The Trump administration released its infrastructure plan this month, hoping to jump-start more than $1.5 trillion in new investment. Digging into the details, however, it seems that's not the only thing the administration hopes to spark.
Buried within the 55-page document is an outline for a new $20 billion federal Transformative Projects fund intended to boost "bold, innovative, and transformative infrastructure projects that could dramatically improve infrastructure." Translated, that means the administration wants to start a venture capital firm.
There's only one problem: There's no need for Uncle Sam to play venture capitalist.
Under the administration's plan, awards will be made on a competitive basis to infrastructure projects deemed risky, yet still commercially viable, investments. Those selected will enter into partnership agreements with the federal government, and certain awards will also involve an equity stake for the feds.
Where's this coming from? Perhaps it's because the venture-capital industry in the United States is an engine of worldwide economic growth and has become an indispensable driver of innovation. And with Commerce Secretary Wilbur Ross running the program, it will have private equity experience rarely found within government. Yet no matter how much Secretary Ross emphasizes "imagination and determination," the project is likely to fail.
When it comes to imagination, the government lacks it. Take, for example, NASA Administrator Robert Lightfoot's remarks during the most recent State of NASA address. While obscured by NASA's usual forward thinking on outer space, Lightfoot's notion of transformative transportation in 2030 was underwhelming.
That vision includes drones (which 5-year-olds play with now), supersonic passenger planes (like the Concorde ... which first took to the skies back in 1969), and flying cars (which, while transformative, are essentially drones that carry people). NASA's crystal ball has become a rearview mirror. The agency that took us to the moon in less than a decade, and still dreams of missions to Mars, believes that the most exciting development in U.S. airspace in 12 years will be three technologies that already exist.
Project Wing (Alphabet's drone initiative) began testing delivery drones in Australia because U.S. federal aviation law wouldn't allow it at the time. Dubai and China have both seen drone taxis take flight, while the United States may not see flying cars for another two years. We've had supersonic flight technology for decades, and it's only getting better, yet the FAA set a speed limit 45 years ago.
No amount of determination or brute government force can make bad investments good. This is a common mistake made by those who advocate for government intervention in capital markets. A lack of investment for seemingly good ideas, we're told, can be addressed through government spending. Not true.
The fact that not all projects get private funding is a beneficial feature of capital markets, not a failure. Not all projects should be funded. Private investors, facing the reality of losing out big for being too risky or unwilling to pursue good opportunities, have a strong incentive to cast aside bad bets.
Seeking out projects deemed too difficult or risky for private sector investment is a recipe for investing taxpayer dollars in those already-discarded bad bets. Look no further than the expensive default of the solar panel company Solyndra.
Even more troubling than the defaults are the systematic distortions this program could introduce into the capital market. Our research on other similar government programs shows that frequent recipients of awards don't lack access to private capital--they just happen to have political access.
This has a cascading effect. Once the government gets involved, that company is treated as a relatively safe asset. This attracts private capital-- independent of the project's true merit--shifting resources away from worthy, unsubsidized ventures that likely have more viable business plans and a much higher probability of success.
There's plenty to be encouraged by in the administration's plan. Occupational licensing reform, permitting improvements, and investments in rebuilding critical infrastructure are worthy endeavors. Let's double down on those efforts and leave venture capital to the venture capitalists.
Christopher Koopman and Veronique de Rugy are senior research fellows with the Mercatus Center at George Mason University.
Editorial on 02/25/2018
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