RALEIGH – If, in general, the excess of legislation in the North Carolina General Assembly can properly be compared to noxious emissions, then a new bill sponsored by Sen. Fletcher Hartsell must surely qualify as something worse. Perhaps something involving deadly radiation.
Hartsell, a Cabarrus County Republican, wants the State of North Carolina to act as a guarantor of up to $30 million for each venture-capital firm that chooses to invest in North Carolina businesses. His proposed New North Carolina Venture Capital Program would receive a $100 million appropriation next year to cover the start-up costs.
It is entirely possible that, as hinted in a Raleigh News & Observer piece, the intent of the bill is to shower billionaire David Murdock with even more taxpayer largesse for his North Carolina Research Campus in Kannapolis. He had promised to put up $100 million of his own money in venture capital to encourage research-based enterprises at the campus. If the investment pays off, he wins. If it doesn’t, he might well find it convenient to foist some of the cost off on taxpayers in Asheville, Wilmington, and elsewhere. But you need not to take note of Hartsell’s home address, his former role as Cabarrus County attorney, and the growing controversy there about subsidizing Murdock's operations to come up with reasons why this legislation is ghastly.
I wish the first and foremost reason could be that North Carolina state government had wisely kept its nose, and the taxpayers’ money, out of the business of backing private-sector business deals. But that’s not true. Setting aside for the moment the increasing use of targeted tax incentives, it’s worth remembering that the state legislature has for years appropriated a few million dollars a year to the North Carolina Biotechnology Center to make grants to start-up firms. This was always a bad precedent. So were previous policies that used state taxpayer funds to guarantee farm and economic-development loans in rural areas. Now it should be more apparent why.
Once down the road of government “investing” other people’s money in private business ventures, it is difficult to know where to stop. Politicians, famously a class of people with an exalted view of their own acumen and importance, will inevitably be tempted to “think big.” If backing a few biotech firms or rural-development loans is an appropriate role for state government, why not back larger-scale businesses?
The correct answer is that investing in private business ventures is never an appropriate role for government, an institution based on the use of force to accomplish common ends. Government exists to perform tasks that free people, acting voluntarily, cannot accomplish. But you and I can get together with others and form a business. We can seek funds to capitalize the business from banks, partners, investors, or (as is often true) from friends and family. All who risk their own money in the venture have the opportunity to prosper if it does well. And they lose it if the venture does poorly. This relationship between risk and reward is critical to the operation of free enterprise. History clearly shows that when government interferes at either end of the risk-reward relationship – by artificially reducing the risk through subsidies and guarantees or artificially reducing the reward through confiscatory taxes and regulations – the economic consequences range from disappointing to disastrous.
In the present case, using government to decrease the risk associated with some investments will inevitable draw scarce capital away from higher-value uses. Government planners have no means whatsoever to outguess investors in the market about which ventures will succeed or fail. There is nothing more basic to understanding economics than to appreciate the role markets play in organizing and transmitting far-flung, obscure bits of information. This role is impossible within a system of corporate socialism, in which politically connected businesses need not acquire financial capital by competing with other firms to attract risk-calculating investors and can instead governmental power to weight the scales in their favor.
What Hartsell is proposing is that state government force North Carolinians to become venture capitalists, regardless of how we might prefer to dispose of our own money, and then entrust the investing of those funds to bureaucrats or political operators. Sure, some individuals will benefit from such a policy. Some of these may even be billionaires with golden promises and silver tongues. But North Carolina is unlikely to prosper by adopting the cutting-edge policies of 1920s Italy or 1950s Romania.
Hood is president of the John Locke Foundation.