How States Can Avoid “Picking Winners” while creating “winning economies”

Throughout the past 50 years, state and local officials have argued over the value and/or necessity of economic policy favoring one company or group of companies OR outright incentives to the same.

“Corporate welfare” “The Rich Get Richer” “Better use for tax money” “What about the poor?” “Cronyism”

“Free market rules supreme” “Picking winners” “Immaterial to site location decision” “Cut taxes and regulation and jobs will sprout”

◦ BTW – this had disastrous results in Iraq “Government has no role in the “free”

marketplace”

Abraham Lincoln (a Whig cum Republican) got elected to Congress running on a “public works” platform: river ports, public buildings, etc.

Interstate highway system, built mostly in the 1950s, replaced railroads and created the most efficient economy in the world

The U.S. Department of Defense created the semiconductor and sparked the electronic revolution in a place called California

Crazy federal scientists at DARPA - the Defense Advanced Research Projects Agency build the internet and create the dot.com revolution. Al Gore wishes he was one of them.

Incentives disappeared in most areas of the U.S. except in the disadvantaged Southern states.

Aging industrial areas with high unionization rates failed to adjust to a new economic reality – other countries had rebuilt and had newer, more efficient production

Cost avoidance started the “Sun Belt Migration” revolution

Armed with tax and cash incentives the “South invades the North”

But some were doing what Japan was doing to the U.S. – gaining market share

In the 1950s an enterprising Governor asked an electrical engineer at the University of Illinois if he would help him create a locus of economic activity, based on emerging technologies, in this Southern State.

By the 1970s, an “overnight sensation” called the Research Triangle was the zenith of the new economy

The Midwest adopted the worst of the South. The US Chamber of Commerce called for an

“Industrial Policy” to fight Japan, Inc. States developed outrageous incentive

programs for “fast growing” companies, unmindful of the infrastructure that the Research Triangle had built up to support its now-famous park.

The feeding frenzies of the 80s erupted into a host of really bad economic development policies in the states.

The small business revolution of the late 70s.◦ Research says “all jobs created by small business”◦ “Economic gardening” becomes a new catch phrase for

e.d., designed to accompany the “Small is Beautiful” craze. The data set was wrong BTW.

Some states were beginning to look at “Target Industries” – industry groups that for reasons known and unknown were prospering in their regions

By the mid-80s, the term “clusters” emerged in Arizona as a means of organizing state economic development strategy

Innovation clusters are groupings of companies that “cluster” in particular geographic areas to share intellectual innovation, develop labor pools, buy and sell from one another and generally benefit one another via proximity to one another. Their reasons for clustering vary from the presence of natural resources, research capabilities nearby, proximity to customers or suppliers or buyers.

Clusters are seldom “created” or “recruited”. They grow around a locus of activity that poses competitive advantage for the cluster companies.

Clusters are nurtured or grown with deliberate investments by direct beneficiaries.

Clusters can be accelerated by strategic investments by governments in component elements needed by the cluster to prosper.

Aerospace Cleantech Aviation Financial services Bioscience Software/IT Tourism

Agriculture Energy Broadcast/Telecom Beverages* Hardware IT*

Japan, Inc. and MITI – picking winners and losing◦ Honda discouraged from auto manufacturing. “Stay

with bicycles.”◦ Real estate investments in the U.S. in the 70s and

80s. Use of “design standards” vs. “performance

standards” to keep U.S. fiber optic companies out of the Japanese market.

These actions are “protectionism” and “picking winners”. Neither is “purposeful development” of the economy

1983: President Ronald Reagan and Ag. Sec. John Block are flummoxed by failure of PIK (Payments in Kind) program

Chrysler bailout in 1979 gives glimpse of “jobs as hostages” and “too big to fail.” Lee Iaccoca extracts millions from states to keep Chrysler jobs.

PRC government taking positions in Tar Sands, rare minerals

Aligning with mineral rich countries that are ostracized by UN countries

Created an export-based economy and now moving toward consumer economy

Massive investments in higher education and export of students to other countries.

North Carolina: Research Triangle now planning to double size of park and will include State investments in applied cleantech research for tenants.

New Mexico: film industry is paid to produce films in state. Poor policy that has cost state millions

Arizona: state-run incubator through Arizona State

Texas: Texas Enterprise Fund – cash for jobs

Requires intensive research and ongoing updating of findings – clusters change and cycle differently.

Key elements are supply chains, locational factors, prominent labor needs, tax sensitivities, favorable regulatory environment

State investments should focus on cluster components such as research and development through universities, transportation improvements, adequate energy supplies, ease of access to market through minimal restrictions, broadband capacity, joint ventures with mutually beneficial rules for licensing and patent ownership among others.

Tax policies that encourage cluster growth, but do not support individual companies within the cluster are a must.

State government as a customer of cluster outputs. Purchasing or otherwise creating a market or new market for cluster companies. E.g. 30% RPS created “floor” for wind and solar companies. Note Colorado Rail, SUTRAK and Lamar bus manufacturer

Certificate programs, state-paid training programs for cluster companies

Place-making: creating a locus of activity for cluster activity. Examples: Research Triangle Park, Fitzsimons Campus, Johns Hopkins Research Park

Attracting and holding federal laboratories that foster cluster growth: NREL, NOAA, NIST

Funding facilities at college campuses that stimulate cluster growth

Recruiting and retaining “super star” scientists or academics for key cluster programs

EDOs, Chambers Colorado Energy Coalition Colorado Cleantech Industry Association Colorado Space Coalition Colorado Software and Internet Association Metro Denver Aviation Coalition CO-Labs

Strong K-12 system that delivers literate 18 year olds to continuing education and opportunity in clusters

Adequately funding pre K-12 and Higher Education, especially in cluster-related areas.

