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Is Congress Ready to Invest in Regional Economies?

The Senate is considering a bill that would devote billions to create new tech hubs around the country. It faces an uncertain future, since picking winners makes other regions jealous.

The downtown skyline of the city St. Louis.
The city of St. Louis, Mo., could become one of the country's newest tech hubs, if Congress agrees to grant billions for R&D funding aimed at key metro areas.
A few parts of the country have made out like bandits in recent years. In the decade between the Great Recession and the pandemic plunge, 90 percent of the job growth in technology and innovation sectors occurred in just five major metropolitan areas. In any given year, roughly 80 percent of the nation’s venture capital funding flows to just three states: California, Massachusetts and New York. The pandemic didn’t change that.

The United States is less a land of opportunity than a nation with pockets of opportunity, suggest MIT economists Jonathan Gruber and Simon Johnson in their book Jump-Starting America. “We increasingly rely on a small set of superstar cities located on the coasts to drive our innovation economy,” they write. “Meanwhile, much of the rest of the country has missed out.”

There’s now serious interest in Washington in doing a better job of spreading the wealth around. A bipartisan proposal called the Endless Frontier Act would devote $100 billion over 10 years to research and development funding, including $10 billion that would go toward building up a new set of tech hubs across the nation.

“We have so much untapped potential throughout the country,” said Republican Sen. Todd Young of Indiana. “We have a number of people who aren’t fully in the game, people whose talents aren’t being harnessed, people who don’t live on the coasts, who don’t live in major metro areas like New York or Silicon Valley or Austin or the Research Triangle in North Carolina.”
Young is the lead co-sponsor of the Endless Frontier Act, along with Democratic Senate Majority Leader Chuck Schumer of New York. There are even more ambitious plans than theirs being presented. President Biden has proposed spending $20 billion to bolster new tech hubs, while a competing Senate bill calls for $80 billion.

“If this is well implemented,” Young said, “we’ll see generations of talent able to cycle through these tech hub locations, to make sure we’re firing on all cylinders as a country.”

The Endless Frontier Act faces its first test on Wednesday, when it will be considered by the Senate Commerce Committee. An earlier markup of the bill had to be postponed when it attracted 200 amendments, many concerned with the question of where exactly the money would be directed.

With the potential for billions in federal investment going to particular metropolitan areas, there’s naturally a lot of interest among senators in seeing that the funds head toward their own states. There’s also resistance from senators from rural states who don’t see much likely upside for their constituents.
“If you’re in Alabama, you might win this lottery,” says Robert Atkinson, president of the Information Technology and Innovation Foundation, which is promoting the expanded tech hub concept. “But there are places where it’s not really possible. Wyoming is not going to win one.”

Young and the bill’s other sponsors are looking to address these concerns. The whole thing may well be rewritten on Wednesday to guarantee tech hubs are sprinkled throughout each region overseen by the U.S. Economic Development Administration, while also directing more money to smaller markets.

This is the usual approach in Washington — making sure legislation creates enough winners to leave everyone happy. It’s sometimes derided as the “peanut butter problem” — money gets spread evenly all over, but it can be spread too thin to do much good.

That approach won’t work when it comes to building up new centers that can compete in the knowledge economy, Atkinson says. There has to be concentrated federal investment in a limited number of places that already have good bones in place — research universities and existing economic clusters — to have realistic hopes of creating hubs that will lure subsequent private investment.
“We need to get a few places that are so successful that companies around the world want to be there,” he says.

Picking Winners

There’s a persistent argument that the government has no business picking winners. The feds have certainly put money into companies and industries that have not paid off. The most famous recent example is Solyndra, a failed solar panel company that procured $535 million worth of federal loans under the Obama administration before going belly-up.

Industrial policy — the whole idea that the federal government can direct growth — has many doubters. “It’s really got to be locally driven,” says Joel Kotkin, an urban studies scholar at Chapman University. “They’ve got their act together internally, whether it’s Fargo or Fayetteville or Des Moines. I can’t see why the federal government should be in the business of picking one locality over another.”

Atkinson counters that there’s plenty of proof that metro areas had their fortunes made by federal investment, such as government contracts for semiconductors in Silicon Valley. From military bases to land-grant colleges to the Tennessee Valley Authority, the federal government has a long history of making bets that have paid off for particular places.

