell out and they
will lose their jobs.
success of capitalism in providing whole populations with a standard of living
unimaginable just a couple centuries ago is based on billions of voluntary
investment decisions in which prudence resulted from the need of individuals to
balance two vivid and compelling emotions: the fear of loss and the desire for
gain. If you bet too much on highly speculative investments, you might lose it all. If you avoid risk by being too conservative, you lose capital by failing to keep up with inflation.
government employee invests money taken from taxpayers, this prudence-producing
dynamic is absent. If the investment pays off, at best he gets a pat on the
back. If it goes bust, at worst he gets a transfer to another department with no
loss of pay. His wealth and his generous pension do not suffer by one penny.
investors manage their fear of loss and desire for gain with diligent research
and diversification of assets. The incentive to judiciously use these tools is
tremendously greater when one’s own money is at risk than if the personal
rewards or punishments are minimal.
this, why would anyone think that government employees can do a better job at
picking winning investments than private investors?
Politicians who promote these market adventures usually dodge such questions
with something like, "We have strong corruption laws," or, "The program has
built-in conflict-of-interest safeguards."
nice, but outright corruption is not the main worry – politicization and
accountability for poor judgment are. The politicians’ fallback when challenged
on this are wounded pronouncements about the dedication and virtue of public
when losses have grown to an extent that any reasonable person can see that the
money was wasted, they bluster: "We’re investing for the long term. We expected
some losers, but just a few 'home runs' will more than compensate." Years later,
same answer. Only when the current generation of politicians has passed does
history provide a definitive verdict: "Bad idea."
For some time now Michigan state
government has been a leader in the corporate welfare "war between the states,"
and as such has provided many examples of these common-sense truths. Here are
In the mid-1990s, the Michigan
Renaissance Fund, a government entity with a mission similar to those now being
proposed, poured $20 million into flat panel display research at the University
of Michigan as part of an apparent quid pro quo agreement with Optical Imaging
Systems. (OIS was a subsidiary of Guardian Industries, whose CEO regularly
contributed large amounts to both political parties in the state.) In return for
the government research, the results of which would be shared with the company,
it would build a plant near the university.
memo penned by the Renaissance Fund's executive secretary suggests that
the diligence and fine judgment generally characteristic of private investors were absent
in this case:
"Our files (are) very sparse on
background material on the OIS/Flat Panel deal. Most of the deal was put
together directly by the Governor, (the university president and a company official). ... We were brought in after the deal was cut to do the paperwork. ... If we had not started a Flat Panel Center at UofM, OIS would have left. ... (That is the party line anyway.)"
What was the outcome? OIS closed
its doors and went bankrupt in 1999, costing Michigan taxpayers $20 million.
Here’s one more: Freed from
powerful incentives for prudence that drive individual investors, bureaucrats
entrusted with the public’s money are particularly subject to investment fads
and "the madness of crowds." This was demonstrated during the "dot.com" bubble
era when Michigan offered online grocery retailer Webvan $23.4 million in tax
credits in exchange for the company's promise to build one of its 26 warehouse
distribution centers in the
state. Fortunately, Webvan ceased operations and filed for bankruptcy before
the company could claim credits against any tax liability.
bottom line? Unlike private investors and their fiduciaries, when the government
engages in market speculation there are no penalties for bad results and no
consequences for bureaucrats who make losing bets with other people's money.
that could ameliorate this would be to require that the pensions of every
politician and every government employee involved in these schemes be placed in
the same investment pool with the public’s money. This condition would deliver a
quick and merciful death to such proposals.
point: No prudent private investor would go into debt for the sole purpose of
making speculative investments. Yet in Michigan and elsewhere, state politicians
want to borrow billions of dollars with the stated purpose of making risky
investments. Individual taxpayers have no choice about this, and they have no ability
to "redeem" their shares. What is wrong with this picture?
Economic history shows that when government seeks to pick winners and losers
in the market, the net consequences for citizens are always bad. However good
the intentions, by the very nature of the activity there is no way to overcome
the issues of prudence raised here. The words "I’m from the government, and I’m
here to invest your money," should send a shiver through taxpayers.
Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy,
a research and educational institute headquartered in Midland, Mich. Permission
to reprint in whole or in part is hereby granted, provided that the author and
the Center are properly cited.
 State-run investment promoters implicitly argue that investors are ignorant of the dangers of overly conservative investment, meaning that promising but risky ventures will starve without government capital. Countless examples from economic history, and every new business that is launched today, are proof this is not true.