Wishful thinking is a dangerous drug. Some pundits and policymakers believe that, if your intentions are pure and you have the “right” people in power, all government needs to do is sprinkle a little pixie dust (in the form of billions of taxpayer dollars) and magical things will happen.

Of course, reality has a funny way of throwing a wrench into the best-laid plans. Which brings me to the question I raise in a new 2-part series for  Discourse magazine: Can governments replicate Silicon Valley everywhere?

In the first installment, I explore the track record of federal and state attempts to build tech clusters, science parks & “regional innovation hubs” using state subsidies and industrial policy. This is highly relevant today because of the huge new industrial policy push at the federal level is building on top of growing state and local efforts to create tech hubs, science parks, or various other types of industrial “clusters.

At the federal level, this summer, the Senate passed a 2,300-page industrial policy bill, the “United States Innovation and Competition Act of 2021,” that included almost $10 billion over four years for a Department of Commerce-led effort to fund 20 new regional technology hubs, “in a manner that ensures geographic diversity and representation from communities of differing populations.” A similar proposal that is moving in the House, the “Regional Innovation Act of 2021,” proposes almost $7 billion over five years for 10 regional tech hubs. Meanwhile, the Biden administration also is pitching ideas for new high-tech hubs. In late July, the Commerce Department’s Economic Development Administration announced plans to allocate $1 billion in pandemic recovery funds to create or expand “regional industry clusters” as part of the administration’s new Build Back Better Regional Challenge. Among the possible ideas the agency said might win funding are an “artificial intelligence corridor,” an “agriculture-technology cluster” in rural coal counties, a “blue economy cluster” in coastal regions, and a “climate-friendly electric vehicle cluster.”

In my essay, I note that the economic literature on these efforts has been fairly negative, to put it mildly. There is no precise recipe for growing tech clusters, as most economists and business analysts note.

“Despite several attempts, Silicon Valley has not been successfully copied elsewhere,” notes Mark Zachary Taylor, author of “The Politics of Innovation: Why Some Countries Are Better Than Others at Science and Technology.” Judge Glock, a senior policy adviser with the Cicero Institute, offers a more blistering assessment of such efforts: “Almost every American state has tried to fund the creation of biotech clusters, projects that almost inevitably end with weeds growing through the parking-lot pavement and a trail of corrupt bargains.”

I then highlight the key findings from several major studies of these efforts, all of which make it clear that, as cluster scholars by Aaron Chatterji, Edward Glaeser and William Kerr noted in 2014 after gathering all the research conducted on the topic: existing evidence “suggests that the regional foundation for growth-enabling innovation is complex and that we should be cautious of single policy solutions that claim to fit all needs.” Furthermore, “even if clusters of entrepreneurship are good for local growth, it is less clear that cities or states have the ability to generate those clusters.”

I also highlight research from my Mercatus Center colleagues on “The Economics of a Targeted Economic Development Subsidy” documenting costs of state-level planning & case study of Foxconn fiasco. They summarize the fairly miserable track record of state and local mini-industrial policy efforts. As they note, the extensive economic literature on this matter finds that “the net effect of targeted economic development subsidies is likely to be negative” because “the taxes funding the subsidies will discourage more economic activity than will be encouraged by the subsidies themselves.” Similarly, Harvard Business School economist Josh Lerner evaluated dozens of similar targeted development efforts from around the globe in his 2009 book Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed—and What to Do About It. He concluded that “for each effective government intervention, there have been dozens, even hundreds, of failures, where substantial public expenditures bore no fruit.”

In my essay, I also discuss the astonishing array of federal efforts to promote the geographic spread of high-tech sectors and jobs since 2000. Throughout Bush, Obama, Trump & Biden admins, there’s been a lot of spending, but not a lot of success. Just lots of new laws and bureaucracies:

In 2012, the Obama administration launched the multiagency Rural Jobs and Innovation Accelerator Challenge and Advanced Manufacturing Jobs and Innovation Accelerator Challenge. This occurred at roughly the same time President Obama was launching his Startup America initiative. He also signed the JOBS Act (Jump-start Our Business Startups) in 2012. All these efforts included various measures to support the spread of advanced manufacturing and high-tech startups across the U.S. But none of these efforts have borne much fruit so far.

In the second installment of this series, I explore better ways to encourage regional tech innovation and economic development without doubling down on failed programs of the past. Specifically, I explain why, when it comes to economic development efforts, policymakers would be wise to avoid the costly, ineffective “fun stuff” and refocus on time-tested “boring” strategies:

The boring approach to economic development seeks to promote an open innovation culture that is conducive to risk-taking, investment and growth without the need to extend targeted privileges to particular firms or industries. Such a culture comes down to a classic mix of simplified and equally applied taxes, streamlined permitting processes and sensible regulations, limits on frivolous lawsuits, and clear protection of contracts and property rights. As Matt Mitchell and I argued previously, policymakers need to resist the urge to go for broke with splashy policies and programs. They need to appreciate the benefits of generalized economic development policy (a.k.a. the boring approach) as opposed to far riskier targeted development efforts.

