The Obama administration generated indignation when it risked hundreds of millions of dollars on Solyndra, a private firm with questionable prospects. But our cities and states spend billions of dollars annually through loans and tax breaks for businesses whose prospects are often little better than Solyndra, despite little evidence that these dollars generate real economic growth. State-funded private enterprise is now so widespread that its failures barely ripple throughout the press in the way that Solyndras did. Maybe the story of Curt Schillings 38 Studios will change that.
Schilling, the former Boston Red Sox pitcher of bloody sox fame, is the proprietor of 38 Studios, an electronic game developer that grew out of his apparent fascination with gaming. In 2010 Rhode Island guaranteed $75 million in loans to the company in exchange for Schillings agreement to move it to Providence and create 450 well-paying jobs. State officials desperately wanted the jobs because Rhode Island had one of the nations highest unemployment rates and a lousy reputation as a place to do business.
Even if 38 Studios had been a roaring success, risking $75 million to generate a mere 450 jobs is foolish. But right now Schillings company is collapsing just months after the release of its first game, Kingdoms of Amalur: Reckoning. The company recently missed payroll and was late on a loan repayment to the state. Now 38 Studios is asking for further assistance to keep the doors open. The potential for new jobs via the loan guarantee is rapidly falling toward zero.
The 38 Studios deal emerged after Schilling met then-Rhode Island Gov. Don Carcieri, who invited the retired pitcher to relocate his budding company to Providence. The states legislative leaders embraced the plan, too. All of them seemed star-struck by the prospect of a deal with a celebrity athlete, even though none of New Englands many private VC funds would invest in Schilling.
Advocates justify these government-sponsored business capital programs by arguing that banks and other private investors wont finance speculative small firms, so government must step in. Even as Schilling made the rounds on talk radio and TV as a kind of celebrity small-government advocate, he justified taking the states money on the grounds that he had plenty of his own skin in the game to complement the states investment. But it was clearly the Rhode Island loans that allowed Schilling to dream big and bet big, when he probably should have used his own money to build a business more carefully and demonstrate he was a worthwhile risk.
Not every need that the market wont fill requires a government program in response, as 38 Studioss woes illustrate. But we keep trying and watching the efforts blow up in our faces.
Back in 1993, for instance, the federal government seeded a massive $450 small business loan fund to be administered by Los Angeles officials in the wake of the riots the previous year. Banks, so the argument went, were reluctant to lend to businesses in minority urban areas. So the subsidized Los Angeles Community Development Bank jumped into the void. At first it caught criticism for making too few loans, despite explanations from those administering the program that they couldnt find enough qualified firms. Then the program shifted into high-gear, making loans rapidly but unwisely to firms that promptly went bust. Few of the firms that survived ever met the goals of the loan program to create new jobs. Among those that did, only 11 percent of jobs went to local residents, though one of the terms of the deals was that businesses should hire from the community. Frustrated, the city shut down the program after a critical federal audit.
Often these government capital programs go on for years, producing little of value until one day someone wakes up and totals up the losses. In 2004 the Buffalo News traced the failure over decades of some $500 million in government redevelopment money invested in its home city. The loans and grants went to office towers that never got built, small retailers that went bust, and subsidized downtown projects that didnt produce additional development in one of Americas poorest cities. The city, the paper determined, had little to show for half a billion dollars in taxpayer investments.
Private investors balk at financing projects in places like downtown Buffalo or South Central Los Angeles because success there is a long shot. Thats why these government-subsidized efforts tend to be largest in the places with the most difficult business environments. Politicians use taxpayer money to compensate for all the disadvantages, including government imposed ones, which firms face.
In New York, Gov. Cuomo recently announced a $1 billion program of new incentives targeted toward Buffalo. But this latest revival plan does nothing to address the citys drawbacks, including one of the highest state and municipal tax burdens in the country and an expensive yet inefficient local government.
Next door in New Jersey the Christie administration has approved some $1.5 billion in business tax breaks. The money buys promises from firms to create a few thousand jobs over 10 years, which is little more than an economic hiccup. Only by becoming more competitive can New Jersey, consistently rated one of the nations worst places to do business, generate real economic growth after losing about 225,000 private sector jobs in the recession.
Making good economic news in Rhode Island is even tougher. Thats why investing in Schilling seemed so appealing until reality intruded. Now most of the states elected officials are decrying the 38 Studios deal done under a former administration. Still, somehow I doubt that the lesson they garner from this fiasco is that Rhode Island needs to do the hard work of making itself hospitable to business again.
Original Source: http://www.realclearmarkets.com/articles/2012/05/23/curt_schillings_day_of_reckoning_99679.html