Regional innovation hubs are one of the latest trends in American industrial policy. On the surface, they sound like a plausible way for the government to strategically encourage the development of certain key sectors or industries, conjuring images of mini-Silicon Valleys sprouting up across the United States. In reality, they may do more to waste scarce taxpayer dollars and bestow unfair privileges upon special interests.
The 2022 Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act appropriated $500 million in funding to the U.S. Economic Development Administration to promote these regional tech hubs. This year, the agency begins accepting proposals for how to distribute the funds. The proposals will come from various “consortia”—which include everything from state governments, to private industry, to labor unions—representing particular geographic regions.
While the idea of replicating the success of Silicon Valley in different parts of the country may seem appealing, the history of government-led efforts to foster economic growth in struggling regions has often fallen short of expectations. For instance, the Appalachian Regional Commission, established in the 1960s to facilitate economic development in that region, has struggled to generate sustainable economic growth and reduce poverty. More recently, the State Small Business Credit Initiative, a 2010 federal program to support small businesses, got off to a rocky start when audits revealed millions in mismanaged funds.
The underlying problem is that bureaucrats often lack the incentives and the information to identify viable candidates for innovation. Such initiatives can also be hijacked by special interest groups seeking handouts from the government, thereby detracting from the intended purpose of funds and contributing to wasteful spending.
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