Economic Growth
Believe it or not, I'm always looking for and celebrating what is, by my standards, good news from the world of business.
My critiques go primarily to business' requests for, and government's willing compliance in providing, taxpayer subsidies of various kinds to for-profit enterprises. See, e.g., Nicholas Johnson, "Golden Rules & Revolutions: A Series - VIII," April 19, 2008 (with links to the prior seven).
I think "the marketplace," "free private enterprise," and "competition" is what business does best -- not joint enterprises with government. I also think government can do best what governments have traditionally done, governments in this country and elsewhere: roads, schools, parks and other public lands, libraries, police and fire protection, and so forth. It's only the combination I find self-defeating and problematical -- especially for the taxpayers who end up picking up the bill. See, e.g., Nicholas Johnson, "Time to Learn From What Works," Iowa City Press-Citizen, January 20, 2006; Nicholas Johnson, "Growing Iowa's Economy the Right Way," April 27, 2008.
But because some people characterize anyone who criticizes TIFs and other subsidies for business as "anti-business" I try to make a point of noting with praise those business successes that do not involve "corporate welfare."
About half-way through Nicholas Johnson, "Subsidizing the Sheraton" in "Bush and Giveaways to Sheraton," April 25, 2008, I note: "For example, although I haven't yet investigated the program and its payback rates, I'm intrigued by another story in this morning's paper, Kathryn Fiegen, "City Loans Help businesses Get Started; Number of Applications for program Has Almost Tripled," Iowa City Press-Citizen, April 25, 2008, p. A1.
Even more self-reliant, Jay Honeck, owner of the Alexis Park Inn, posted a comment on the Press-Citizen's Web site explaining how he and his wife have built their business in Iowa City in the face of government subsidies for his competitors but not for him. Needless to say, he's not enthusiastic about the prospect of the City of Iowa City transferring taxpayers' money to the Sheriton -- as the title of his piece suggests: "Please, not again!" Here are some excerpts:
In 2002 my wife and I bought the old Alexis Park Inn next to Iowa City's airport. It was in bad shape, with a checkered reputation, but we knew a diamond in the rough when we saw it.Posted by: jjhoneck on Wed Apr 23, 2008 6:23 pm and reproduced in Nicholas Johnson, "Call the Cops, Robbery in Progress," April 24, 2008.
Since then we have spent these last six years remodeling and refining our service, until we now have the top-rated hotel in Iowa City. We have seen double-digit increases in both revenue and occupancy throughout that period -- a result few would have predicted.
The lesson? Offer a great lodging experience at a fair price, and you will prosper.
During those six years we never applied for nor accepted government assistance. We did not incur any debt, choosing to fund the renovations with the cash flow from the business. This is MUCH harder to do, and takes much longer -- but, in the end, it's the only way to assure success in a business with razor-thin margins.
And so it is this morning that I note another story of business success without government subsidy: The Gazette's report of what a couple of venture capitalists have done: George C. Ford, "$4 million for Iowa City business; Venture capitalists invest in soybean products firm," The Gazette, May 3, 2008, p. B12.
"Venture capital" and "venture capitalists," as the names imply, involve the provision of "capital" (money) for "ventures" (new business ideas) by investors who are in the business of taking risks -- risks beyond those that banks are willing to take -- knowing they'll lose on many, but more than make up for those losses with the enormous returns that sometimes come their way from the winners. Venture capitalists were much of the driving force behind the 1990s' "dot com boom" in the Silicon Valley of California, where many are still located. (If you'd like a quick overview of more information, "Venture Capital," Wickipedia.org, is fairly good.)
The Gazette's story begins,
Two venture capital firms are making a $4 million investment in a 4-year-old Eastern Iowa agribusiness.Now let me make clear at the outset that all I know about this business transaction is literally "what I read in the papers." There could already, or also, be tax breaks and government subsidies involved that the story doesn't mention. The venture capitalists could be taking a disproportionately and unfairly large share of the ownership in exchange for their investment. Without knowing more I'm not prepared to be giving this deal any awards.
Asoyia of Iowa City grows and processes 1 percent ultra low linolenic soybeans to produce specialty trans-fat-free oils.
St. Louis-based Prolog Ventures, the lead investor, was joined by Life Science Partners of Boston.
I just cite it as an example of venture capital.
And why?
Because some of those who advocate intertwining government and business with tax breaks, subsidies, TIFs, earmarks and other deals make the argument that unless "we" bribe the company in question ("we" meaning the taxpayers of Iowa, or Johnson County, or Iowa City) no businesses will ever come here; they'll just take some other place's bribe and go elsewhere. "Everybody else is doing it, so we have to do it, too." The free private enterprise system will collapse without corporate welfare from government.
Well, I don't believe it, and from this story it would appear that Prolog Ventures and Life Science Partners don't believe it either.
There are lots of other ways than corporate welfare to get a business economy up and running: The entrepreneurs. Investment from their family and friends. Shareholders. Bank and other loans.
And, if even all of those sources are not enough there are always the venture capitalists, looking for an opportunity to invest in "the next big thing" -- in this case, a $4 million investment in "ultra low linolenic soybeans to produce specialty trans-fat-free oils."
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