Steve Kelman speculates that the government's role in making risky investments pays off well.
One thing I like about writing a blog is that it gives me a chance to put ideas out for discussion that I think are correct but for which my level of evidence is much lower than it would need to be for publication of academic research. In that spirit, I offer a speculation occasioned by a recent visit to San Antonio, Texas.
San Antonio’s most famous attraction -- aside from the Alamo -- is the River Walk, a charming, tree-shaded area of restaurants and shops along the meandering, narrow river that flows through downtown. On previous visits to the city, I had always assumed that the River Walk was developed in the 1980s or 1990s, when the idea of reclaiming underused or poorly used urban spaces happily took hold in many cities -- not just in the United States but around the world (think Quincy Market in Boston, the newly opened High Line in New York or Islington in London).
I was surprised to learn on my most recent visit that the River Walk was developed during the Great Depression of the 1930s, as part of what today would be called an economic recovery project under that era’s government-funded Works Progress Administration. I also learned that the River Walk currently generates $6 billion in revenue a year.
Put those two facts together. River Walk has been around for about 60 years. Clearly, the original government investment in the River Walk back during the Great Depression has had a spectacular return from a social point of view. But I would propose making a much more dramatic suggestion. Assuming that revenues from the River Walk have grown steadily in the past six decades, it is possible that the total return on the investment in the River Walk would justify the government’s entire spending on the Works Progress Administration. Maybe that’s not literally true, but it’s also clearly not true that no other WPA investment provided any returns, either immediate (reducing unemployment) or long-term (providing bridges, roads, etc.).
I have long had a similar thought about the Internet. Imagine that no government research and development money had ever yielded any returns other than the investment of the Defense Advanced Research Projects Agency that set the Internet in motion. This is clearly absurd (think NIH-funded medical research, just for starters). But I suspect a case could be made that the return on the government’s investment in the Internet alone implies a positive rate of return for all government-funded R&D since the beginning of the Republic.
Assuming there is anything to this, is there a lesson here? Well, one is that perhaps it is the government's role to make very risky R&D or infrastructure investments that (if chosen decently well) are also the ones with potentially the highest returns if they pan out. Companies can make such investments, too, if they are willing to go bankrupt under the most likely scenario that the investment will fail or if they are big companies that put only a small part of their capital at risk with such investments.
The government (or at least our government) has the advantage of being unlikely to be driven into bankruptcy by failed risky investments. It also has the advantage of being able to measure returns by a criterion broader than the profit it can itself capture. Individual firms that make Internet-related research investments will unlikely be able to capture all the returns from such investments, and job creation from such investments is not an economic benefit to the firm by itself.
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