Politicians can find start-ups hard to resist

By Jay Fitzgerald | The Boston Globe | May 22, 2012

In the end, they probably just can’t resist.

Former Red Sox star Curt Schilling’s digital-game firm is far from the first young company to gain government backing, only to run into financial problems that put taxpayers’ money at risk. But political leaders keep making these bets, despite high-profile flops such as alternative energy firms Solyndra LLC in California and Evergreen Solar in Massachusetts, both of which received millions of dollars in government support and ended up bankrupt.

Such examples underscore that government officials must be more skeptical about diverting taxpayer funds to business ventures, economists said. But, they added, politicians, are unlikely to stop taking these risks as they feel pressure to show voters they are doing something immediate and tangible about the economy.

“They believe they get reelected if they’re perceived as creating jobs,” said Barry Bluestone, an economist and dean of Northeastern University’s School of Public Policy and Urban Affairs. “The political incentives are so strong to do these types of deals.”

Edward Glaeser, an economist and director of Harvard University’s Rappaport Institute for Greater Boston, laughed when asked if politicians would ever stop investing taxpayer dollars directly in specific companies. The problem, he said, is the broad policies that create a favorable business climate, such as improving schools, transportation systems, and workforce training, typically take much longer than a two- or four-year term to pay off.

“By investing in specific companies, you have this image of someone taking charge of the economy, of doing something,” said Glaeser. “It creates a strong incentive to keep doing it.”

Whether such approaches work is open to debate. Studies of incentive programs have been mixed, in part because it is difficult to determine whether incentives or other factors, such as a rising economy, spur corporate decisions to expand.

The conflicting findings on government incentives led Josh Lerner, a Harvard Business School professor, to study the issue in his 2009 book, “Boulevard of Broken Dreams.” His conclusion: “For every success story out there, you can find a whole host of failed efforts.”

States too often rush into loans and incentive deals without proper planning and financial safeguards, Lerner found.

And too often, officials chase big deals that attract attention — and risk too much money. “It’s what politicians love,” he said in an interview, “being photographed handing over a big check to an entrepreneur.”

The issue of whether government agencies should act as venture capitalists resurfaced last week when Schilling’s 38 Studios missed a $1.1 million payment on its $75 million in loans guaranteed by Rhode Island, raising the possibility that the state could lose it all. It recalled other controversial taxpayer investments, such as Marlborough’s Evergreen Solar Inc., which received an initial $58 million in incentives from the Commonwealth of Massachusetts, but ended up closing its Devens factory, laying off 800 workers and filing for bankruptcy last year.

Solyndra, which received $535 million in federal loan guarantees, also filed for bankruptcy last year. Those deals were backed by Governor Deval Patrick and President Obama, both Democrats.

But as 38 Studios demonstrates, risking taxpayer money is a distinctly bipartisan affair. Former Rhode Island governor Donald Carcieri, a Republican, supported the government-backed financing for Schilling.

“I almost have sympathy for Rhode Island,” said Michael Goodman, associate professor of public policy at the University of Massachusetts Dartmouth. He noted that Rhode Island was hammered by the recent recession and still has one of the highest unemployment rates in the nation, 11.2 percent in April, nearly double the Massachusetts rate of 6.3 percent.

“They’re desperate for jobs in Rhode Island,” Goodman said. “Even though it was a questionable idea, you can almost understand why they went along” with the 38 Studios loan.

Schilling launched 38 Studios in Massachusetts in 2006, and sought government support here before moving to Rhode Island. Greg Bialecki, the state’s secretary of housing and economic development, said the Schilling deal was just too rich for the Patrick administration.

But Bialecki defended the general policy of helping specific companies to expand or remain in Massachusetts, particularly those in industries deemed vital to the state’s future.

He noted that successful firms such as Cambridge biotechs Genzyme Corp. and Vertex Pharmaceuticals have received direct or indirect help from the state in the forms of infrastructure improvements, tax credits, grants, and other incentives. Sometimes, Bialecki said, the state has to take risks when the private sector can’t or won’t.

But Harvard’s Glaeser disagrees. “Politicians make very bad venture capitalists,” he said. Such investments are so tricky, he added, that even venture capitalists experience costly failures.

But the political pressures are often too great to walk away from high-profile investment opportunities, especially if a firm is led by a celebrity, such as Schilling, said Mark Zandi, chief economist at Moody’s Analytics, a forecasting firm in West Chester, Pa. A sound tax code, top-notch education system, and modern transit are just not as sexy. “It’s the political economy – and this is politics,” said Zandi. “The benefits of many of these long-term policies aren’t noticed until after a politician is out of office, years later. It’s very difficult for them to quickly point at successes in education and say, ‘I did that.’”

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