Illinois Taxpayer Dollars to be Plowed Into Tech Startups

M.W. Frerichs, Illinois State Treasurer

This past Tuesday (Jan. 26), Illinois State Treasurer Michael Frerichs announced that Illinois will invest more than $220 million in emerging tech companies, which he predicted will create an estimated 3,600 jobs over the the next three years. In an article in the current issue of Crain’s Chicago Business, Treasurer Frerichs is quoted as saying:

People ask how can you afford to make these investments at a time like this? I ask, how can you afford not to make these investments?”

In the mind of any thinking person, alarms should go off whenever someone answers a question with a question, and this goes double for public office holders such as Mr. Frerichs.

The real questions are why anyone should consider state government capable of picking winners among high-tech venture startups, and, more importantly, whether state government should be using public funds to pick winners in the first place.

Over the course of decades past, there have been some notable successes of government (principally federal, rather than state) sponsorship of R&D. After WWII, the U.S. Gov’t. sponsored research into turbine engines for use in jet fighter planes, including using what was valuable in jet engine technology Germany had developed during the war. Likewise, post-war federal investment in computer research for defense purposes started the computer revolution and gave us the internet that we have today.

But those are the success stories. Did Mr. Frerichs and everyone else at Crain’s forget about that Solyndra investment? Sure, it was an investment at the federal rather than the state level, but that’s a quibble. Loan guarantees for Solyndra are in essence no different from the $220 million in taxpayer funds that Illinois is about to plow into tech start-up ventures.

Plus, the feds get to play with much bigger chunks of change than the $220 million that Mr. Frerichs is talking about, which means that they have better odds of having at least a few successful companies amidst all the tech startups that wind up in the dustbin of market history.

According to the Treasurer’s press release, the $220 million “will come from existing investments and is not entangled in the state budget impasse that involves the General Revenue Fund.” Is that supposed to take a load off our minds? Could that money not be used for other, more pressing needs?

Frerichs asks how Illinois can not make such investments. Well, for starters, it’s been a few years now and Illinois still doesn’t have a budget. The City of Chicago is about to impose the largest real property tax increase since Fort Dearborn was disassembled and used for firewood. The Chicago Board of Ed is staring at a funding gap in the hundreds of millions of dollars, and there’s no sign of any fiscal cavalry riding to the rescue from Fort Springfield. To make matters worse (yes, they can get worse), one may reasonably ask whether the CPS financial debacle will require yet another real property tax increase.

The only safe conclusion is: no option is off the table.

But let’s turn back to picking winners for a moment. Mr. Frerichs will be investing public moneys indirectly, in venture funds managed by supposed investment pros, and not directly in the startup companies themselves. That’s a distinction without a difference. By investing indirectly, Illinois state government merely delegates, in part, winner-picking to the fund’s managers.

If I remember correctly, the Rauner administration is of the Republican persuasion. The gospel according to the Republican patron saint, Ronald of Reagan, tells us that “government is not the solution to our problem; government is the problem.” I guess that gospel doesn’t apply when government is handing out money to venture capital funds.

Having the government pick winners, whether directly or indirectly, smells a lot like “government industrial policy,” which in turn smells a lot like (dare I say it?) … socialism. (!!!)  There’s no evidence anywhere that any level of government, state or federal, is capable of picking winning technologies in the market. Sure, the turbine technology and the computer revolution were nice. But the history of “industrial policy” (the formal term for government picking winners and losers) presents an almost uniform series of abject failures. If one thinks that the state’s indirect investment of $220 million will leave the venture fund managers to pick the winners free of state government influence, I can sell you a bridge that connects Brooklyn to lower Manhattan, and it’s a genuine antique.

Remember that country, what’s the name of it again…oh, yes, Japan. Japan had its Ministry of International Trade and Industry, and we can see what a great success that was. MITI was supposed to foster innovative government/industrial partnerships for investment. Sound familiar? But even the Japanese admit that such limited growth as they’ve had came from not following, rather than following, MITI’s directions. MITI favored the development of steelmaking in Japan, and disfavored such exports as autos and electronics. Japan now has three times the steelmaking capacity that it needs, with no native natural resources (iron ore, for example) with which to feed it even if there were market demand for more steel. Meanwhile, automobiles and electronics have been Japan’s landmark successes in international trade.

State government always characterizes these taxpayer-funded venture investments as the “but for” money, the funding without which a promising project would not go forward. That’s patently false. If a project is promising enough, the private sector will fund it.

