Tuesday, April 23, 2013

Game Theory and Public Policy: SoloPower, United Streetcar & Nike


Molly Young has an excellent article in The Oregonian explaining the downfall of SoloPower and the various incentives bestowed upon them by the feds, the state and the City of Portland and related agencies.  It wasn't long ago at all that the state was still doubling down on its investment in SoloPower.

This investment appears to be a complete bust.

Over the weekend The Oregonian's Brad Schmidt had a similarly excellent article about the troubles at United Streetcar, another beneficiary of public largess.

This investment appears troubled and its success seems entirely dependant on other municipalities being forced to source streetcars domestically.

These two stories along with the ultimately failed efforts to lure Nike to build on the South Waterfront point out a particularly risky aspect of public policy: proactive interventions in the local economy.

I have been weary of investments in specific industries and especially for ones in which it seems dubious that the region has a comparative advantage.  I do not like all the investment in manufacturing of solar cells as it seems highly unlikely that without government subsidy there would be any economic reason for manufacturing to stay here.  The counter-argument is, I suppose, that after initial manufacturing here, the operation could morph into more local R&D and engineering while the bulk of manufacturing got shipped overseas.

I never liked the streetcar for this same reason especially because the counterargument is not really credible in this case.  The logic of the streetcar investment rests on the creation of a self-sustaining industry in the future.  It could happen - but I suspect that the streetcar demand domestically is not going to be enough to see it mature and scale up to something viable.

What we end up doing is overpaying in both time and money for streetcars whose quality is probably not as good as the Slovakian ones currently in operation.  But local jobs!, cry the critics - what about all the great jobs.  To which the rejoinder is familiar: pay a whole lot less in public money for the streetcar and invest the extra in education, infrastructure, etc. that will lead to overall economic improvement.

Finally there is Nike, which shared a little of the same policy question: should you bet public money on this risky venture.  To which I argued yes (from the perspective of the City of Portland).  With Nike you were on as safe territory as you can get company-wise, the bet was on how other private investments in the surrounding areas would evolve. I thought it a pretty good gamble.

Which all leads back to the modern reality that policy makers are increasingly involved in game-theoretic decisions - how much public investment to make in trying to lure companies, sustain companies, and create companies.   The reality is the world now works this way and taking the high road and not offering anything will probably mean communities lose out on investment.  

But it will always be a game and a risky one at that.  And in the press we will hear disproportionately about the failures, because they are easy to notice. But policy makers don't want to get caught chasing their tail, always offering greater and greater incentives because in game theory reputation matters and if you get a reputation as an easy mark, the other players will start holding out for more.

1 comment:

Marc Onesta said...

Solar power - as much of a great idea and concept it is, is a huge economic bust! Public tax dollars funds should not go towards picking sides of private enterprise. Market forces will work under a balanced capitalistic system when public service stays out.