“Boston would have been a shoe manufacturer without MITRE” — a cybertechnology corporation — “that was really spurred by the Kennedy administration,” Atkinson says.

Now, with fresh billions on the table, the argument in Congress isn’t so much about whether the government can pick winners, but rather which winners might get picked. Sen. Roger Wicker of Mississippi, the top Republican on the Commerce Committee, has objected to the notion that a lot of money will start flowing out of Washington but not reach smaller states or rural areas.

Gruber, the MIT economist, notes that much of the nation’s rural population actually resides within designated metropolitan areas. They should see spillover effects if the dominant city in their region is chosen for federal funds. Even if they’re not directly adjacent to a new hub, it might be beneficial for people in the Midwest, for example, to seek jobs in a super-charged St. Louis or Cincinnati, without having to pack up and leave for Austin or Seattle.

“The notion that this is not useful for rural America is just simply wrong,” Gruber says.

There’s considerable irony in the fact that senators are fighting over which types of places might win federal designation as new tech hubs. Most federal research and development spending — and indeed the lion’s share of the money in the Endless Frontier Act itself — is spent using peer-reviewed National Science Foundation grant programs dominated by MIT, Berkeley and a few others.

The Mississippis and Wyomings of the world have no shot under those usual funding methods. The federal government would still pick winners, only it will be the usual, well-established suspects continuing to come out ahead.

“If you just run the same R&D system, it does flow to certain universities that dominate it,” says Mark Muro, policy director of the Brookings Institution’s Metropolitan Policy Program. “You have to actively steer if you want different outcomes from more R&D investment.”

When Amazon went looking for a second headquarters, seemingly every city in the country came up with a proposal. In the end, the company picked the most predictable places possible — the Washington, D.C., area and New York City. (The New York deal fell through but Amazon is still creating thousands of additional jobs there.)

Not every place can become Silicon Valley, but more places can be homes to HQ2s, Atkinson says, particularly as more major companies look to spread out their post-pandemic workforces.

“A lot of places will have second offices, but will put them in Shanghai or Tel Aviv,” he says. “They ought to be thinking about Indianapolis or Birmingham.”

The Importance of Federal Investment

The federal government has never gotten out of the business of funding scientific research, but it’s certainly been less of a priority in recent decades. During the 1960s, the feds devoted an amount equal to 2 percent of the economy to R&D. Now, it’s 0.6 percent, which leaves the U.S. 12th in the world.

“The Endless Frontier Act is an initiative in response to China’s very significant investments in R&D, cutting-edge 21st century technologies, things like artificial intelligence and quantum computing and genomics — the very platforms to build sectors of the economy on top of in the future,” Sen. Young told the Washington Post. “If we’re going to outgrow, out-innovate and ultimately out-compete the Chinese Communist Party and ensure our values prevail and are defended, then it’s essential that we invest in these areas.”

Firms have taken up some of the slack when it comes to R&D dollars, but they don’t do the kind of basic research that leads to breakthroughs or even entire new technologies, as was once the case with innovation centers such as Bell Labs. Most private R&D is devoted to improving specific products, not blue-skying new fields.

“IBM stopped rewarding its scientists for publications, offering rewards for patents instead,” Gruber says. “Publications by corporate scientists are down 60 percent over the past 50 years.”

The Nobel laureate Walter Gilbert initially proposed setting up a private company to run what would become the Human Genome Project. That idea failed, with most of the money ultimately provided by the National Institutes of Health. Mapping DNA has paid off not just in scientific but economic terms, with 270,000 Americans employed in the genomics sector. Not to mention its importance in developing coronavirus vaccines.

If there’s a case to be made for increasing federal investment, there’s also an argument for trying to shift some of the money to more places. The fight in Congress right now is over who might receive the pool of tech hub money Young and Schumer are proposing. Ultimately, the whole idea of public investment in R&D would enjoy greater political support if the economic benefits weren’t all being reaped by San Francisco, Boston and a few other places.

“Basically,” Gruber says, “the whole country wins if we can relocate some of our tech economy to the middle of the country.”
Alan Greenblatt is the editor of Governing. He can be found on Twitter at @AlanGreenblatt.
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