Gov. Andrew Cuomo likes to say that he has done more for Upstate New York than anyone since DeWitt Clinton, the New York governor in the early 19th century who pulled off what many thought was not possible: the building of the Erie Canal.
Under Cuomo, we’ve had the Buffalo Billion, the $1.5 billion Upstate Revitalization Initiative and the state’s $250 million commitment to the new photonics institute. In addition, he has directed hundreds of millions of dollar to upstate through the regional economic development councils—the Finger Lakes region alone has received roughly $300 million in REDC funding since 2011.
The Erie Canal was a historic financial commitment, but it represents more than that. Few public-sector undertakings have been so successful, from its on-time, on-budget construction to the enormous economic benefits the canal brought to the upstate region and beyond. To Cuomo, a similar return on his promised spending is all but guaranteed.
But is that so? Have big government bets on economic revitalization and innovation ever gone wrong? Remember Solyndra? Or closer to home: the fast ferry, Medley Centre and the Infotonics Technology Center?
In fact, neoclassical economics teaches that public-sector spending to stimulate economic activity rarely works as intended. Government efforts to pick winners often fail, critics say, because officials lack the technical expertise and business acumen needed to do so. Public spending also is prone to cronyism and corruption. And by creating undue competition with private ventures, it distorts the workings of the market.
In other words, government intervention ties Adam Smith’s “invisible hand.”
Most mainstream economists do believe, of course, that the government should step in when “market failure” occurs—like during the financial crisis and Great Recession that followed. But relatively few go beyond that, to argue for a more dynamic role, with public officials steering the direction of innovation and entrepreneurship.
One such economist is Mariana Mazzucato, professor of the economics of innovation at the University of Sussex and author of “The Entrepreneurial State: Debunking Public vs. Private Sector Myths.” In a Foreign Affairs article last year, she wrote that “the conventional view of what the state should do to foster innovation is simple: it just needs to get out of the way.” But she shares the view of John Maynard Keynes, who said in addition to jumpstarting the economy public-sector investments should “do those things which at present are not done at all.”
Wrote Mazzucato: “Past technological revolutions—from railroads to the automobile to the space program to information technology—did not come about as the result of minor tinkering with the economic system. They occurred because states undertook bold missions that focused not on minimizing government failure but on maximizing innovation.”
To help prove the point, she takes a “quintessential example” of private-sector entrepreneurial genius—the iPhone—and deconstructs it. Each of its core technologies, from the microprocessor to its touchscreen to GPS and the Internet itself, was funded publicly. “Even Siri, the iPhone’s cheery, voice-recognizing personal assistant, can trace its lineage to the U.S. government: it is a spinoff of a DARPA artificial-intelligence project,” she notes.
Mazzucato acknowledges that some public-sector initiatives fail but argues it’s wrong to say government should not be in the business of taking risks. “Across the entire innovation chain, from basic research to commercialization, governments have stepped up with needed investment that the private sector has been too scared to provide,” she contends.
Yet government also needs to be smart; it must be “armed with the intelligence necessary to envision and enact bold policies.” Lacking that, it’s like throwing money to the wind.
So, which is it with Cuomo and the billions of dollars he’s pumping into the upstate economy—are these smart, necessary investments or a big, fat waste of taxpayer dollars?
The governor holds up the Buffalo Billion as the model for his “shock and awe” approach to economic revitalization. Billed as a “historic $1 billion investment in the Buffalo-area economy to create thousands of jobs and spur billions in new investment and economic activity,” the program was designed to target high-potential sectors such as advanced manufacturing, health and life sciences, and tourism. Its success does not hinge on a single silver bullet but rather a diverse portfolio of investments, the Buffalo Billion website states.
That may have been true at the start, but today, three-quarters of the $1 billion investment is focused on a single project: the massive SolarCity Corp. factory under construction at Riverbend, the abandoned Republic Steel site. The state is building the SolarCity plant—which will be the largest of its kind in the Western Hemisphere—at an estimated cost of $750 million. The company will lease the plant for $1 a year plus utilities for 10 years.
In exchange for New York’s enormous financial commitment, SolarCity has promised to employ 1,460 at the factory making solar panels, attract 1,440 additional contractor and supplier jobs, and have at least 2,000 other people on its payroll statewide to support “downstream” sales and installation. (That’s $153,000 in state investment per job.) The company also has pledged to spend roughly $5 billion in New York in the decade after the factory reaches full production. If SolarCity fails in any year over the 10-year term to meet its investment and job-creation obligations, it would be required to pay $41.2 million to the state.
SolarCity has a star CEO (Elon Musk) and a number of stellar private-sector supporters (Google Inc. among them). It also has never made any money—since its founding nine years ago, the firm has piled up an accumulated deficit of more than $300 million. Its stock debuted at $8 a share in December 2012 and soared as high as $88.35, but today it trades at roughly half that value; it’s down 32 percent over the last year versus a 4 percent decline for the S&P 500 Index.
If you are curious what might go wrong for SolarCity, pull up its second-quarter filing on the SEC website. The section on risk factors totals 18,762 words. Yes, much of this is boilerplate, but not all. From its reliance on investment tax credits for solar installations (due to expire in 2016) to its key Triex technology (which could be rendered “less competitive or obsolete” by new innovations in solar technology), the venture is no sure bet. If it fails, what’s the governor’s Plan B for the $750 million solar-panel factory?
I am a Buffalo native. I know the depths to which the city’s economy sank, and I have no qualms about smart, bold government investment to help spark innovation and economic renewal. The details make all the difference, though. To me, funding photonics research that can leverage and grow a deep-rooted industry cluster is a smarter wager than a single factory producing solar panels for a highly uncertain market.
Whether either will become another Erie Canal, I have serious doubts. If it were easy to replicate that model, New York would have done it many times since the 1820s. Clinton’s Ditch stands as an example of what’s possible—and how unlikely success might be.
This is the last in a three-part series of articles.
9/11/15 (c) 2015 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email email@example.com.