The Future Is Delaware

by Reihan Salam

In the summer of 2002, Jonathan Chait wrote a brilliant anti-Delaware jeremiad that came to mind when I read Neil King Jr.’s incredible article on America’s new energy-driven industrial policy in the Wall Street Journal. As King tells the story, the Department of Energy has one of the country’s leading venture capitalists.

The DOE hopes to lend or give out more than $40 billion to businesses working on “clean technology,” everything from electric cars and novel batteries to wind turbines and solar panels. In the first nine months of 2009, the DOE doled out $13 billion in loans and grants to such firms. By contrast, venture-capital firms — which have long been the chief funders of fledgling tech firms, taking equity stakes in the start-ups that will pay off if they go public — poured just $2.68 billion into the sector in that time, according to data tracker Cleantech Group.

Inevitably, this massive infusion of taxpayer dollars is transforming the marketplace. King recounts the many ways in which the DOE led an innovative automotive start-up to change its product mix. The company had intended to build a high-end hybrid vehicle in Finland, and they sought federal funds to scale up their efforts. 

By late spring, DOE was pushing ahead briskly on the Karma loan, say people involved in the deal. But the Karma presented a political challenge: It was already being assembled, under contract, at a plant in Finland. Though it used mainly U.S.-made components, so a federal loan would help U.S. parts makers, the boost for U.S. workers would be limited.

DOE then came to Fisker with a surprising proposal: Find a U.S. site to build the Kx, and DOE would agree to fund both projects together. Fisker could then start gearing up to make the Kx even before the Karma hit the market. Close advisers to Fisker said the issue of job creation had become key to officials within the administration.

“The government’s interest sped it all up,” said David Anderson, a partner at the Palo Alto Investors venture-capital firm, who followed the DOE process closely. “The government basically said, ‘Let’s make this happen sooner rather than later.’”

Part of the impetus for speeding up the process came from the closure of a Delaware-based GM plant. Various Delaware loyalists, led by Vice President Joe Biden, lobbied Fisker Automotive to reopen the plant to manufacture the Kx. Delaware is very fortunate to have a native son in a position of such influence. Of course, the deal will cost Delaware taxpayer a considerable sum, as King notes.

In early September, Gov. Markell told Fisker that if it occupied the shuttered GM plant it would get an array of state incentives worth up to $22 million, including $9 million in cash for utilities. He promised to buy the first car off the line.

These “incentives” are par for the course. They are part of a beggar-thy-neighbor dynamic that has led to massive transfers from taxpayers to corporate coffers over the past few decades.

I don’t actually think that the vice president did anything untoward. He used his influence on behalf of a community he has represented for decades, and that is perfectly understandable if not admirable in some sense. But it’s worth keeping in mind where the push for industrial policy is really taking us. The largess that the DOE and Biden are dispensing isn’t really theirs to give away.

For Biden, the reopening of Delaware’s Boxwood Road plant is “a metaphor for the rebirth of the country.” There ought to be a second half to that sentence: “a metaphor for the rebirth of the country as a haven for crony capitalism.” That’s a little harsh. But this is really bad, guys. 

For context, I urge you to check out Robert Litan’s lecture on “Innovation and the World Economy.” As Litan explains, the last 18 months have seen the United States increasingly take on the characteristics of a state-guided economy. The trouble with state-guided economies is simple: 

Once you’re at or close to the technological frontier, you can’t rely on government bureaucrats to figure out what the next “great big thing” is. You eventually run out of creativity — and thus rapid growth — if your economy is going to be dominated by state guidance.

When you’re dealing with brute force economics, state guidance can work reasonably well. As Paul Krugman noted in his brilliant Foreign Affairs essay on “The Myth of Asia’s Miracle,” Eastern Europe saw explosive growth in the 1960s thanks to the crude application of inputs. Yet the level of capital productivity remained very low.

While the growth of communist economics was the subject of innumerable alarmist books and polemical articles in the 1950s, Some economists who looked seriously at the roots of that growth were putting together a picture that differed substantially from most popular assumptions. Communist growth rates were certainly impressive, but not magical. The rapid growth in output could be fully explained by rapid growth in inputs: expansion of employment, increases in education levels, and, above all, massive investment in physical capital. Once those inputs were taken into account, the growth in output was unsurprising–or, to put it differently, the big surprise about Soviet growth was that when closely examined it posed no mystery.

This economic analysis had two crucial implications. First, most of the speculation about the superiority of the communist system including the popular view that Western economics could painlessly accelerate their own growth by borrowing some aspects of that system–was off base. Rapid Soviet economic growth was based entirely on one attribute: the willingness to save, to sacrifice current consumption for the sake of future production. The communist example offered no hint of a free lunch.

Krugman may have changed his mind about this in the years since. (Perhaps the Soviets were baldly misrepresented by neo-Confederate reactionary economists based in flyover country. I kid.) But this certainly sounds right. State guidance might work for a brief time in follower countries, but it doesn’t work for economic leaders. The implication is that the innovations that actually expand the technological frontier are driven by entrepreneurship. 

Imagine what we might accomplish if we abandoned targeted giveaways in favor of, say, a lower corporate income tax, better schools, and better roads. That, alas, sounds rather mundane. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.