The next American industrial policy

Last summer, Jonathan Rauch wrote a brilliant piece for The Atlantic on the evolution of the American automobile industry that focused on GM, then and now a lumbering industrial giant on the verge of collapse, and Tesla Motors, a small and nimble start-up backed by Silicon Valley veterans. The two companies were as different as night and day -- only now both companies are looking to Washington to stay afloat. Jason Calacanis, serial technology entrepreneur and proud owner of a fantastically expensive Tesla Roadster, has just noted on his excellent blog that it looks as though Tesla is going to get a loan from the Department of Energy.

In December, Patrick Ruffini, a Republican political strategist, made the case against what he called a "Tesla bailout" after citing Calacanis's enthusiastic support. First, Ruffini's objection:



It was not exactly unforeseen that Tesla would need to raise gobs of startup capital for R&D, and do so potentially in a down economy. If Tesla is a good bet, and I agree it's a far better bet than that 15th Twitter clone that got venture money, then it should be able to attract venture capital / private equity investment. Look at the explosion in green-tech VC investment, which will probably be the booming industry of the next decade.

Those who made the worst-case slippery-slope argument against the bailout have been proven exactly right. First it was the banks -- which you could kind of justify based on their role in providing liquidity to the overall economy. Next it was specific industries -- autos. Now, it's niche manufacturers. Next, watch for a bailout of other politically correct industries, like green energy firms.

Now for Calacanis:

What's the problem here exactly? You're saying that America could have a brand new startup car company that produces an affordable car that goes an absurd range just 10 years from now? The cost is a $400 million dollar loan? You're problem with this is what?

Also, Tesla has publicly stated that they are pursuing a flagship--or tent pole--release of their cars. This means they start with the sexy, fast and expensive car for affluent folks, then move on to the sexy sedan for middle income folks. Finally, they take all the technological advances from these two models and move them into the affordable car for everyone.

Whatever you think of the merit of these arguments, there is no question that the Calacanis position -- that the federal government should use taxpayer dollars to make strategic investments in business enterprises outside of the defense sector -- now has the upper hand. Robertson Morrow of Clarium Capital has identified this ideological shift as part of a broader "bull market in politics," which investors and entrepreneurs will have to come to terms with.

Unsurprisingly, a wide array of firms in a wide array of industries are counting on the feds to come to the rescue. Recently, BusinessWeek profiled Clearwire, a pioneer in WiMAX technology that until recently has been a darling of Silicon Valley. Because the company is in the middle of rolling out its network, it is desperate for cash. And thanks to the credit crunch, Clearwire is seeing its financing dry up.

Clearwire CEO Ben Wolff is confident he can raise the money. "The question is when and on what terms," he says. One potential backer might be the incoming Obama Administration, which is expected to offer tax credits and possibly help in securing loans for companies making broadband investments in the U.S. The President-elect has pledged to make broadband service available to all Americans, and Clearwire's WiMAX network could be a cost-effective option. Its wireless technology can reach up to 30 miles from radio tower to customer, making it a relatively inexpensive way to offer broadband service in rural areas.

Wolff says government support would mean a quicker buildout, "but it's not something we are banking on."

It's easy to see why Clearwire thinks it has a decent shot at federal funds: a national wireless network is politically attractive for all kinds of reasons. But it's hard to see where this ends.

When asked about the auto industry bailout, Mitch Daniels, the Republican governor of Indiana, noted that Washington never lifted a finger to aid his state's RV industry, which has been devastated by the economic downturn. Given the difference in scale between the two industries, you can see why one attracted attention and sympathy while the other didn't, but there's nothing terribly principled about the distinction.

Assuming this downturn doesn't evaporate tomorrow, there is good reason to believe that the federal government is going to get more deeply involved in allocating investment capital. Washington is, as a number of advocates have observed, already deeply enmeshed in the defense sector. Yet we're moving well beyond defense, and at some point you have to imagine that we'll cross a threshold and managerial talent will flock towards government rather than the private sector, and an essentially political decision-making process will trump the decentralized decion-making we see (for the most part) in the private sector.

Presented by

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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