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State-of-the-Art
Corporatism

by D. Dowd Muska

he wealth-creating power of the digital revolution has many in California's neighbor-to-the-east gazing toward Silicon Valley and asking themselves, "How can we get on the high-tech gravy train?"

Proponents of economic diversification for Nevada wisely point out that the nationwide spread of gambling and the possibility of a federal crackdown on casinos puts the Silver State's one-industry economy at risk. So with the millennium about to dawn and the Information Age here to stay, diversification activists have become enamoured of technology firms.

In Nevada, there is now universal agreement--well, at least outside the casino community--that diversification is needed, and high-tech is the way to go. So what tools do Nevada's best and brightest plan to use to bring 21st century firms to the Silver State?

Only one, really: government.

If the recent Governor's Economic Development Conference was an indication, the state's public officials--and sadly, many from the private sector as well--are convinced that all that's needed for technology companies to set up shop in Nevada is some heavy-handed planning by bureaucrats and legislators. From federal grants to state subsidies to shoveling more money at Nevada's public schools, the prescription for Nevada's high-tech blues had a familiar theme: Government will make it all better.

Home-Grown Pork

At the conference, Chris Hagen, the governor's science advisor, preached the wonders of the federal government's Small Business Innovation Research program. This high-tech pork initiative benefits small businesses whose products--here's a chilling thought--"meet the research and development needs" of federal agencies. The problem, Hagen explained, is that not enough of this pork is filtering down to low-tech Nevada. The state wants to remedy that by obtaining federal funding to "educate" Nevada's firms that Uncle Sam has lots of handouts for the taking. So much for devolution.

Of course when it comes to corporate welfare, states have started to catch up with Washington. Nevada's Commission on Economic Development (CED), like its counterparts around the nation, provides businesses with tax deferrals, abatements and exemptions. It extols Nevada--despite overwhelming evidence to the contrary--as a "low-tax state," where firms can thrive with little interference from government. The CED also offers or "facilitates" loans and grants for businesses, as well as provides research and funding for the state's local development authorities.

At first glance such policies might seem to utilize market forces to produce jobs for Nevadans. But every tax break the CED gives an incoming business is covered by businesses which don't benefit from such freebies. As libertarian author James Bovard observed in his recent book Freedom in Chains, "Government cannot help one industry or business without indirectly disadvantaging all others."

Diversification activists--who again, have a noble goal--seem blind to the market-warping nature of the CED. "It is wrong to believe that government manipulation of business through tax advantages has no cost," notes economist Sheldon Richman. "To the extent that manipulation brings about investments that would not have occurred naturally, the loss consists in the investments that would have been made but were not. Those foregone opportunities would have created jobs and products that will never be realized. That is a loss, although it isn't entered in the ledger." A truly level playing field where all enterprises bear an equal tax and regulatory burden--and no company or industry can receive subsidies or tax perks--is manifestly preferable to the endless gamesmanship involved in a state-run development scheme.

Yet even if a centrally planned diversification effort could be justified, there is evidence that taxpayers in Nevada simply aren't getting their money's worth from the CED. State government got into the diversification game in 1983, but Nevada's economy remains dominated by casino-related jobs. In 1980, employment in resorts and the service sector comprised 42.3 percent of all jobs in Nevada. In 1996, that figure had risen to 43.2 percent. And what jobs the CED has "created" do not appear to be significantly better than the low-paying casino positions that supposedly plague the state. Last year Las Vegas Business Press reporter Sherrie Cruz found that despite a requirement that new companies pay Nevada's average wage, many of the jobs offered by the CED's "clients" pay below that threshold. Furthermore, as with most economic development schemes, the system is rigged so that out-of-state firms can receive tax perks more easily than can indigenous companies.

Venture Capitol

And who's walking "point" for Nevada's push toward high-tech? The Nevada Commission on Economic Development. Executive Director Bob Shriver, among his other efforts to bring 21st-century companies to the state, has been a leading voice in favor of repealing Nevada's constitutional prohibition against the use of public funds for direct investment in businesses. Nevadans sent two previous attempts to remove the 135-year-old "anti-donation" clause down in flames this decade. But the issue will go before voters again next year, since the legislature overwhelmingly passed a repeal resolution in the 1997 and 1999 sessions.

Why is the Gang of 63 so solidly behind a repeal of the anti-donation clause? Because legislators want to get into the venture capital business. Yes, politicians can't properly manage public expenditures--and many can't properly manage their personal finances--but Nevada lawmakers think they can scour the garages of the Silver State and find the next Steve Jobs.

