I’m on Cape Cod for two weeks with my family. On the occasion of my re-entry to Red Sox Nation I thought I’d revisit this story of public investment in private enterprise – gone horribly wrong.
I love Curt Schilling. And I love the Red Sox. And (once upon a time) I loved video games. So you might expect me to hold in my heart a deep well of forgiveness for Curt Schilling driving his tech startup, a video game business, into the ground last year.
But I don’t have such a deep well of forgiveness. In fact, the whole episode disgusts me.
Most importantly, it reminds me that government-directed ‘Economic Development’ is a stupid plan which usually ends in waste, corruption, influence-peddling, and tears.
Schilling’s 38 Studios
In 2009, the retired pitcher Curt Schilling founded a video game company to develop MMORPs (massively multiplayer online role playing games), apparently based on the premise that he loved playing video games.
To pursue the dream, Schilling invested his own money from a successful baseball career, but he needed more capital to build the video game empire of his dreams.
Although Boston’s venture capital community turned him down, Schilling had other strengths, namely his stature as a New England hero and his reputation as an articulate, albeit partisan, spokesman.
Rhode Island’s then-governor Don Carcieri persuaded his state’s Economic Development Corporation to issue $75 million in municipal bonds to provide funding for 38 Studios if they located their office in Providence, RI. The idea seemed to be that an innovative software company could jump start Providence’s economy, especially in the dark economic times, post-2008 Crisis.
Schilling’s company promised Rhode Island strong starting salaries, a great health care plan, and the attraction of “knowledge workers.”
When 38 Studios filed for bankruptcy in 2012, it left a giant question mark about whether the state of Rhode Island would make bond-holders whole on their losses.
With $150 million in debt and just $22 million in assets, Schilling fired hundreds of employees by email.
Schilling complained about $14 million in additional undelivered tax credits from the state, and accused the newly-elected Governor Chafee of publicly undermining his company.
Chafee, for his part, has directed lawsuits against not only Schilling and his partners, but also former state officials, banks and law firms involved in the deal.
In retrospect, the most insightful comment, before the state invested, came from the now-Rhode Island State Treasurer Gina Raimondo who said in July 2010:
“In general, I would proceed very carefully on this. [The company] is in the Boston area where there are 200 venture capital firms, and it is in a very hot area of gaming so if it were in fact a compelling investment I would have to think it would be well funded already by venture capitalists; the fact that many have looked at it and passed is a red flag.”
That pretty much sums it up. The state officials who signed off on putting $75 million into a gaming start-up essentially bet, without explicitly saying so, that all those smart venture capitalists were wrong – that the venture capitalists had missed something in Schilling’s 38 Studios, that they saw.
When I hear about government officials these days investing in or subsidizing everything from electric cars, to solar panel manufacturers, to incentivizing companies to relocate through tax breaks, I worry. Why do you think the private markets turned down this idea? If you give away public money now, what do you think you’re going to really get?
Not a Democratic or Republican thing
I also want to clarify that this isn’t an ideological, Democrat or Republican issue, or a Left vs. Right issue.
The city where I live now is dominated by Democrats (pretty hard-core ones, too), while the State where I live is dominated by Republicans (very hard-core ones). Public officials on both sides of the aisle and at the city and state levels love subsidizing specific private enterprises in the name of economic development. Sure, it’s often natural gas drillers on the Republican side and renewable energy companies on the Democrat side, but they’re both wrong. All kinds of political stripes in government are convinced they can help incubate or grow businesses or business sectors.
As a rule, they can’t, although they can help themselves in the process. By that I mean they can capture public goods – such as tax-breaks or outright grants – and direct them to private individuals and companies. Which same private individuals and companies in turn, out of the pure goodness of their hearts, know who to support in the next election.
Another way to explain the problem of governments getting in the economic development business
Beyond the obvious opportunities for influence peddling, however, I recently re-read a book which helps explain why governments are just plain bad at kick-starting economic development.
In Jane Jacobs’ Systems of Survival she lists the attitudes and precepts which guide the function of government, and then compares them to the attitudes and precepts that guide successful commercial enterprises. More often than not, the government precepts directly contradict the commercial precepts.
Re-reading the Guardian Syndrome (for governments) I’m struck by how Curt Schilling seems to personify many of these Jane Jacobs-enumerated traits:
Be obedient and disciplined
Adhere to tradition
If those aren’t a great description of Curt Schilling leading the Red Sox to victory in Game 6 over the hated Yankees in the 2004 ALCS – in a bloody freaking Red Sock no less! – then I don’t know what is.