Worse still, some economists claim that when government steps in with this type of investment, it doesn’t add any money to the pot of investment funds, but instead only displaces it, and that the funding so displaced is much larger than the government funds invested. That’s a net negative.

I’d just like to hear the Republican rationalization for having government making industrial policy and having state officials pick, or influence the picking of, winners and losers in the market.

Read Full Post »

China’s Slow-Down

Xi Jinping, President of the PRC and General Secretary of the Chinese Communist Party

Thus does le capitalisme dirigiste hit the wall.  CNBC reports that China’s economic growth edged down to 6.9 percent in the final quarter of 2015 as trade and consumer spending weakened, dragging full-year growth to its lowest in 25 years. Since virtually no self-respecting Western economist or business forecaster believes any official Chinese government-issued economic data, it’s a fair bet that China’s real growth rate is much, much lower than that.

Only a few years ago, foreign money flooded into China as one of the so-called emerging market economies, along with Turkey (which The Sparkspread addressed recently), Brazil, and a few other countries. Commodity prices boomed along with the China boom, although the China boom itself was a debt-fueled spree enabled by China’s banks — under state direction, of course. It made the 1980’s LBO boom in the US look like a sedate tea party. For example: China manufactured more cement between 2010 and 2013 than the United States produced during the entire 20th century.

That is mind-boggling. But the party has to run out of booze at some point, or else the guests reach the point where they lie insensible on the floor, unable to imbibe one more drop.

China’s banks funded all of the booze and buffet tables with huge loans, most of which will never be paid back. The “lackluster” 6.9% growth rate reflects in part the exhaustion of the country’s banks. How can they continue to lend the vast sums needed to prop up China’s exorbitant growth rates? The short answer is, they can’t. When China reports a 6.9% growth rate, it’s more likely that the country’s real growth growth rate is stuck at mid-1970’s levels, back when Mao Tse Tung held the reins.

This is coupled with something of a national identity crisis. What does it mean to be China in the world of the 21st century? It is building artificial islands in international waters and claiming that such construction makes them Chinese territorial waters. It has one aircraft carrier and wants a few more. Its economy did grow by leaps and bounds, every year, for the last few decades. But how does China reconcile all that money and muscle-flexing with its traditional victimology? True, China was a victim of past aggression, whether from the West in the 19th and early 20th centuries, or from Japan between 1931 through the end of WWII. But its recent and remarkable progress imports assumption of a greater responsibility for constructive leadership in the world. Whether the country lives up to that responsibility remains to be seen. It certainly won’t happen without internal stability. The legitimacy of China’s Communist Party rule depends in large measure on a continued impressive growth rate, and that is by no means a sure thing.

Read Full Post »

Plausible De-Rahmability

The lead article in today’s Chicago Tribune reviews the chronology of City Hall events following the shooting of Laquan McDonald in late 2014. Rahm met frequently with his top aides and Police Superintendent Gerry McCarthy. Rahm expects the people of the City of Chicago to believe that no one bothered to tell him about the McDonald shooting, about the dash cam tape that gave the lie to all of the Chicago Police Department after-action reports on the shooting, or about the pressure applied to civilian witnesses to change their stories.

The thought that Rahm Emmanuel’s top aides and advisors, including a top-level attorney in the Law Department and the Chicago police superintendent, would not tell him about the McDonald shooting, that they would withhold from him information about a matter that was likely to lead to a multi-million dollar settlement payout by the  City of Chicago, is laughable on its face.

And that’s just the dollar side of the equation. The political side makes his claims of ignorance even more laughable. No one could work in any position of responsibility under Rahm Emmanuel without having a very finely-honed political sense; maybe not as fine as Rahm’s own, but certainly far above average. While the McDonald drama played out, Rahm was in an unusually close election, followed by an even more unusual run-off election against Chuy Garcia. No one working for Rahm could not know what a political bombshell this was, especially in this election year. Yet the Mayor expects us to believe that nobody told him anything substantive.

Right.

Remember, we’re not talking about just any Chicago mayor. We’re talking about Rahm Emmanuel. This is the same Rahm who cherishes and flaunts his reputation as the ass-kicker to end all ass-kicking, the same Rahm who could give lessons in micro-management to the likes of Walt Disney, Frank Perdue and Bill Marriott, each a notorious micro-manager.

What fairly leaps out of the email trail is the complete absence of Rahm’s name as an addressee. That is precisely the kind of trail a participant wishing to be viewed subsequently as a non-participant would try to establish.