I also highlight recent research explaining how perhaps the simplest way to strengthen existing clusters, or give rise to new ones, is to make sure America’s immigration policies are hospitable to the best and brightest minds from across the globe.

And I note how, due to the problems associated with many other forms of government-sponsored R&D assistance, many scholars and policymakers are increasingly turning to the idea of government-sponsored competitions and prizes as a superior way to distribute R&D assistance.

With competitions, governments can set broad goals to help facilitate the search for important societal needs. The prizes then create a powerful incentive for innovators to pursue those goals, not only to win money, but also to gain recognition from peers and the public. Another alternative is just using lotteries to distribute R&D money instead of having agencies target grants. That at least avoids political shenanigans and paperwork delays, although it may not be a particularly effective approach.

There is also some good news is overlooked in today’s rush to make big industrial policy gambles: Venture capitalists and new startups are already spreading out naturally.

A 2021 study on “The State of the Startup Ecosystem” by Engine, a research and advocacy organization supporting startups, revealed that “as Series A funding grew over the last fifteen years, more of that growth has started to shift to areas located outside of the largest ecosystems.” Series A funding refers to the initial round of outside venture capitalist investment in startups. The report looked at Series A deals from 2003 to 2018 and found that “Series A rounds outside of the top five ecosystems grew nearly 900 percent, while the number of rounds outside of the top nine grew nearly tenfold.” Whereas Series A fundings outside of the top five ecosystems stood at 38% in 2003, they had jumped up to 43% in 2018. “The increase in deal location diversity over this period reflects an increasing spread in venture capital investment across the country and less centralization of investment in areas like Silicon Valley,” the report concluded.

Meanwhile, tech innovators and investors are increasingly engaging in innovation arbitrage as they move to cities and states across the nation that are more hospitable to entrepreneurial activities. Firms and investors are voting with their feet (and dollars) by flocking to areas where tech clusters can more naturally sprout because the general policy environment is sound.

But government efforts to artificially try to create regional innovation hubs in a top-down, technocratic fashion will almost certainly persist. As they do, some will argue that this time will be different! Perhaps, but it is more likely that the past is prologue; these new hubs will likely cause federal politicians to jockey for position to have their regions named one of the winners and get a big cut of all the new high-tech pork being served up by Washington. We can do better.

Jump over to  Discourse to read both installments here and here.

Also, down below I list several other things I have written recently on industrial policy efforts more generally.

• Adam Thierer & Connor Haaland, “Does the US Need a More Targeted Industrial Policy for AI & High-Tech?” Presentation for IHS Papers Workshop: Does America Need a New Industrial Policy?, 2021.
• Adam Thierer, “Government Planning and Spending Won’t Replicate Silicon Valley,” Discourse, August 18, 2021.
• Adam Thierer, “To Promote Tech Hubs Across the Country, Governments Should Focus on Improving the General Business Environment,” Discourse, September 9, 2021.
• Adam Thierer, “‘Japan Inc.’ and Other Tales of Industrial Policy Apocalypse,” Discourse, June 28, 2021.
• Adam Thierer, “Industrial Policy as ‘Casino Economics‘,” The Hill, July 12, 2021.
• Adam Thierer & Connor Haaland, “Should the U.S. Copy China’s Industrial Policy?” Discourse, March 11, 2021.
• Connor Haaland & Adam Thierer, “Can European-Style Industrial Policies Create Tech Supremacy?” Discourse, February 11, 2021.
• Matthew D. Mitchell and Adam Thierer, “Industrial Policy is a Very Old, New Idea,” Discourse, April 6, 2021.
• Adam Thierer, “On Defining ‘Industrial Policy,’” Technology Liberation Front, September 3, 2020.
• Adam Thierer, “Skeptical Takes on Expansive Industrial Policy Efforts,” Technology Liberation Front, ongoing series.

The Cato Institute is seeking a “researcher to support a campaign to educate the public and policymakers on the implications of biometric identification systems related to immigration policy reforms.

The better applicants will know how many different governmental systems work—legislation, appropriation, regulation, procurement, grant-making, and so on—and have zeal to chase down all the ways the national ID builders are using them to advance their cause.

Immigration reform legislation in the Senate that features a vast expansion of E-Verify is yet another reason to join the fight against having a national ID in the United States.

