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Deval's economic bet on biotech

by: Karl Marx

Mon Jan 07, 2008 at 22:01:05 PM EST

Governor Deval Patrick's proposed $1 billion biotech package embodies an economic bet. It assumes that state government can successfully pull the levers of industrial policy; that state government, better than private investors, can pick winners. Will it work? What will happen if it doesn't work? What happens if California becomes the ultimate destination? These are among the hard questions few policymakers seem to ask as they rush to open the public treasury. What kind of commitment will the Commonwealth be making? And what does it mean for sensible tax policy that benefits all firms and sectors rather than one component?

The problem with state subsidies is that that create constituencies that can never retrench once the "sunk costs" are made. Indeed there are a number of stakeholders waiting for approval of the governor's biotech bill. And surprise! The $1 billion price tag won't be enough. Here's a report from Mass High Tech http://masshightech.bizjournal...

There are plenty of stakeholders with plans riding on Gov. Deval Patrick's proposed $1 billion state investment in life sciences -- from the people for whom life-saving innovation is being developed to the scientists, educators, entrepreneurs and businesses depending on state support to thrive and commercialize.

Yet for all of the political wrangling, public discussion and media attention since Patrick introduced the bill in May, the bill has yet to move through the state Legislature, receive funding or prompt state officials to name a new executive director to the agency slated to manage the bulk of funding associated with the life sciences bill.

And even as the bill moves toward passage "early next year," say some state officials, other state and industry officials are starting to think that $1 billion isn't enough.

"What's at stake with this legislation is whether or not Massachusetts continues to lead the world and the United States in the life sciences area," said Jack Wilson, president of the University of Massachusetts.

UMass stands at a strategic intersection of the Bay State's life sciences ecosystem and is seeking support from the bill to fund life sciences projects with an estimated price tag of more than $100 million...

State Rep. Daniel Bosley, a member of the group, noted the bill may not call for enough funding. Bosley is chairman of the state's Joint Committee on Economic Development and Emerging Technologies, one of three legislative panels holding hearings on the life sciences bill.

"Going into this, I thought that $1 billion was a lot to spend," Bosley said. "But it's not enough."

Is this another Big Dig in the making? Or is it yet another example of state government hubris?
Karl Marx :: Deval's economic bet on biotech
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I don't trust the whole thing.... (0.00 / 0)
simply because Deval Patrick endorses it.

That being said, I think an important benefit the state government can offer is to identify several future growing and shrinking industries.  Once the government has identified 3-4 future growth industries it should create incentives that allow all those industries to grow.  For the 3-4 industries it labels as shrinking industries the state government should create an exit strategy to help them all die gracefully.

Never should a state government/Governor identify one single industry and label it as special at the expense of all of its competing industries.  Here is why: back in the eighties, during the tech boom in Massachusetts, good employees were being pulled out of retail, wholesale, finance industries to join the quick growing tech industry.  This left major retailers and banks with a shortage of good workers and the need to pay a lot extra to lure good workers back.  Labor is a commodity that must be considered.  If Deval Patrick creates all kinds of incentives for the biotech field then workers from all the other industries will be lured to it causing a shortage elsewhere.  Playing favorites to a single industry costs other industries money.  

If you have multiple industries being allowed tax breaks and incentives then you get a better balance of labor.  Also, you can retrain and move labor from the shrinking industries to the growing industries for better balance.  Massachusetts lost several large retail companies over the last 20 years and those jobs will never return because retail companies won't be able to compete with the biotech industry for labor (given all Deval Patrick's tax breaks).  I also know firsthand the pain that can be caused when those favorite industries suddenly become shrinking industries - The MetroWest real estate market took a big hit when Digital became Compaq, which became HP - each time laying off employees.  With nowhere else to go the laid-off tech employees moved out of state and caused the real estate market to languish for years.

Deval is simply playing favorites for biotech.  He should instead search for a balance of varying industries.

As a footnote: This is what is happening in China right now.  The economy is growing due to the rapid growth of the manufacturing sector.  All the technology manufacturers in China are eating up employees from other manufacturing sectors (footwear, handsewns, apparel, rubber dog-poop) and causing labor shortages such that many US companies can no longer buy product from China.  One sector of the manufacturing industry was allowed a favorite status at the expense of all the others.

Ed Markey is now the official 'cheapest' man on earth.  1.5 percent to charity while the average American gave 3 times as much...

How about (0.00 / 0)
he stop giving away my hard earned cash to private businesses and lower the friggin taxes charged to those businesses so they'll be more inclined to stay/come here without giving them my $$$$$?

"I acknowledge having racist and classist and sexist feelings of white male superiority." -John Howard

As I understand it, (0.00 / 0)
the primary focus of the funding is to establish a research facility at UMass to leverage the university's already fine reputation with a full-scale facility that would be found attractive to biotech companies looking for a base of operations (similar to MIT or Stanford and high tech). The other focus is to provide bond funds to reduce the initial cost of capital development.

This is not much different (if at all) than what MA and every other state has been doing for decades with industrial development bonds. MA's track record in that are has been pretty darn good over the course of time, regardless of who the Governor is. Since the issuance of the bonds is managed by an independent authority, presumably made up of a board of people with deep experience in the sector, there is no reason to think it could not perform equally as well as MassDevelopment (MIFA) has done.

Deval's plan (0.00 / 0)

As usual, you make excellent points. But I think my premise still holds. Why should the Commonwealth be in the biotech business? State government ought to have a neutral tax policy. It ought to focus on fighting crime and providing security; managing transportation infrastructure and providing public education. It should not be in the business of picking select industries (i.e. the film industry) and doling out tax cuts or credits or favorable regulation. This is a rent-seekers game politicians of all stripes are willing to play. Deval's foray into corporate tax reform does little to broaden the base (limiting exemptions) and lowering the rate (preliminary rate suggestions are dismal, in my opinion.)

I'd like to hear more about industrial revenue bonds. They too are a subsidy which also carry tax implications. That is not to say they can be successful but at some point one has to ask if the market won't take the risk, why should government, particularly since the opportunity cost to government can be  large.  

"Work is the essence of Man."

[ Parent ]
I will say this. (0.00 / 0)
Biotech is the most vibrant area of venture capital going at the moment. There is oodles of cash going into it.

Nonetheless, the availability of R&D funding and higher-ed supported infrasatructure is factored into the VC model for funding start-ups, and as much as I dislike the dynamic of it, it comes down to the old "if we don't do it, someone else will." That's how Raleigh-Durham and Charlotte (among others)have become the boomtowns they have.

I don't think you can call IDBs a "subsidy" business any more than you can say that the tax-exempt bond business is a subsidy business. It's not a question of whether the market will take the risk. It is a more efficient means of raising the capital, because the costs are less and the bond investment is more attractive, hence, more certain to sell out.

As long as the IRC provides for tax-leveraged economic development, it is going to occur, with or without Massachusetts' participation. Arguing for the elimination of the tax leverage is fine, but excluuding the state from utilizing it while every other state forges ahead is just silly.

[ Parent ]

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