Is high tech really at risk?

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William Haseltine is convinced that the answer is yes. I'm less certain.

First, a quick note. Mr Haseltine writes:

The United States leads the world in scientific and technical innovation. As long as the government continues to invest in research (and it seems as if at least for now we shall), we can continue to lead the world for many years to come.

And then he follows with:

The success of our economy and our competitive advantage relies in large measure on our ability to translate innovation to commerce. Interruption of the flow of invention to new business opportunities and to increases in productivity may convert short term troubles to long term failures.

But how tightly interrelated are the first and second points? For example, isn't it possible that the Americans could translate Chinese or French or Swiss innovations to commerce? That is roughly the story of the World Wide Web, which was a European technical innovation. I worry that the language of "competitiveness" will lead us to engage in a senseless arms race over government R&D in which the basic premise is that growth in R&D spending elsewhere, say in China, somehow represents a menace to our way of life. This is absolutely not what Mr Haseltine is saying. It is, however, an argument that would likely be deployed on behalf of this program. As the great Amar Bhidé argues in The Venturesome Economy, one can make an equally plausible case that we should be subsidizing "venturesome consumption" or the training of MBAs rather than basic research or small technology companies.   

Mr Haseltine goes on to argue that the government needs to support the technology sector.

One approach is to have government provide badly needed capital to venture firms. The government would function as an additional limited partner, receiving the benefits of successful investments without interference in management of the funds. Additionally government may provide direct assistance to small- and medium-size innovative firms by substantially increasing the money available through the Small Business Innovation Research funding mechanism. These measures would open the door to new companies and help fledgling companies survive through the crisis. With these measures I believe the venture business may survive together with our hopes for a healthy recovery. Without these or other actions we face a more difficult and uncertain future.

Tom Friedman has argued along similar lines.

You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners -- university endowments and pension funds -- are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20 percent of the investors' upside and keep 80 percent for themselves.

This strikes me as a useful reminder of the kind of claims we'll be hearing far more of in the months and years to come. Technology is not the only critical and vitally important sector, after all. In a democracy, my sense is that every sector that employs voters is critical and vitally important.

And it actually seems that Friedman has gotten the VC landscape badly wrong or so argues Sarah Lacy at TechCrunch. One important point Lacy makes that is worth highlighting is the following:

Most shocking to me, Friedman invoked one of the most repeated Valley mantras to prove his point when he wrote, "Some of our best companies, such as Intel, were started in recessions, when necessity makes innovators even more inventive and risk-takers even more daring." Mr. Friedman: Read the second half of your own sentence again. The reason recession-born companies are so inventive and daring is because founders are forced to work within constraints, precisely because it is harder to raise capital. Nothing kills a great idea like too much cash. Unless it's a flood of too much taxpayer cash, because then we all lose.

The government does act as a venture capitalist right now, through DARPA, for example. DARPA's richly deserved accolades stem in no small part from its narrowly tailored mission. A more broadly tailored mission, to support all venture capital firms or venture capital firms that have been successful in the past -- under radically different economic circumstances -- or venture capital firms that have political connections, doesn't seem like a good way for taxpayers to get value for money.

Friedman suggests that it is the clean energy sector that should be boosted, and perhaps a DARPA-like approach makes sense. But do we want to subsidize technologies that would be commercially viable in the absence of the subsidy? I'm reminded of the McCain-Palin campaign's bizarre proposal for a large prize to fund the development of a better battery for electric vehicles -- you'd think firms would be willing to fund such a device in the absence of a prize.

And of course transfers of this kind will develop a constituency, one that will fight tooth and nail against any cessation of the transfers in question once the recovery begins. Why? Because China will, as long as it continues to enjoy economic growth, and that is by no means a guarantee, will remain a potent "threat" to a lot of firms that should never have been funded in the first place.

A few months, I spoke to a venture capitalist, a brilliant contrarian who has had considerable success as a talent-spotter. He was struck by how little real innovation he was seeing, and he was worried that this didn't bode well for the country's economic future. But he wasn't worried about the last few months -- he was worried about a kind of intellectual slowdown he has seen over the past several years, a period during which a lot of private-sector venture capital money has been chasing after a lot of unpromising ideas. Thankfully, as a number of analysts argued at the time, the Web 2.0 "boom" was not really a "boom." The bets were relatively small.

But how small would the bets be if firms were betting someone else's money? 

I should stress that I am not advocating laissez-faire. I think it makes perfect sense for the federal government to make upgrades to public infrastructure, including IT infrastructure. And I also think that Friedman is right to suggest that supporting new ventures is preferable to propping up aging industrial dinosaurs, a phenomenon Elizabeth Kolbert has called "The Chrysler Effect." I just think we should tread lightly. 

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Reihan Salam is a policy advisor at Economics 21, a columnist for The Daily, and a blogger for National Review Online.

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