I have a blog post up at Cato@Liberty today about Senate Democrats’ national ID plans. The thing is nine printed pages long. It doesn’t get my recommendation that you read the whole thing—unless you really jones for identity-systems talk. Here’s a summary:

The plan is confusing, disorganized, repetitive, and sometimes contradictory. Summarizing it is a little like trying to piece together the egg when all you have is the omelet, but three themes emerge: First, this summary backs away from an earlier claim that there would not be a biometric national identity database. There will be a national biometric database. Second, repeating the word “fraud-proof” does not make this national ID system fraud proof. Third, this national ID system definitely paves the way for uses beyond work authorization. This is the comprehensive national identity system that people across the ideological and political spectrum oppose.

I pity the Hill staffer who had to write the national ID parts of the plan. He or she almost certainly doesn’t know enough to write sensibly about the design of identity systems, and the demands of politics require the plan to talk about impossible things as if they’re possible, and even easy.

So reports the Wall Street Journal:

Lawmakers working to craft a new comprehensive immigration bill have settled on a way to prevent employers from hiring illegal immigrants: a national biometric identification card all American workers would eventually be required to obtain.

It’s the natural evolution of the policy called “internal enforcement” of immigration law, as I wrote in my Cato Institute paper, “Franz Kafka’s Solution to Illegal Immigration.”

Once in place, watch for this national ID to regulate access to financial services, housing, medical care and prescriptions—and, of course, serve as an internal passport.

It’s bad enough that America educates the world’s best and brightest, only to send them home for lack of visas. But to drive away immigrants who come to the U.S. and start businesses is just unconscionable. I hope Paul Graham’s idea for a “Founder Visa” takes off: 10,000 / year for founders of companies that are started in the U.S. Brad Feld has a great column on this today, answering questions about how the visa would work.

As the Economist said on the related issue of H1-B visas for skilled foreign workers:

SILICON VALLEY, as the old joke goes, was built on ICs—Indians and Chinese that is, not integrated circuits. As of the last decennial census, in 2000, more than half of all the engineers in the valley were foreign-born, and about half of those were either Indian or Chinese—and since 2000 the ratio of Indians and Chinese is reckoned to have gone up steeply. Understandably, therefore Silicon Valley has strong views on America’s visa regime.

I suspect the demographics for entrepreneurs are similar, especially in Sillicon Valley, which has long been driven largely by “enginpreneurs” rather than MBAs.

What an absurd country we live in: We accept, for better or worse, massive illegal immigration across our porous southern border as a fact of life, but can’t muster the political will to give legal status to the most creative and innovative from around the world drawn to the Land of Opportunity made possible by capitalism. So, being dutiful and law-abiding, these “Talented Tenth” go home to suffer under the dead weight of bureaucracies even more oppressive, incompetent and corrupt than our own. How sad.

A few gems from George Gilder’s 1990 masterpiece Microcosm: the Quantum Revolution in Economics & Technology as I work my way through the book:

Predatory Pricing. Gilder details how early microchip manufacturers created wholly new markets put Say’s law into action: supply creating its own demand.  Not only did these companies introduce new technologies, but they created demand by slashing the prices of those technologies by multiple orders of magnitude (10-10,000x) even before they figured out how to lower production costs enough to make even a small profit. While such practices would later give rise to charges of “predatory pricing” and “dumping,” Gilder explains:

Selling below cost is the crux of all enterprise.  It regularly transforms expensive and cumbersome luxuries into elegant mass products.  It has been the genius of American industry since the era when Rockefeller and Carnegie radically reduced the prices of oil and steel. (122)

The Learning Curve: Gilder explains the dynamic by which prices drop so consistently in innovative new industries:

Early in the life of a product, uncertainty afflicts every part of the process. An unstable process means energy use per unit will be at its height. Both fuels and materials are wasted. High informational entropy in the process also produces high physical entropy. The benefits of the learning curve largely reflect the replacement of uncertainty with knowledge. The result can be a production process using less materials, less fuel, less reworks, narrower tolerances, and less supervision, overcoming entropy of all forms with information. This curve, in all its implications, is the fundamental law of economic growth and progress. (125)

The Curve of the Mind: Gilder explains the broader implications of the Learning Curve to the competitiveness of the market economy, and how easily yesterday’s giants can become tomorrow’s easy prey:

Firms that win by the curve of mind often abandon it when they establish themselves in the world of matter. They tight to preserve the value of their material investments in plant and equipment that embody the ideas and experience or their early years of success. They begin to exalt expertise and old knowledge, rights and reputation, over the constant learning and experience of innovative capitalism. They get fat. A fat cat drifting off the curve, however, is a sitting duck for new nations and companies getting on it. The curve of mind thus tends to favor outsiders over establishments of all kinds. At the capitalist ball, the blood is seldom blue or the money rarely seasoned. Microcosmic technologies are no exception. Capitalism’s most lavish display, the microcosm, is no respecter of persons. (113)