There is the “private marketplace” The public marketplace where governments

compete for political or economic advantage◦ Competition for the best students among colleges◦ Competition for more tax revenues, etc

And the public-private marketplace where the interests of both sectors coincide

Understanding and in-depth research on how these markets intersect is key to purposeful economic development

If so, it should be easy to measure. Labor – is it competitive, competitively

priced? Infrastructure – is it adequate to move

information, goods and services quickly to and from markets?

Is there adequate funding for start-ups, new ventures, Valley of Death companies?

Is research and development funded competitively compared to other states?

Is State tax policy aligned with cluster growth needs and incentives?

Is higher education well-funded and delivering the graduates needed for clusters?

Cleantech: First listed as a cluster in 2003. Center of wind, direct trade route to global centers for cleantech

2005 Governor Owens and Senator Salazar create Colorado Renewable Colaboratory

Voters approve Renewable Portfolio standard of 10%, eventually increased to 30%

Ritter introduces 57 bills to advance cluster Income tax code rewritten to benefit all clusters and

primary employers Metro Denver WIRED program trains several hundred

students in Cleantech and BIO technologies

Cleantech employment grows 3.6% annually for last five years.

Percent of Electricity Generated through Non-Hydro Renewable Sources

U.S. Energy Information Administration

8th Highest

Sources of non-hydroelectric renewable energy include biomass, geothermal, solar, and wind. Many states have focused on expanding these non-hydroelectric energy sources. Colorado’s percent of non-hydro renewable energy increased from 2.5 percent in 2007 to 6.1 percent in 2008. Wind is the primary source of renewable energy in the state.

Fig. 121

Total Wind Energy Net GenerationU.S. Energy Information Administration

Top 10 States and Colorado

Only 11 states reported energy generated from wind in 2000. That number jumped to 35 states in 2009, with Colorado ranking seventh.*2009 data is preliminary.

Fig. 123

7th Highest

Total Solar Energy Installed CapacitySNL Financial Operating Capacity Dataset

Top 10 States

6th Highest

2010

Large scale solar operations are still new in the United States and require significant amounts of land and sunshine. In 2010, 27 states had quantifiable solar operations. Fig. 127

Prior to 2003 Colorado ranked 27th in bio science companies. Battelle study in 2003.

Strongest segment was devices. Pharma followed farther behind.

Fitzsimons construction, accelerated by creative project manager puts Fitz “in play” five years ahead of schedule.

Tom Cech’s return led by CU Foundation gives CU (new building for Tom) and Fitz Campus international claim to prominence

“Proof of concept” legislation keeps pharma companies in Metro Denver. Fewer yanked to Silicon Valley.

Colorado now a “bio state” and ranks in Top 15 in all competitive categories.

From aerospace to aviation to wind turbines – Lidar creates huge financial opportunity for all three

The hybrid aircraft◦ Bye Energy◦ Ascent◦ UQM◦ Cesna

Tagging electrons from digital data packets

Total R&D Spending at Academic Total R&D Spending at Academic Institutions per Capita Institutions per Capita National Science FoundationNational Science Foundation

Fig. 21Colorado is one of the nation’s centers of public and private R&D spending. This is possibly due to a strong entrepreneurial economy and substantial investments in Colorado universities by the federal government, particularly in aerospace, bioscience, and energy.

17th Highest

Population 25+ Completing High Population 25+ Completing High SchoolSchoolU.S. Census Bureau, American Community SurveyU.S. Census Bureau, American Community Survey

17th Highest

Fig. 83Eighty-nine percent of Colorado’s population aged 25 and over have completed high school, ranking the state in the top half of the nation.

Pre-K Resources per Child*Pre-K Resources per Child*National Institute for Early Education ResearchNational Institute for Early Education Research

3rd Lowest

Fig. 138

Early childhood education is an essential part of long-term student success. Colorado ranks below the national average in resources devoted to pre-K education.*Rankings based on of the 38 states with programs.

Student/Teacher Ratio in Public Student/Teacher Ratio in Public ElementaryElementaryand Secondary Schoolsand Secondary SchoolsNational Education AssociationNational Education Association

With an average of 16.8 students per teacher throughout the state, Colorado’s student-teacher ratio ranks as one of the 10 highest in the country. The national average is 15.2. Fig. 144

10th Highest

Student/Teacher Ratio in Public Student/Teacher Ratio in Public ElementaryElementaryand Secondary Schoolsand Secondary SchoolsNational Education AssociationNational Education Association

With an average of 16.8 students per teacher throughout the state, Colorado’s student-teacher ratio ranks as one of the 10 highest in the country. The national average is 15.2. Fig. 144

10th Highest

Percent of Family Income Needed to Percent of Family Income Needed to Pay for Pay for a Public Four-Year College a Public Four-Year College NCHEMS Information CenterNCHEMS Information Center

Rising college costs and diminished levels of state funding result in a higher share of a family’s income required for college.

Fig.150

18th Highest

State and Local Public Higher State and Local Public Higher Education Support per Full-Time Education Support per Full-Time StudentStudentNCHEMS Information CenterNCHEMS Information Center

Fig. 154

3rd Lowest

Colorado continues to offer one of the lowest levels of support per full-time higher education student. Colorado spends 6.4 percent less than its 2001 peak in the level of support per student.

Percentage of State Funding for Percentage of State Funding for Transportation (1980 vs. 2010)Transportation (1980 vs. 2010)

Over 50% of Colorado highways are now in “poor” condition.

Purposeful Economic Development gets the biggest share of the “not equal” jobs