One of the chief duties of Rahm’s acolytes is to keep as much distance as possible between Rahm and any scandal. If there’s a smoking gun lying around somewhere, you’d better be sure Rahm’s fingerprints aren’t on it, or you’ll be looking for a new job. If Rahm had a coat of arms with a motto, it would probably run something like this: “Honi soit qui mauvaises nouvelles ne garder pas tres loin de Rahm.” (“Evil be to him who fails to keep bad news far away from Rahm.)

Rahm apparently thinks that Chicago ought to just accept his story and get over it. (“Move  along, nothing to see here.”) It is this type of attitude that explains why outsiders like Trump and Sanders are leading in the polls in this political year.

Read Full Post »

Istanbul Attack: Will it End Erdogan’s Double Game?

Recep Tayyip Erdogan, President of Turkey

Based on the latest reports available, ten people, mostly German tourists, were killed today in a suicide bombing in Instanbul’s Blue Mosque/ Hagia Sophia district, one of that city’s major historic tourist attractions. The attack is reportedly the work of the Islamic State and was carried out by a Syrian national who crossed into Turkey recently. The big question, though is whether this will end President Recep Tayyip Erdogan’s double game, in which Turkey, a NATO country, pretends to be an ally of the West, but actually does more for the Islamic State than Switzerland ever did for Nazi Germany.

As you can see from any map, IS has neither ports nor pipelines. Erdogan permits the Islamic State to truck crude oil into Turkey, sell it there, and buy what it needs. Without Turkey’s complicity (not to mention funding from the Saudis and other Gulf States), Daesh’s capabilities would be no greater than those of Boko Haram.

Last month, Russia, still angry about Turkey shooting down one of its fighter jets that crossed into Turkish airspace, published photos of oil trucks delivering crude from ISIS wells to Turkish refineries and ports. Erdogan’s son is heavily involved in the IS oil trade, and his son-in-law serves as Turkey’s energy minister.

Erdogan, a Sunni, is opposed to Syria’s Bashar al Assad, an Alawite Shia. Support of Daesh/IS in its fight against Assad thus serves certain of Erdogan’s foreign policy and religious goals. Of course, our esteemed ally’s assistance to IS cuts directly against US policy in the region. But Obama can’t publicly criticize Turkey because the US needs it as a staging area for the US forces still in Afghanistan and Iraq. Turkey was also supposed to be the birthing room for the “moderate rebels” who, we were told, would fight Assad and then turn around and fight Jabhat al-Nusra, the Al Qaeda affiliate in Syria, and IS. But the effort to arm a group of these so-called “moderate rebels” (a candidate for the Oxymoron Hall of Fame) is a complete non-starter. All of that fine US military hardware that was intended for the non-existent moderate rebel force has been going directly into the hands of Jabhat al-Nusra and (yes, get this) Islamic State. That’s right, the US has been arming IS, courtesy of Erdogan.

Erdogan’s support for Daesh is also a function of his relationship with the rich Gulf sheikdoms, like Qatar, in particular, from whom he gets funding for domestic programs that preserve his popularity with the Turkish electorate. The Gulf States fund IS because they’ll take IS’s cruelty and barbarism over a Shia victory in Syria any day of the week.

But best of all for Erdogan, the Islamic State acts as his proxy army in his war against the Kurds. Erdogan has to worry not only about Kurdish rebels inside Turkey’s borders, but also about the growing Kurdish settlements in the Rojava, the area in the very north of Syria along the Turkey-Syria frontier. Erdogan probably thought that if he remained on good terms with Daesh that they would not strike in Turkey.

His calculation was proved wrong earlier today in Istanbul.

Daesh survives in large part because Erdogan keeps the Turkish border open for it. The American and Western European press create the impression that the wayward adolescents and other crazies who want to join Daesh have to get to Turkey and then sneak across the border while cleverly avoiding Turkish authorities. That happens only in Obama’s dreams. In reality, Erdogan does everything short of giving them a free bus ticket to Raqqa.

So why did IS attack Istanbul? Has the Erdogan-IS relationship turned sour? Erdogan would like Turkey to be the keystone for the balance of power in the Middle East, between Israel and the Islamic world. Maybe IS sees that as a back door way of re-establishing the Caliphate that used to be in Istanbul back in the days of the Ottoman Empire. Perhaps IS is telling Erdogan that there’s only room enough for one Caliph in this Middle East.

Read Full Post »

Exelon Shocked (Shocked!) at First Energy’s Ohio Bailout

Rick and Inspector Louis Renault, at the Cafe Americain, Casablanca, ca. 1942.