And yet, these same traits can be death in an entrepreneurial venture, where many of the following opposite characteristics lead to success. From Jane Jacobs’ list of the Commercial Syndrome (for successful companies):
Come to voluntary agreements
Collaborate easily with strangers and aliens
Use initiative and surprise
Be open to inventiveness and novelty
Dissent for the sake of the task
When I reread Jacobs’ book, I thought of Curt Schilling, and the fact that he’s a natural ‘Guardian’-type trying to do a ‘Commercial’-type activity. Probably it never was going to work. He should have just run for office.
What is to be done about economic development?
So what should government officials of either the right or left do when they want to promote jobs, economic opportunity, prosperity, and upward financial mobility in a given area?
The best answers are long-term, and the benefits diffuse, and therefore difficult to attract the attention of elected and appointed public officials, who tend to need short-term and identifiable results, in order to gain election and re-election.
But, despite the barriers, what should an elected or appointed economic development official try to do?
I would like my public officials to focus on projects with wide-ranging, inter-generational impact.
Such as improving public education, and access to higher education.
Such as reducing crime and enforcing regulations.
Such as creating and maintaining transportation infrastructure with a view to lowering inter-generational costs.
Such as beautifying public spaces like parks but also virtually any high-traffic pedestrian area.
Such as encouraging art and creativity in public spaces.
Such as lowering barriers to private enterprise by removing layers of bureaucracy at the city and state level. Anyone who has tried to start a small business, or re-develop a building inside a city, or open a restaurant, has found themselves crushed by innumerable codes, fees, inspections, permits, and signage requirements. Some of this is well-intended, or was once useful, but now much of this is the accumulated detritus of years of ‘good policy.’
Our governments already do all of these things, and often very successfully. Importantly, they all lead to economic development. Just as importantly they can benefit the largest portion of the public, rather than narrow groups. I’m really objecting to the tendency of public officials to get impatient and try to channel the public purse to particular private projects or narrowly defined interests.
What kinds of thing do we often get instead, which I hate?
We give targeted tax breaks for a particular favored industry.
We get tax breaks to incentivize a particular company to move to the city, encouraging a race-to-the-bottom mentality between competing cities in a zero sum game of beggar-thy-neighbor.
We give tax breaks to companies to ‘create certain #s of jobs’ hoping people don’t notice, or don’t understand, that business owners are – rightly so – not in the ‘job creating’ business, but rather the ‘profit increasing’ business. As soon as possible, or as soon as the tax incentives expire, business owners will try to eliminate jobs, because that’s what they’re supposed to do. That’s what helps keep businesses sustainable. To think otherwise is to fundamentally misunderstand business.
We give subsidies both direct and indirect to favored real estate developers and favored real estate developments and then justify it with the idea that we’re ‘increasing the long-term tax base.’
Curt Schilling’s 38 Studios catastrophe is the kind of monstrous hybrid Jane Jacobs predicted would be the result of bringing a Guardian (government) mindset to a Commercial (for profit) enterprise. I think that’s an inherent danger for economic development folks who work in government.
In the meantime, this could be the year. Go Sawx.
 I mean, let me clarify. I hate his stupid politics. But Shilling was a key figure – and played a bloody martyrdom role – basically the consecrated Jesus figure – in the 2004 Mother of all Sports Championships. So that’s how I’ll always love Curt Shilling.
 I’m wearing my grimy blue, autographed, “Rick ‘Rooster’ Burleson” cap as I write this. He was my favorite player from the earliest years when I fell for the Sox, which included boyhood heroes Freddy Lynn, Jim Rice, Carl Yastremski, and Dwight Evans. I chatted with Burleson at a Las Vegas convention for debt-buyers a few years ago. At that time he coached a minor-league team in the Indians’ farm system. But that’s an entirely different story, and not the point here at all.
 We had the Atari 2600 pretty early on, among the neighborhood kids. Hours upon hours of Space Invaders and Missile Command.
 We all know from Tony Robbins that we should just pursue our passions and the money will flow.
 I keep linking to this article because it’s really good, on Texas Republican Rick Perry’s idea of economic development. But the Democrats in my city engage in lower-profile economic development projects with similar merit, one of which I wrote about here.
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