04/17/2006 Economic Growth: New State Solutions for Job Creation

Monday, April 17, 2006

In Today's Dispatch:


The New State Investment Model for Job Creation

A Progressive Policy for Economic Growth

How do states encourage job growth? For too long, the answer by many state governments had been to hand out fat tax subsidy checks to corporations with little accountability and with little for the taxpayer to show at the end of the day.

But that's changing. States are increasingly taking a more active approach to job creation and becoming direct investors in job growth. When states invest funds directly, the returns on those investments come back to the taxpayer for reinvestment in new ventures, whether for technological innovation or revitalization of previously abandoned communities.

In an age when progressives are asked to answer the question of how their policies can create new jobs and new opportunities, these programs provide at least one large answer.


The Success of State Venture Funds

Hawaii is the latest state moving in that direction with a proposed Hawaii Innovations Fund which could grow to $200 million in government funds over four years to invest in Hawaii's renewable energy, life science and technology companies. If enacted, Hawaii will join thirty-six states that run venture capital funds, including New York's Small Business Technology Investment Fund and the Maryland Venture Fund.

The Maryland Venture Fund (MVF) has been one of the largest such funds, existing for ten years and investing over $48 million in more than 100 companies, usually at the startup phase when seed money is most crucial. It has nurtured Maryland-based biotech and information technology companies that have not only enriched the state's economy but returned profits back to the state as they've gone public�yielding an annual internal rate of return of 30 percent and allowing MVF to move towards self-funding with only minimal additional appropriations from the state legislature each year.

A variant approach has been in Pennsylvania, where the state has seeded an investment organization Bioadvance and its venture capital arm, BioAdvance Ventures, with $33.8 million in tobacco settlement money.  This fund has been dedicated to encouraging the development of biotechnology in the southern Pennsylvania region -- with two sister organizations investing in other parts of the state. (See here for more). The overall goal is to dedicate $2 billion of the tobacco settlement to encourage the development of life-saving (and job-creating) biotechnology firms in the state.

In a number of states, these investment efforts have been assisted by state and local employee pension funds�their $2.7 trillion in assets making them what writer William Greider has called a potential "New Colossus" for expanding public investment in the economy:

  • In Indiana, the public pension funds collaborated with state universities and various health-based companies to launch the Indiana Future Fund, a $73 million investment fund designed to benefit Indiana companies, especially in the life sciences and high technology arena.  And this is just a small part of the state's public pension fund investments encouraging in-state economic growth.
  • Washington State holds nearly $1.3 billion in Washington-based investments, using the money to leverage additional capital from other sources to invest in the state.
  • Wisconsin's pension fund is also increasingly concentrating on support for state venture funds that can create jobs in that state.
  • The largest scale pension investments, however, are in California, where the main public pension fund, CALPERS, has in-state investments totaling $20 billion or 11% of the fund's assets, a portion of which are dedicated directly to venture capital funds in the state.

More Resources


Investing in "Domestic Emerging Markets"

While investments in high technology get a lot of attention, a number of these new state government investment strategies are also looking to revive areas devastated by deindustrialization and chronic poverty. Around the world, "emerging markets" are hotspots for investment, so many states are treating these poor domestic areas as "domestic emerging markets" that just need a bit of patient capital to revive.

Back in 2000, California State Treasurer Phil Angelides laid out the philosophy that undergirds the new wave of tough-minded investment in "The Double Bottom-Line: Investing in California's Emerging Markets." Angelides compared "the ease with which billions of dollars of American capital have flowed during the past decade to risky and highly volatile developing countries across the globe and the difficulties faced by California�s own underdeveloped communities as they struggle to attract desperately needed capital investment to fuel their resurgence." But as the state has increased investments in California communities needing investment, he emphasized the hard-headed investment principles for using public funds:

Community reinvestment initiatives should be structured to contribute to community revitalization while achieving market returns�

[T]o build a long-term community reinvestment dynamic, these investments must be viewed and approached as primary opportunities offering strong returns � not as investments of lesser worth agreed to as a matter of politics.

This last point emphasizes the idea that whether the investments are in high technology or in urban revitalization, these state investments deliver economic returns that are measurable on the financial bottom-line. One study found that eight large public pension funds have more than $3 billion invested in urban development projects � and have helped leverage private equity partners that have validated their economic returns.

