Give President Obama credit for saying the right thing when he praised America’s spirit of entrepreneurship in his State of the Union address. It’s a shame his policies contradict his rhetoric.
“None of us can predict with certainty what the next big industry will be, or where the new jobs will come from,” the President said, just moments before announcing that he can, in fact, predict that 1 million electric-powered cars should be on the street in 2015. “Thirty years ago, we couldn't know that something called the Internet would lead to an economic revolution. What we can do - what America does better than anyone - is spark the creativity and imagination of our people. We are the nation that put cars in driveways and computers in offices; the nation of Edison and the Wright brothers; of Google and Facebook. In America, innovation doesn't just change our lives. It's how we make a living.”
Policymakers should study the stories of Google and Facebook – as well as all the other entrepreneurial ventures that have created jobs in America – to inform their decision-making. If they did, we’d have a very different set of policies than both Republicans and Democrats have pursued for decades.
Google was founded by Larry Page and Sergey Brin. The first funding they received was $100,000 from Andy Bechtolsheim, the co-founder of Sun Microsystems in 1998. It continued to grow because of $25 million of funding provided in 1999 by the venture capital companies Kleiner Perkins and Sequoia Capital (firms that also helped Amazon.com, Genentech, Apple, and Kayak get started). Eventually, Google hired Wall Street investment bankers to underwrite an initial public offering which raised $1.67 billion.
Facebook, for those who haven’t seen the movie, was started by Mark Zuckerberg. It received its first funding from Peter Thiel, the founder of PayPal, who invested $200,000. In 2006, another venture capital firm, Greylock Partners, led a $25 million round of financing. At some point in the future, Facebook may choose to hire Wall Street investment bankers to underwrite an initial public offering to raise more money.
This money was used to hire employees and buy computer servers. This is how the free enterprise system works.
The free enterprise system does not just work for software companies. In the last five years, venture capital firms have invested nearly $14 billion in CleanTech companies, according to the National Venture Capital Association.
The advantage of the free enterprise model of investment is it recognizes President Obama’s observation that we cannot know what the next big industry will be. Some venture capitalists believe CleanTech is it – that’s why they invested all that money. Others think CleanTech is a lot of hype and they haven’t invested.
Eventually, one group will be proven more right than the other. They will make more money, attract more investors, and make new investments. Investors who are consistently wrong, on the other hand, will eventually go out of business. And in this way, the free market efficiently allocates capital from those that have it to those that need it.
Despite his rhetoric, President Obama has a different vision. He thinks the government, not the American people, will “win the future.” He believes the “best and the brightest” minds in America can sit in a room in Washington and choose winners and losers. So he has chosen the electric car to be a winner and wants 1 million of them on the streets by 2015.
How does he know that 1 million electric cars is the right number and not 500,000? Why not 2 million? Why electric cars and not plug-in hybrids or fuel cell-powered hydrogen cars? Why 2015 and not 2014? How about 2020?
Recognizing there is no way to know the answers to these questions requires a great deal of humility. Humility is what the free market is about: Anybody who wants to can invest in an idea they think has merit.
At the end of his State of the Union, Obama criticized other nations where “if the central government wants a railroad, they get a railroad - no matter how many homes are bulldozed.” How far down this road has our central government travelled? Our central planners pick winners by giving tax breaks or subsidies to favored industries; they pick losers by setting up burdensome regulations which put firms out of business or create a barrier to entry for potential entrepreneurs.
The favoritism played by elected politicians and unelected bureaucrats in Washington has spawned a multi-billion lobbying industry in Washington. Lobbyists work to ensure regulations are crafted in ways that help their clients and hurt the competition. Companies profit by hiring a lobbyist to secure them an earmark rather than creating a product that people want to buy. Businessmen secure a taxpayer subsidy for producing a product or sometimes a subsidy for not producing a product.
So don’t be fooled by President Obama’s false modesty. He does think he can predict what the next big industry will be. He thinks he knows where jobs will be created. And Washington chooses the answers to those questions every single day.