Who can forget that scene in Casablanca when Inspector Louis Renault (Claude Rains) shuts down Rick’s (Humphrey Bogart) Café Americain because he’s shocked (shocked!) to find that gambling is going on in Rick’s establishment. Just then, a croupier hands a thick wad of bills to Inspector Renault: “Your winnings, sir.” Ever the gentleman, the Inspector thanks him very much.

Exelon has now assumed the role of Inspector Renault before the Ohio Public Utilities Commission, where it is shocked (shocked!) that First Energy, one of the nation’s largest merchant generators, may get a bailout in the form of revenue guarantees that will, supposedly, enable it to keep its generating stations open. (Ohio P.U.C. Docket No. 14-1297-EL-SSO, Second Supplemental Testimony of L. Campbell on behalf of Constellation and Exelon Generation).

Yes, that’s right, Exelon, the parent of Exelon Generation: the same Illinois-based nuclear generation giant that tally-ho’d down to Springfield last year to seek its own economic protectionism measure (Illinois General Assembly, H.B. 3293) in the form of a new “low carbon emission standard,” a standard so narrowly tailored that Exelon Generation was its only conceivable beneficiary. Exelon had, and still has, its hands full trying to polish its own Illinois bailout with high-gloss “market-based” varnish.

In Ohio, First Energy confronts the same issue that Exelon and others have been complaining about for several years now: market electricity prices are so low that First Energy, like Exelon, is threatening to shutter some of its generating stations unless the state bails it out.

As The Sparkspread previously explained, in the early 2000s Exelon, First Energy and many other large electric utilities, like so many itinerant free market monks, preached a pure, Ayn-Randian gospel to state legislatures and regulators: the salvation lower consumer electricity prices could be attained only through faith in unfettered (well, almost unfettered) retail competition.

Utility executives urging state legislators to adopt retail electric competition, ca. 2004.

Illinois, Ohio and a number of other states joined this crusade and opened their electricity markets to competition. They spun off their generation assets to new genco subsidiaries, leaving just the delivery services (wires) under the traditional regime of cost-of-service rate regulation. They were betting on a future of increasing natural gas prices, which ordinarily set electricity prices at the margin. Visions of dollar signs danced in their CEOs’ heads.

Unfortunately, things didn’t quite work out. Caught between the expansion of natural gas supply obtained by fracking and a glacially-paced economic recovery, the real shock (shock!) to Exelon and First Energy is that the market went against them, as free markets have been known to do. That’s why they’re called “free” markets.

In Ohio, Exelon claims that the bailout of First Energy will hurt consumers to the tune of $2.0 billion. Besides, the holy canons of the free market prohibit bailouts of risk-taking, private, for profit enterprises like merchant generators. (Of course, those same holy market canons likewise forbid Exelon’s Illinois bailout, but they deserve a dispensation, right?)

Consistency is merely the hobgoblin of little electric consumers.
But in Ohio, the Public Utilities Commission might allow a bailout of First Energy’s merchant generation fleet, which is one of Exelon’s competitors in the PJM market. In a precise reversal of the tone Exelon adopted in the fight for its own Illinois bailout, in Ohio it finds horrifying the prospect of precisely the same type of bailout for First Energy.

Read Full Post »

Melanie Neilan in Steppenwolf’s Domesticated

Domesticated, at Steppenwolf through February 7, 2016

Melanie Neilan plays the role of Casey, the daughter of a scandal-plagued politician, in Steppenwolf’s Domesticated. The synopsis:

Politician Bill Pulver faces the cameras to stumble his way through a carefully crafted apology as his wife Judy stands stoically behind him…. but what is she REALLY thinking? We are about to find out in Bruce Norris’s wickedly funny, unpredictable play about a marriage burst apart by a sex scandal. This scathing, wildly entertaining play investigates gender politics, modern marriage and the sexual mysteries of the animal kingdom.

Melanie Neilan, as Casey in Steppenwolf’s Domesticated.

 

Tom Irwin as Bill Pulver, with his daughters, Cassidy (Emily Chang, left) and Casey (Melanie Neilan)

 

Mary Beth Fisher, Meg Thalken and Melanie Neilan in Steppenwolf’s Domesticated

“This is, for sure, a very juicy play, a savvy discussion-starter,” Chicago Tribune 

“Domesticated is as funny and grotesque as we know Norris can be,” Chicago Critic 

“…a sensational cast of 14, “Domesticated” puts a more diverse 21st century twist on Edward Albee’s emasculating “Who’s Afraid of Virginia Woolf,” Chicago Sun Times

Check out the trailers here.

Read Full Post »