This state government and public pension investment is part of a broader trend of expanding investments in a range of community-based investment vehicles, from Community Development Banks to Community Venture Capital Funds, all designed to increase capital access in communities often starved of the financial capital needed to revive local businesses. The Social Investment Forum highlights the quiet revolution as the assets of community investment institutions have grown from $4 billion in 1995 to $19.6 billion in 2005, a growth of 388 percent in a decade.

In a multi-trillion dollar economy, even these amounts haven't been enough to revive all of the communities undermined by deindustrialization and poverty, but their initial success and growth point the way towards where public policy should be heading.

More Resources


A New State Policy Model for Job Creation

What makes this change in policy most striking is the dismal policy of corporate subsidies that it is (still too slowly) replacing. The community organization, Good Jobs First, has been the premiere chronicler of tax subsidy boondoggles handed out to corporations by state and local governments, corporate handouts that do little to spur healthy growth and that usually leave public treasuries too empty to address other public needs:

  • Wal-Mart alone has received $1 billion in taxpayer money for a retailing model that not only generally fails to spur additional growth but quite often undermines healthy retailing districts in its vicinity
  • Southern states have paid out billions of dollars in subsidies to foreign car companies without getting any equity for taxpayers and at a cost per job that has often undermined other public investments.
  • New York City has wasted hundreds of millions of dollars on subsidies to "retain" companies, where there were usually no long-term commitments that the firms actually keep jobs in the city and state.

And most of these corporate subsidies don't create new jobs, but, at best, pit states against each other in bidding to influence the site location of jobs that would have been created in any case.

In contrast, the new state policy model concentrates on investments that create new jobs and industries, not just cannibalize jobs from other locations, and investments that actually generate new revenues for the government because the state itself has an equity stake in the new growth created. States use control of their own capital sources, from state venture capital funds to public pensions, to leverage local investment by private investors. And instead of trying to bribe big corporations to come to a location, this approach to public investment more naturally builds the skilled workforce and local network of firms that convince multinational firms to build a branch in a location on the merits of its underlying economic vitality.

Gar Alperovitz, a leader at the Democracy Collaborative, outlined the principles of this new approach in a recent essay, The New Ownership Society:

What is striking is that the idea that wealth should benefit the community directly is quietly becoming a commonplace. This community-oriented concept is the polar opposite of the Bush ownership principle that wealth should be concentrated among individuals (especially those at the top)�

[T]hese approaches differ from traditional social programs in that they do not depend primarily on taxing and spending--at a time when the ever-deepening fiscal crisis will continue to constrain traditional strategies. Many also anchor jobs firmly in local communities--at a time when globalization and runaway corporations threaten local economic stability.

Alperovitz emphasizes that "most of the strategies have enjoyed unusual support that transcends traditional left-right divisions--above all because at the local level, practical solutions to problems matter far more than ideological rhetoric, even to conservative Republicans."

There are still rightwing groups that want to hand all public capital, such as our state pension funds, over to distant Wall Street managers (see this week's Eye on the Right), but more and more state government leaders are committed to the idea that our public capital is best invested with an eye to revitalizing our states' economies and reinforcing community-owned wealth that can be reinvested for further growth.

By contrasting such positive community-led investment with the failed policies of corporate tax giveaways, progressives can take control of the jobs debate in their states

More Resources

More Resources

The Success of State Venture Funds

See Hawaii HB 2181 and SB 2546 for alternative versions of its proposed venture capital legislation
States and Local Investments,
National Association of Seed and Venture Funds
Gene Koprowski, State-Run Venture Funds Picking Up Slack for Private VCs, Ecommercetimes
William Greider, "The New Colossus" The Nation

Investing in "Domestic Emerging Markets"

Phil Angelides, "The Double Bottom-Line: Investing in California's Emerging Markets (California Treasurers Office).
Public Sector Pension Funds and Urban Revitalization: An overview of policy and programs
Social Investment Forum, 2005 Report on Socially Responsible Investing Trends in the United States

A New State Policy Model for Job Creation

Steve Dubb & Gar Alperovitz, Building Wealth: The New Asset-Based Approach to Solving Social and Economic Problems (Democracy Collaborative & Aspen Institute)
Good Jobs First

Eye on the Right

During the rightwing campaign to privatize the federal Social Security program last year, the AFL-CIO developed this handy list of Front Groups for the Attack on Retirement Security, which highlights both the Wall Street firms looking to cash in on investment fees from pension privatization and the various corporate-backed think tanks like the CATO Institute and FreedomWorks used to front research for the campaign. And this article gives a good history of the radical rightwing ideology driving much of the privatization agenda.

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Matt Singer
Editor, Stateside Dispatch