AGAINST State Investment in Private Tech Companies

Posted on March 17th, 2009

I realize that there are times when governments invest in or provide investment subsidies to private enterprises for reasons of national security or in times of national emergency. Although I personally think there is far too little debate or evaluation about the merits of when this can or should be done, few people doubt that there are times when it is necessary.

A case, albeit weaker, can also be made for government ownership of a commercial “monopoly” in the beginning stages of a area’s economic development to ensure the creation of a basic economic infrastructure. This governmental investment is made available to ALL citizens and businesses. Past examples of this are local telephone service, natural gas pipelines, and rural electrical distribution grids. A future example might be high-speed internet. Even when there is a good case to be made for such, a legislature should very seriously consider a sunset and eventual end to government ownership once the original purpose has been achieved.

A very weak case can also be made for the government to provide investment incentives such as grants or tax exemptions to particular companies due to competition with other states and regions that are providing those benefits to companies that locate there. I have come to have more and more doubt about the wisdom of doing this, but still recognize there is a weak case to be made for the practice.

However, there is a very big and serious difference between private companies / investors “shopping” states for incentives for investment that would happen even without government assistance as opposed to those that would not happen without governmental investment. The former investments would happen “somewhere” regardless of government assistance because they have favorable expected returns relative to the risk involved. The latter are just bad investments for anyone involved.

Even so, it appears that we are now faced with the desire of some in our state government to establish ongoing programs to invest in private enterprises and/or create/participate in venture capital pools with private sector investors. While the intention to create jobs, diversify the economy, and increase regional income are all good, the method should horrify even the most ambitious “economic developer”.

For the moment, let’s set aside the arguments that government should not be involved in private enterprise as a matter of principle, or even that government should not be involved in “picking winners and losers”, and we might even forget the argument that the results of such have traditionally been abysmal. Let’s discuss whether individuals should willingly pay taxes and/or give up services to finance government investment in private enterprise. Don’t you think that if government could consistently find good investment opportunities better than the private sector, wouldn’t investors be lined up around the block to seek my and other legislator’s advice on how they should invest. I don’t see that happening. That is a wise decision on their part, I think.

The problem is not a market failure due to the lack of willing private capital for investments with favorable risk-return ratios, but instead, a lack of willing private capital for investments with unfavorable risk-return ratios. This means that if the government is to make these investments, then the taxpayers were being forced into bad or poor investments that they would not ordinarily make.

This ultimately boils down to the fact that the funds given to government sponsored venture capital pools or by direct investment in specific businesses are paid for through some combination of higher taxes or lower spending on other programs such as highways, education, or other government programs. The most direct beneficiaries of government investment in private companies are the special class of private investors who have the power to lobby for the special favors and perhaps the employees of these “favored” companies. It is clearly not going to benefit the general public directly, and any indirect benefits are marginal at best and oppressive at worst.

Taxpayers deserve for the government to treat them fairly, act in their best interest, and not to behave irresponsibly with their hard-earned dollars. In this case, government investment in private companies mostly benefits only a few but the costs and risk is distributed among all taxpayers.

If given the choice, would citizens, particularly lower income ones, willingly pay higher taxes and/or forgo services for the government to finance these activities? If not, then how is this the right thing to do?

How can it be fair to force citizens as taxpayers into investments that they have rejected as individuals? How can it be in their best interests?

Furthermore, if the state is invested in a particular company, would other competitive companies avoid Arkansas because the state has a vested interest in helping one succeed and the other fail? Would those companies believe that they would be treated fairly and equally before the law when stake, salience, certainty, immediacy, and self-efficacy can ALL be reasonably established?

It would be more fair for our state government to create a good investment potential in Arkansas by removing undesirable obstructions to private investment. We can best, more fairly, and more responsibly do this by funding a good public infrastructure, provide responsibly and competitively low levels of general taxation, an unobtrusive and fair regulatory environment, and a highly educated and skilled labor force.

The healthy investment climate described above is one where government supports, rather than substitutes for private investors. Not only is that a fairer public policy, it is a better one.

The heros of old, Democrats all, knew this when they crafted our State Constitution to say in Section 7, Article 12: “Except as herein provided, the state shall never become a stockholder in, or subscribe to, or be interested in the stock of any corporation or association.” That is a fine piece of wisdom, one that we should not meddle with without fear of extreme peril and regret.

An angry constituent asks, “Are you going to put a cap on the exective salaries of those companies we invest in? How many corporate jets will our tax dollars be buying? How much in campaign contributions do I need to make to get any action in this sweetheart deal? How many swanky parties at exclusive country clubs will I be paying for but not invited to? Are you going to prevent bonuses from being paid out to executives of these companies that we invested in, but are not paying dividends? If you support this, why don’t you follow the Japanese model . . . resign, or go commit suicide?”

No siree, Rob. There ain’t no way I’m gonna’ touch this, even with a ten foot pole. The American people are rightfully mad as hornets about this very thing. I learnt as a kid, the hard way mind you, that it didn’t make no sense to be poking at a hornet’s nest, no matter how long of a stick you foundt.

Tags: economic policy
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2 Responses to “AGAINST State Investment in Private Tech Companies”

1. Joshua Lowry Says:
   March 17th, 2009 at 8:15 pm

   I agree!!! All citizens concerned about this should contact their representatives asap.

2. Bradley Jacobs Says:
   March 20th, 2009 at 12:25 am

   Your a really good writer. I never thot about stuff like you say it. I seen where your say you are libertarian. I would like you to put post some stuff about that.