Thursday, November 3, 2011

Cut Out The (Private Sector) Middleman

State Senators Tim Cullen and Dale Schultz have jumped on the venture capital bandwagon. Their recent Journal Sentinel opinion piece touted a venture capital bill for Wisconsin. Venture capital is described by Investopedia as, "Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This form of raising capital is popular among new companies or ventures with limited operating history, which cannot raise funds by issuing debt. The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity."

The jobs are right around the corner.

"We believe that properly structured and administered by non-politicians, the venture capital bill will be our most important long-term jobs legislation of the year," state Cullen and Schultz.

Huh? The most important jobs legislation? If that's the case, we're in real trouble. Venture capital is a small part of capital markets and much less efficient than the glowing mythology created by venture capital firms and the media.

Now, some of the caveats of the bill are laudable: making sure private money is invested before public dollars are committed and rejecting proposals that use a CAPCO investment structure.

But even those caveats don't mean venture capital is a panacea for job creation.

The authors also state, perplexingly, "We should not put public dollars where private dollars don't want to go." WTF?! Um, public goods and public investment are exactly that - the stuff businesses won't do because they generally can't see a clear and immediate profit from such (but nonetheless are still integral to our daily lives and counted on by all citizens). Business isn't going to build the Hoan Bridge or the Marquette Interchange, repair and plow the roads, nor ensure clear air and water. These types of costs are externalized onto the general public by businesses. They benefit disproportionately from such infrastructure, but aren't willing to decrease their bottom line for it. So, yeah, we do want public dollars to go where private dollars won't go. And it would also be nice of those parasites would pay their fair share.

For some reason, in the article, the state senators parrot the oft-repeated right-wing theme of bashing government, "The Legislature should reject any plan that presumes government can make better decisions with your money than investors can with their own money." Based on the fact that the majority of American citizens are ill-prepared for retirement (have been unsuccessful in investing for their golden years), this mantra falls flat in the face of the evidence. Ask Social Security recipients if they are happy with that investment program which allows them to invest during their working years (over such time their investment appreciates at a steady, reliable rate) and then receive a defined benefit when they retire.

How about a good old fashioned investment in a nationwide public works program? Post WWII, it created the middle-class and erected the infrastructure that made us the greatest nation and the envy of the world. Now other countries have passed us by, or at least have a plan for public investment and realize it's importance. Instead of directly investing through our government, to put our fellow Americans back to work, our legislators are selling the debunked idea of channelling such investment through private sector machinations. Venture capital funds (which may be a viable, small portion of government-initiated job creation) are, generally, a circuitous and inefficient route to job creation.

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