Private failure, not taxpayer-funded industrial policy, is an important part of economic growth

These days, most states have some sort of government agency responsible for bringing jobs into the state. Most of them, including Arizona’s new Commerce Authority, focus on “target” industries. Whether the focus is the solar industry or another group of companies, the punchline is always the same: a centrally-controlled body – either the agency or the state legislature – should direct taxpayer-financed resources to nurture specific companies for the good of the state’s economic future.

 But is this approach – prone as it is to the chasing of fads –the right one? It’s an important question because most companies don’t survive very long. And those that do aren’t the premiere companies forever or even for very long.

In his new book, Adapt: Why Success Always Starts with Failure, Financial Times columnist Tim Harford highlights a study by economic historian Leslie Hannah published in the late 1990s. Hannah looked at the 100 largest companies in the world in 1912 and tracked their lifecycle. He found that by the next decade ten of those companies had vanished. Over half had disappeared in the next 83 years.

There aren’t many on the list of successful companies we would recognize today. In fact, none of the companies in 1912’s top 10 were even in the top 100 by the 1990s.

The cycle continues today. Before the current recession, 10 percent of American companies disappeared every year. But this isn’t a permanent loss to long-term economic growth – those failed ventures are replaced by new and better companies that innovate and create more prosperity.

Instead of transferring taxpayer money to today’s favored industries, policymakers should take the long view, encouraging private-capital investments without government-imposed impediments.

A tax code that doesn’t penalize investment would be a vital first step. Even better: Get rid of the state income tax, creating a boon to entrepreneurship. Short of that, reducing the tax burden on investment success – such as eliminating the capital gains tax for investors – would be essential.

Many private investments may fail, but that’s OK. At least government policy won’t be committed to propping up a handful of connected companies with taxpayer money. Private investment activities – even when they fail – plant the seeds for long-term economic growth.

Stephen Slivinski is senior economist for the Goldwater Institute.

Learn More:

Goldwater Institute: Research shows states don’t stimulate job growth with taxpayer handouts

Arizona Commerce Authority: Public meeting agenda and minutes

Tim Harford: Failure – it’s everywhere