County Government Wants Authority to Invest in Private Businesses

WTOP news reports on a bill in the Maryland state legislature that would allow Montgomery County, Maryland to invest tax dollars in private equity companies:

“Delegate Brian Feldman, who leads Montgomery’s delegation to the House of Delegates, says the proposal would improve the county’s ability to compete for new biotech companies. He notes the state already can make equity investments in businesses that have returned millions of dollars to state coffers.”

Remarkably little analysis has been done on whether county governments (or state governments) are good venture capitalists, but it’s hard to see how county officials are in a better position to weigh the prospects of start-up companies than private venture capitalists with their own money on the line. This is a bit like the tail wagging the dog. Unfortunately, I have no doubt we can expect to see a lot more of this as more reports of the federal government’s occasional “success” in its equity “investments” in big banks and other businesses “too big to fail” show paper profits.

Of course, at least conceptually, a difference exists between the federal government’s program that took equity stakes in banks and the proposed county program. The federal government took equity stakes in banks to provide capital and liquidity and to hedge against what they believed would be certain losses even though the businesses themselves were fundamentally sound. All the investments were in established financial institutions with a track record of effective management under normal economic conditions; they weren’t start-up ventures in a highly uncertain and risky business like biotech. Also, no one really expects the federal government’s investment in GM or Chrysler to pay off, so this was really a direct bone to an important political constituency, not a true venture capital investment.

Montgomery County’s rationale for the program also seems odd because its economy is strong. It’s benefiting from the goose in jobs resulting from expanded federal government employment. In fact, the problem facing the county is that low-income and middle-income households are being priced out of the market because supply can’t keep up with demand (which is also due to the country’s stringent planning laws). Where are all these new workers going to live if the county is successful?