Socioeconomic Empowerment. As Gilder explains, the revolution of the Microcosm drew on, and empowered, the a diverse array of the downtrodden, both native-born and foreign:

The United States did nor enter the microcosm through the portals of the Ivy League, with Brooks Brothers suits, gentleman Cs, and warbling society wives. Few people who think they arc in already can summon the energies to break in. From immigrants and outcasts, street toughs and science wonks, nerds and boffins, the bearded and the beer-bellied, the tacks’ and uptight, and sometimes weird, the born again and born yesterday, with Adam’s apples bobbing, psyches throbbing, and acne galore, the fraternity of the pizza breakfast, the Ferrari dream, the silicon truth, the midnight modem, and the seventy-hour week, from dirt farms and redneck shanties, trailer parks and Levittowns, in a rainbow parade of all colors and wavelengths, of the hyperneat and the sty high, the crewcut and khaki, the pony-railed and punk, accented from Britain and Madras, from Israel and Malaya, from Paris and Parris Island, from Iowa and Havana, from Brooklyn and Boise and Belgrade and Vienna and Vietnam, from the coarse fanaticism and desperation, ambition and hunger, genius and sweat of the outsider, the downtrodden, the banished, and the bullied come most of the progress in the world and in Silicon Valey. (114).

The 111th Congress and the new Obama administration should scrap “E-Verify.” The federal government’s inchoate immigration background check system is the culmination of 20 years’ failure to create a tolerable “internal enforcement” program for U.S. immigration law. Rather than building on past failure, the new Congress and president should pull the plug on E-Verify and reform immigration law so that it aligns with the nation’s economic need for labor.

More here.

Arnold Kling on the Sergey Brin effect and inequality:

Income inequality in the United States consists of two gaps. The first gap is an upper-lower gap, between those with a college education and those without. The second is an upper-upper gap, between those with high incomes and those with extraordinarily high incomes. The upper-lower gap reflects changes in the structure of the economy. New technologies place a premium on cognitive ability. Harvard University economists Claudia Goldin and Lawrence Katz have dubbed this “skill-biased technological change.” In today’s economy, more value added comes from knowledge work, and relatively less comes from unskilled labor.

Kling goes on to discuss policy options that might address inequality, such as tax and immigration reform options.

Inequality is one of the most fundamental and divisive political issues around, the root of considerable discontent. It offends many persons’ sense of fairness. Much inequality of fortune stems from luck–where one is born, for example. Growing inequality might be heralded as a forerunner of an H.G. Wells Time Machine world where humanity is divided into two classes that eventually become two species. It might come about as a result of exploitation, in which one group becomes wealthy at the expense of another. This clearly happens in the case of slavery; according to Marxist theory, of course, exploitation is the rule rather than the exception.

The free-market answer to these points is simple enough. Inequality in a market economy should not matter. In a market in which everyone has equal rights, trade makes everyone better off (Marx being wrong on his theory of value). Some have a larger piece of the pie than others, but the pie keeps growing, and there is more for everyone. Inequality might grow, but as the rich grow richer, the poor also grow richer. This argument is nicely made by Cox and Alm in Myths of Rich and Poor. Earlier, Hayek notes that yes, markets reward results, not merit, but from the standpoint of a population, it is results that matter–we want houses that don’t fall down in a strong wind, even if the architect who designs them is lucky rather than good. Furthermore, luck is not entirely beyond one’s control.

Building on this set of argument, it is common for libertarians to set aside concerns about income inequality as a result of “envy.” Whatever it is, it seems to be nearly universal; I recall (and am too lazy to hunt down and link to) a study a few years back showing that populations report higher levels of happiness in countries with less inequality. (There must be a limit to this at some point, one would expect, surely a population comprised almost entirely of people some of whom are starving, where others are merely malnourished, would not be particularly jolly).

Game theorist Axelrod seems to have tracked down the root of the problem. In his various tournaments, he sometimes set up games in which he asked participants not to be envious, that is, not to think of themselves as doing badly even when their opponent in a given game was doing better. He found that people would do it anyway. He hypothesizes that people want to know how well they are doing as compared to some standard, and in the absence of any other standard, are irresistably drawn to compare their results to those of others.

So are we stuck with dealing with inequality as a “problem,” making policy choices that move pieces of pie from the rich to the poor, even though this might mean that overall the pie grows more slowly–or not at all–or even that it shrinks? Hopefully not the latter. Must we adopt a religious outlook, in which wanting is set aside in pursuit of enlightenment, that is, zen, or perhaps a dose of Calvinism, in which all is predestined, or all serves some grand being’s larger plan? I find this stretches my own credulity too far. So teach economic history, and hope for the best.

Along these lines, maybe it was better for capitalism when there were more grim socialist examples around.