Opinion: Daily Journal

It’s No Exception to the Rule

RALEIGH – The Microelectronics Center of North Carolina was supposed to be the exception that disproved the rule.

MCNC, created in 1980 by Gov. Jim Hunt has part of an effort to recruit GE’s R&D headquarters, has provided computing services to state universities. It also used its millions of annual subsidies from North Carolina taxpayers – adding up to a quarter-billion dollars through the late 1990s – to do research in microcomputing, supercomputing, and telecom. Industrial-policy wonks cited MCNC as a precedent for a host of similar taxpayer-funded projects that debuted in the 1980s and 1990s, including the Technological Development Authority, the Information Highway, and the Global TransPark.

Fiscal conservatives and, starting in 1990, my colleagues and I at JLF fumed about this arrangement. We argued that state government had no business trying to play venture capitalist, that tax dollars should never be risked on business enterprises that should be funded and tested in the private marketplace.

Eventually, due to the persistence of critics and some changes in the composition of the General Assembly, the message stuck. MCNC was weaned off of direct state appropriation (though it continued to receive tax dollars indirectly as a contractor for UNC). Then, in 2001, supporters of the original project claimed vindication: a spin-off of MCNC, Cronos Integrated Microsystems, was sold to Silicon Valley-based JDS Uniphase for about $200 million in stock proceeds.

“See,” MCNC boosters said, “we made a great investment! “

To which the appropriate answer was, “What do you mean ‘we’”? Since the taxpayers put hundreds of millions of dollars into MCNC, taxpayers should have received something similar out of the deal. But no such transfer occurred. Instead, MCNC officials said that they would bank the $200 million and fund their ongoing operations off the returns.

That was brazen enough, and they got away with it. But by 2004, it turned out, their appetites for public funds had returned. Rather than spending just the interest, MCNC was dipping into the endowment to cover operating losses. Triangle Business Journal reports that the withdrawal totaled nearly $71 million in 2003 alone. Reeling from the financial hit, MCNC tried in 2004 to secure direct state funding. Denied (thank goodness), the nonprofit then approached RTI International about purchasing three of MCNC’s divisions for an undisclosed sum.

When completed, the transaction will leave MCNC with 10 staffers, down from 93 currently, and just two divisions: the supercomputing work for Triangle universities (itself partially funded with tax dollars) and a venture-capital operation.

If this is a success of government-funded business, I’d hate to see a failure. North Carolina taxpayers were compelled to invest gobs of their hard-earned dollars into a private venture that made a few private individuals wealthy (from the sale of Cronos), derived much of its income from government contracts, and then mismanaged its finances to such a degree that it teetered on the brink of insolvency.

Let me make this simple: government and business are two different things. They operate under different rules and incentives. One is funded coercively. One is funded voluntarily. As much as possible, they should be kept in their distinct and important spheres.

They shouldn’t be mixed together. The results are much like those of my high-school chemistry days: not pretty, kinda smelly.

Hood is president of the John Locke Foundation and publisher of Carolina Journal.