If voters approve the anti-donation repeal next year, legislators will have the authority to make "prudently managed investments in public-private partnerships and corporations designed to provide needed sources of capital for high-quality, job-creating businesses ... within this state that cannot feasibly obtain much financing from existing private financial markets in an easily accessible and efficient manner."

In addition to the frightening notion that Bill Raggio, Dina Titus, Joe Dini and Richard Perkins might soon be investing Nevadans' money in a hyper-competitive, rules-change-by-the-second industry, a state-run venture capital firm raises a number of other disturbing scenarios. Since legislators will be making the calls, inevitably such a process will become politicized. Which companies will get the capital, and how much investing will those companies have to make in legislators' campaigns to get it?

As Cypress Semiconductor CEO T. J. Rodgers wrote in a Cato Institute analysis last year, government subsidies reward bad ideas more often than good: "The corporate mentality of investing 'free' government money is straightforward: "We would never invest our corporate money in this Edsel of a project, but if the government invests in it, great. If the Edsel succeeds, it will be a nice business; if not, we have not lost anything."

Same Old Song

Nevada's power elite has certainly proven its ability to squander taxpayers' money--its unquenchable thirst to spend on government schools tops the list. So it's little wonder that boosting funding for the education establishment is a big part of the plan to bring high-tech to the state.

While tax and subsidy issues are important factors, few disagree that the biggest barrier to the development of a high-tech sector in the Silver State remains "the education thing." With the worst dropout rate in the nation and a labor pool dismally short of college-educated workers, Nevada has a long way to go before high-tech companies see the state as fertile ground for employees.

The remedy offered to fix this, once again, is an expanded role for government. At the conference Gov. Guinn again congratulated himself for his Millennium Scholarships program, a newly minted entitlement which allows any student who maintains a B average in high school to attend Nevada's government universities for free. The governor stated his intention to "fortify our education system" for the New Economy, claiming that the Millennium Scholarships program is "the best recruitment tool we have today" to promote economic development.

That's a nice sound bite, but as NPRI Senior Research Fellow Glen Tenney has noted, students in Nevada already pay a tiny fraction of the actual cost of their education at Nevada's government universities. Expecting high school graduates to flock to college for any reason because tuition is now gratis is a pipe dream. Las Vegas Review-Journal education columnist (and Nevada Journal contributor) Ken Ward voiced another sensible objection when the governor first announced his scholarship plan:

If Guinn's objective is to empower individuals and improve education, he's going about it backwards. The problem isn't so much one of access to higher education but one of competence at the K-12 level. The sensible solution is to reform Nevada education from the ground up by unshackling students from dysfunctional public schools.

But since most of Nevada's elected officials are wholly owned subsidiaries of the state's teacher union, that won't happen any time soon. Naturally, education privatization wasn't on the agenda at the conference--the word "voucher" was nowhere to be heard.

So the plan to finally bring high-tech to Nevada seems to be a three-fold farce: First, teach budding high-tech industries how to get on the federal dole. Second, award corporate welfare to firms that manage to charm the political elite. And third, in the education area, evade initiatives that really would produce graduates with the skills that technology firms value.

In the Wall Street Journal earlier this year, economist Edmund S. Phelps offered an eloquent distinction between capitalism, "in which every would-be entrepreneur is free to enter the market and compete without favoritism," and corporatism, "in which private corporate interests are reconciled and coordinated by the central government."

Clearly Nevada's political leadership, development officials and even many of its business leaders plan to pursue a corporatist strategy to attract and retain technology firms. It's almost as if the powers-that-be want to replicate, for high-tech businesses, the cozy relations between the state's public sector and casino interests. But how often has that partnership acted in Nevadans' best interest?

Cypress Semiconductor's Rodgers has some advice for Nevadans looking to create a Silicon Desert:

... as a general rule, Silicon Valley CEOs like smaller government and lower taxes and are willing to forgo subsidies to achieve those goals. The popular impression that CEOs cling strongly to their corporate welfare is completely inaccurate and stems from two sources: 1) a few CEOs whose companies receive massive subsidies and who do fight for them and 2) industry lobbyists who are out of touch with the companies they allegedly represent.

Nevada's public officials are falling over each other in the push to diversify the state's economy through high-tech. Yet their plan to achieve this worthy goal is patterned not on the creative and capitalistic environment that produced Silicon Valley, but on the failure-ridden government-knows-best model of the past.NJ

Contributing Editor D. Dowd Muska (ddm@npri.org) wrote about state art subsidies in July's NEVADA JOURNAL.


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