The Breakdown | Explaining Southern California's economy

Actually, the economy will self-correct, but we don't have time to wait. So should we start investing?

An interesting comment came out of Gov. Jerry Brown's biotech mini-summit in San Diego yesterday, where he predicted that he'd be able to win over enough Republicans in the next three days to pass his "jobs-and-taxes proposal." This is from the LA Times PolitiCal blog:

"We all know this economy is not going to self-correct," said David Gollaher, president and chief executive of the California Healthcare Institute, a trade group for the biomedical industry. "San Diego and the U.S., we have the talent ... but it's going to take creativity on the part of our political leaders."

Actually, given enough time, the economy — nationally and regionally — will self-correct. The problem is that the nature of the financial crisis and its aftermath would drag out the process so much that the American Way of Life would be completely changed. We've endured what economists call a "balance sheet recession," in which businesses and consumers have to reorganize, renegotiate and rid themselves of debt. That's why we have such high unemployment. That's why why the stock market is so unstable. That why the yield on 10-year treasuries is below 2 percent. Everyone is too busy dealing with the debt orgy of the past 30 years to be able to concentrate on reviving demand.

Gollaher is right to call for political creativity. The question is whether that means a break with business as usual (even in a dreadful economy) or some kind of reinvention of how politics and growth industries such as biotech interact. You could take a conventional approach and argue that biotech/biomedical needs all the tax breaks it can get. Or you could look at it from the spending side and suggest that the government needs to create more stimulus, in the form of loan guarantees along the lines of what it's done for the green energy sector.

I think it might be more interesting to set up private-public play and establish a biotech-biomed bank, something like what's been proposed for U.S. infrastructure (I talked about the prospects of an I-Bank on the Madeleine Brand Show today). There's definitely investor interest in this, even predictions of an impending investment bubble. And FYI, there was already one biotech bubble, back in the late 1990s and early 2000s, which popped. I know that sounds bad — bubble, bubble, boil and trouble — but a bubble can be a signal that investors are excited enough about a new industry to literally throw money at it. And remember, althought the dotcom bubble burst, we still have plenty of extremely successful tech companies in the Web 2.0 world.

The "creative" challenge here would be that the government will be creating a capital pool that wouldn't be leveraged to build things we know a lot about, like roads and bridges, but rather leveraged to explore new ways to cure diseases or improve surgery and diagnostics. Of course, funding basic scientific research is another way to do this, but the time-frames tend to be very long-term.

I like the idea of these "banks" because they enable the government to operate like a real investor, being strategic rather than simply writing checks (the government should expect to get a modest return on investment) or handing our tax breaks (which is another way to write checks). They also allow the government to capitalize on what's favorable about its relationship with the financial sector, which realizes that radical cuts to federal spending aren't a solution to our current impasse — it was federal money, after all, in the form of bailouts that rescued the finance industry in 2009.

Also, a goodly chunk of the biotech and biomed industry is located in California. So it wouldn't be a bad idea for the state to explore the possiblity of setting up a poltically creative bio-bank (B-Bank?) on its own.

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