An Italian version of this blog appeared in the newspaper La Repubblica on October 3, 2014.
When Renzi visited Silicon Valley last month he did so in the name of bringing innovation, competition and dynamism to Italy. He is right to make this a key concern given that this country has had little dynamism for the last 20 years due to stagnant productivity and hence stagnant growth. Yet unfortunately rather than learning what really happened in Silicon Valley he seems to have bought into the slogans and myths around Silicon Valley—not the actual history. The myth that it was driven by genius entrepreneurs, high-risk financiers (who he tried to seduce in the City this week), and a government that focuses on reducing different types of ‘impediments’ for such risk-takers. Indeed the Jobs Act that he is currently emphasizing focuses on removing such impediments.
Yet since his reading of the history is wrong, so are the policies. Silicon Valley is a result of massive direct public investments (not subsidies) along the entire innovation chain—from basic and applied research to late stage commercialization. While venture capitalists, mythologized by Renzi, pursue short-run profits, focusing on an early ‘exit’ through either an IPO or a buyout, the US government has proved to be the patient public financier, providing (through a decentralized network of state agencies) patient high risk finance to companies like Compaq, Intel and Apple. And today is supplying the same kind of finance to green companies like successful Tesla, which recently received a $465 million guaranteed loan, and less successful Solyndra which received a $500 million loan: in the innovation game you win some lose some.
Indeed, had Renzi walked into Apple Inc, he would have found great designers like Sir John Ives working away with smart teams, but not all that much R&D. This is because Apple has historically put together, with an ingenious sense of design and simplicity, EXISTING technologies. Technologies funded by the government. In the case of the iPhone: the Internet GPS, SIRI voice activated system, and touch screen display—all funded by the taxpayer. Of course Apple is not alone. Google’s algorithm was funded by the National Science Foundation. The biotechnology, nanotechnology and shale gas industries all owe their emergence to public funds.
Pretending instead that innovation will come to Italy by simply lowering tax, and reducing regulations—especially around the labor market of course (the usual easy target)— ignores this history. Ironically Renzi is selectively copying only one thing from the US: the much criticized 2012 Jumpstart Our Businesses Act (JOBS Act). And it is no surprise he got such a welcome in the City this week given that it is precisely these kind of policies that create one of the most dysfunctional aspects of modern day capitalism: socialization of risks, privatization of rewards. The US JOBS Act attempted to provide risk averse venture capitalists with even less investment risk, by relaxing financial disclosure requirements for smaller firms (those with less than $1 billion in annual revenue). It also legalized ‘crowd funding’, meaning that VCs can recruit a wider range of investors (and individuals) when taking firms public. How this can generate actual job growth – when it seems tailored to ensure that VC investors can reap massive returns on small firms touting government technologies – is difficult to know. Indeed there is an increasing army of small firms that complain about how they lose out from VC’s speculation and short-termism.
If Renzi wants to bring innovation and dynamism to Italy he must yes make Italy more efficient, but also move beyond the sole focus on ‘rigidities’. The discussion should move towards a debate on the types of long-term investments that are needed, by the public and private sector alike, and to crucially ask Italian business and finance to step up to the game. Don’t suck up to the City (and Italian finance) but ask the financial sector to stop lobbying for lower capital gains, which is only making them more short-term, and to actually co-invest with you in the long-term areas that smart innovation led growth requires. Ask Italian business to stop asking for subsidies and handouts, stop complaining about red tape and decide to co-invest alongside government in the opportunities which will shape Italy’s innovative future. And when told by conservative economists that all he needs to do is to cut tax, he should be picky and focus on reducing taxes on hiring labor—not on capital gains—and then remind them that the tax rate paid by the top earners was close to 90% under President Eisenhower, a US Republican and ex military general—hardly a communist—who reigned in the USA in an era in which some of the most important investments in innovation were made. And then perhaps quote another non-communist, one of the smartest and successful investors in history, Warren Buffett who unlike Renzi seems to understand that lobbying from the City has destroyed not created jobs:
“I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”
© Mariana Mazzucato