Engines Of Economic Dynamism Or Wolves In Sheep’s Clothing?

Regional innovation hubs are one of the latest trends in American industrial policy. On the surface, they sound like a plausible way for the government to strategically encourage the development of certain key sectors or industries, conjuring images of mini-Silicon Valleys sprouting up across the United States. In reality, they may do more to waste scarce taxpayer dollars and bestow unfair privileges upon special interests.

The 2022 Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act appropriated $500 million in funding to the U.S. Economic Development Administration to promote these regional tech hubs. This year, the agency begins accepting proposals for how to distribute the funds. The proposals will come from various “consortia”—which include everything from state governments, to private industry, to labor unions—representing particular geographic regions.

While the idea of replicating the success of Silicon Valley in different parts of the country may seem appealing, the history of government-led efforts to foster economic growth in struggling regions has often fallen short of expectations. For instance, the Appalachian Regional Commission, established in the 1960s to facilitate economic development in that region, has struggled to generate sustainable economic growth and reduce poverty. More recently, the State Small Business Credit Initiative, a 2010 federal program to support small businesses, got off to a rocky start when audits revealed millions in mismanaged funds.

The underlying problem is that bureaucrats often lack the incentives and the information to identify viable candidates for innovation. Such initiatives can also be hijacked by special interest groups seeking handouts from the government, thereby detracting from the intended purpose of funds and contributing to wasteful spending.

There are instances where the government has successfully catalyzed innovation. The Defense Advanced Research Projects Agency (DARPA) played a key role in the early days of the internet, and Operation Warp Speed under the Trump administration was critical to the rapid development of a COVID-19 vaccine.

Yet, there’s a significant caveat associated with even these government success stories. The people who bear the risk of losses are not the same people who stand to benefit from a success windfall. While the losses are socialized–i.e., covered by taxpayers—the benefits are privatized. Elon Musk’s SpaceX profits handsomely from government contracts, but even if SpaceX pays taxes and consumers might one day benefit from trips to Mars, SpaceX profits pad the pockets of private sector investors, whilst taxpayers bear a majority of the up-front risk.

Another looming concern is the potential misuse of innovation hubs to advance unrelated political agendas such as immigration policy or racial equity. While these issues may be important, conflating them with industrial policy dilutes the effectiveness of initiatives by introducing unnecessary controversy, which could derail the entire effort.

Regional innovation hubs have the best chance of viability if our leaders keep political issues separate from funding decisions, thereby increasing the likelihood that innovation initiatives stay true to their core missions. Moreover, taxpayers, the ones bearing the brunt of the risk, should have a stake in the potential rewards of risky innovation efforts by receiving a cut of the profits in the event ventures are successful. If these principles are followed, there is at least some chance of success. If not, expect more government boondoggles benefiting the politically-connected few at the expense of the many.