Upping the Ante

California's stem-cell gamble could profoundly alter the stakes for creating jobs and business opportunities in a state.
February 2005
William Fulton
By William Fulton  |  Columnist
Director of the Kinder Institute for Urban Research at Rice University and former mayor of Ventura, Calif.

Here in California, we are often on the cutting edge of economic development. Now we're about to enter a whole new realm, thanks to the recent passage of Proposition 71, the stem-cell initiative.

Although it won almost 60 percent of the votes cast in November-- Prop. 71 is one of the most peculiar pieces of public policy you'll ever see. It requires a nearly bankrupt state to float $3 billion in bonds to fund basic medical research of the type that the federal government or private research institutions typically undertake. This money is to be doled out by a board that will be mostly insulated from political oversight. Its members will be individuals, such as representatives of universities and research centers, that would certainly be viewed under other state laws as having a conflict of interest. And the measure was enthusiastically supported by a Republican governor, even though this governor had previously opposed all new state debt and also campaigned for an incumbent president who is morally opposed to most of the research agenda.

But what's at stake, in economic development terms, is enormous. And if the Prop. 71 gamble succeeds, it could alter the state-level economic development stakes in a profound way.

State-level economic development efforts usually are focused on jobs. A state might target a sector of the economy that could be lured into the state or is at risk of leaving. Then the state's economic development officials offer to build roads and other infrastructure, train employees, provide tax breaks or sometimes even give cash payments to companies that relocate, stay or expand in the state. The most generous view is that state economic development efforts help build and retain a business and jobs base that is a good match for the state. The most cynical view is that state economic development efforts do nothing more than buy jobs. But one thing is constant: State efforts target companies and jobs that already exist.

Prop. 71 seeks to use state funds--borrowed funds, no less--to stimulate basic medical research that will presumably keep California at the forefront of the biotech economy for the next decade or two. No one disputes that there is boundless economic opportunity in the new treatments and therapies resulting from medical breakthroughs in stem- cell research and related fields. And California--although expensive, crowded and broke as a state government--still has a vast and impressive biotech infrastructure.

By passing Prop. 71, however, California has taken an unprecedented step for a state: It is essentially replacing the federal government as the funder of basic research needed to create biotech breakthroughs. Many regions have used biotech as an economic development engine by developing research institutions that will spin off breakthroughs, patents and nearby companies. But usually they have done so by competing for federal research dollars, especially from the National Institutes of Health.

In the case of Prop. 71, however, California is exploiting an opening created by President Bush's moral qualms about stem-cell research. Dominated by "Red State" thinking, the federal government is severely constrained in conducting stem-cell research and is unlikely to play its customary role as the funder of basic breakthroughs. By contrast, voters in the Big Blue State have agreed to make stem-cell research a constitutional right under the state constitution. Ironically, Blue States such as California may reap huge economic benefits if they are willing to pursue medical research that Bush and other Red State conservatives are reluctant to support.

California is not alone in trying to kick-start the biotech sector. Arizona raised $90 million for the Phoenix-based Translational Genomics Institute. Florida is contributing hundreds of millions of dollars for the East Coast branch of San Diego-based Scripps Research Institute. But the passage of Prop. 71 is upping the ante more than anybody imagined. Already, research scientists are flowing out of the Washington, D.C., area to California. And Arizona is fearful that the celebrated TGEN effort is pint-sized in comparison.

The exact payoff to California is hard to estimate. No one can predict how much economic activity Prop. 71 will stimulate or how much of the likely bonanza California will be able to retain. The initiative vaguely requires that the state benefit economically from patents and other breakthroughs but doesn't specify how. But there is little question that a payoff will come and that California will retain its lead in the biotech field because of Prop. 71.

The old-fashioned game of chasing jobs probably won't go away. After all, governors love to cut ribbons at factories--even our movie-star governor here in California. But in passing Prop. 71, we in California may be leading the states into a previously uncharted territory. In the future, it won't be enough to target the jobs. States also will have to invest in the breakthroughs.