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AEI-Brookings Joint Center Policy Matters 04-01 The first economic development fad of the 21st Century has arrived. Silicon Valley is out. Biotech is in. Politicians are falling over themselves to lure biotechnology research organizations to their city or state with ever-larger amounts of taxpayer money. For only a relatively small public investment, they claim, the lucky region gets thousands of jobs and countless spinoff companies, ultimately creating a vibrant “cluster” of economic activity. Florida Governor Jeb Bush crowed recently that giving the Scripps Research Institute $310 million in state and some $200 million in local tax dollars to set up shop in Palm Beach County was “the opportunity of a lifetime.” Baltimore officials hope that a biotech center in a run-down section of town will lead a local renaissance. Virginia’s Secretary of Commerce and Trade called a new facility being built by the Howard Hughes Medical Institute “an extraordinary windfall for Virginia.” State officials encouraged the county to give the multi-billion dollar Institute a break on local property taxes to make the state seem biotech-friendly. It all sounds so promising. There’s just one small problem: these schemes almost never work. Sure, biotech and other high-technology clusters can be major economic engines. Look at San Diego, an actual biotech center; or Silicon Valley, which, despite the dot-com bust remains an envied worldwide high-technology hub; or North Carolina’s Research Triangle Park, where thousands of scientists work on leafy corporate campuses. With these shining examples in mind, politicians desperately promote their own cluster development ideas. Sometimes they think direct subsidies, like Florida’s scheme to lure Scripps, will do the trick. Other times they designate an area as a “research park,” build some facilities and sweeten the pot with tax incentives. They trot out their favorite success stories and studies drafted by hired guns predicting thousands of new jobs as proof of the glorious future that awaits—if only the naysayers would stop being so shortsighted. Governor Bush said that the Scripps deal would do for Palm Beach County what Disney did for Orlando. That dream might come true in the governor’s Magic Kingdom, but it’s not too likely in the real world. Predictions of future benefits from cluster development initiatives tend to be hopelessly optimistic. Consider a consultant’s report on the economic impact of the Scripps deal. According to the report, Scripps plans to have 545 workers at the facility within seven years. The report then assumes the Institute will grow in Florida like it did in San Diego, employing 2,800 people and generating an additional 44,000 jobs within 15 years. In other words, the report concluded that the project will be a huge success by assuming that the project will be a huge success. But success stories are the exception, not the rule. And the fact is, nobody really knows how to start a cluster. You wouldn’t know that if you listen to boosters and read their reports, which never mention past failures. Florida taxpayers might have been more squeamish about handing over half a billion dollars if the job growth predictions had been based on, say, certain experiences in Maryland or Texas instead of San Diego. The Maryland Science and Technology Center opened with great fanfare in the late 1980s, promising to employ 12,000 people and generate an additional 25,000 jobs. Those dreams never materialized. A local council member recently called the Center a failure, and the city plans to rezone the site to allow residential construction. The state wants a refund on millions of dollars it invested in the site’s infrastructure. San Antonio broke ground on its Texas Research Park in 1987 among visions of regional biotech greatness: 30,000 jobs in the Park and another 100,000 spinoff jobs within 30 years. It hasn’t been 30 years, but according to a report in the St. Petersburg Times, it doesn’t look promising: 15 companies and about 300 jobs so far. Looking at the U.S. experience with cluster-promotion through clear eyes, rather than the rose-colored glasses favored by hack analysts, confirms the general ineffectiveness of these initiatives. In a recent study I found that attempts to jump-start clusters through science parks usually amount to nothing. The number of research parks in the U.S. soared from 16 in 1980 to 135 by 1998 to more than 150 today. I found that the number of jobs—total and high-tech—in counties that established research parks did not typically grow by any more than in similar counties without parks. In other words, the promised jobs simply didn’t materialize. The bottom line is that business clusters can be major sources of economic growth, but nobody knows how to bake them from scratch. And just as it turned out that not every region could be Silicon Valley, not every city can be a biotech center. Better ways to encourage economic development aren’t very exciting: things like investing in an educated workforce and making it easy for entrepreneurs and investors to set up new businesses will pay off over time. Unfortunately, to politicians those boring policies can’t compete with fancy, futuristic-sounding cluster projects. Companies that get subsidies from these schemes are happy with their windfalls. Politicians that give subsidies are happy with their ribbon-cutting photo-ops and the opportunity to feed pork to wealthy potential campaign donors. But in most cases the thousands of promised jobs will remain nothing more than science fiction. Scott Wallsten is a resident scholar at the American Enterprise Institute and a fellow at the AEI-Brookings Joint Center for Regulatory Studies. |