Baker doubling down on failed biotech strategy

This opinion piece has been corrected in several spots (headline and story) to reflect the fact that $1 billion has not been spent by the Massachusetts Life Science Center. Only $650 million has been spent so far, which would significantly reduce the estimated cost per job

HERE WE GO again. Government giveaways to industries will benefit all of Massachusetts, so the story goes. Unfortunately, there is no evidence to suggest that story is true.

In 2008, then-Governor Deval Patrick argued that by giving away $1 billion to build the biotech industry, the Commonwealth would spur the creation of hundreds of thousands of jobs and truly establish the Bay State as an industry leader.

The power of markets to improve and extend human life is without peer in human history. The progress of the biosciences and health care treatments is central to continuing that upward trajectory. Happily, Massachusetts has world-class institutional and economic strengths that make us uniquely equipped to be a global leader in the life sciences.

As an organization that strongly supports the biosciences, Pioneer has fought to ensure that the Legislature does not create obstacles to new drug developments and that companies’ intellectual property rights are protected. But the Institute has opposed government investments in the industry because, with a few exceptions, there is little empirical evidence that such a strategy has contributed meaningfully to the industry’s success. 

To understand the bioscience initiative of 2009, we need to step back and gain some perspective. There is the billion-dollar price tag, of which only $650 million has been spent, and Patrick’s promise of 250,000 new biosciences jobs, 95 percent of which never materialized.

But beneath those visionary numbers, there is a weak business development and economic case for the initiative. According to the method of measuring life science employment used by Battelle/BIO in 2014, Massachusetts added 13,474 jobs from the start of the initiative in January 2009 through December 2016. Dividing that job gain by $650 million equates to $48,241 of taxpayer subsidies per job.

Was that massive per job subsidy worth it? No. The subsidies haven’t boosted Massachusetts’ private sector wages. As Figure 1 shows, at the start of the Life Science Initiative in the first quarter of 2009, life science wages in Massachusetts represented 5.4 percent of Massachusetts private sector quarterly wages. In the last quarter of 2016, life science share declined to 5 percent. Life science quarterly wages increased by a smaller percentage than did other Massachusetts private sector quarterly wages (29.9 percent versus 40.5 percent.)

Figure 1. Massachusetts Private Sector and Life Sciences Quarterly Wages

Bureau of Labor Statistics, Quarterly Census of Employment and Wages.

How about jobs? Since 2009, the growth in the share of private sector jobs represented by the life sciences in Massachusetts is almost imperceptible. As Figure 2 shows, growth in the life science share of all of Massachusetts private employment went from 2.85 to 2.91 percent. Over the same time, Massachusetts’ private sector employment excluding life science jobs grew from 2.604 million to 2.998 million, an increase of 15.1 percent. Add in new life science jobs and Massachusetts private sector job growth went up an additional one-tenth of one percent, to 15.2 percent. Was that one-tenth of one percent increase worth $650 million? No, and it’s likely that those jobs, or at least the majority of them, would have been created anyway.

 

Figure 2. Massachusetts Private Sector and Life Sciences Employment

Bureau of Labor Statistics, Quarterly Census of Employment and Wages.

Then, it is instructive to compare life science job growth in Massachusetts to job growth in leading life science states that did not offer a taxpayer-funded $1 billion support package. According to the federal Bureau of Labor Statistics, from the 2009 start of the biotech initiative through the end of 2016, California, Massachusetts’ main life sciences competitor state, added nearly three times as many jobs (39,828). Other leading life science states, such as Texas (14.1 percent) and North Carolina (14.5 percent) added jobs at a comparable rate to Massachusetts. Michigan added 13,364 life science jobs, far outpacing Massachusetts’ growth rate (27.3 to 17.7 percent).

Why then is Massachusetts able to attract the top companies? It is because of Massachusetts’ fundamentals and larger market forces, not because of Massachusetts’ relatively small and misdirected biotech initiative. Massachusetts, and especially the Greater Boston area, has huge institutional advantages that have driven the knowledge economy for decades. Add to that unparalleled strengths in higher education and healthcare research, and you have the makings of a biotech mecca.

All this is not to denigrate the value of an incredibly important sector for Massachusetts, the country, and the world. Rather it is to underscore that the state’s billion-dollar initiative had a marginal effect on job creation — the ostensible reason why the initiative was launched in the first place.

It is certainly not because of a comparatively modest set of state investments that were spread thinly over many areas, some with dubious goals. Let’s talk scale. Spending $1 billion over 10 years is $100 million annually, and that is a drop in the bucket in terms of the size and impact on research and capital investment in the industry.

According to the National Science Foundation, in 2013 overall business R&D expenditures in Massachusetts totaled $17.4 billion. So, the $100 million state “investment,” or subsidy as the case may be, represents approximately six-tenths of one percent of total business expenditures that year. Another way of putting the initiative in perspective is to note that on an annual basis it represents less than 1 percent of the total payroll for the life sciences industry in Massachusetts.

Then there is the politically wired subterfuge that undergirded the biotech initiative: half of the Commonwealth’s bioscience capital investments went to the University of Massachusetts. The idea was to establish UMass campuses as national and international biotech industry research centers, competitive with leading global universities including Harvard and MIT. When the biotech initiative was being debated by the Legislature in 2008, the presidents of those two universities wrote a letter discouraging the inclusion of such earmarks and encouraging, instead, the use of targeted, strategic funding decisions.

The Legislature did not heed their advice. What has been the result of earmarking more than half of the Life Science Initiative’s capital funding to UMass? Not encouraging. According to the National Science Foundation, between 2011 and 2015 external research funding to UMass—that is, funding from the federal government, industry, and not-for-profits—has dropped from $437.8 million to $410.8 million per year. To fill this funding shortfall, over the same period, UMass and the state Legislature have had to step up their own funding of R&D from $148.9 million to $215.6 million.

I understand the impulse: When you go to a global conference on biotech, you want to draw attention to the state — and like a good guest at a house party, you don’t want to show up empty-handed. But this is a lousy investment for taxpayers. That’s true if it is Patrick wielding a billion-dollar biotech wand or Gov. Charlie Baker penciling in half a billion to a similar strategy.

This is not to say that government should play no role in advancing the biosciences in Massachusetts. We need the federal government, through the NIH and other entities, to continue to invest in research. And there are other levers that state government can use to foster job creation in this important industry. For example, the state Legislature can put an end to its radical, annual attempts to place back-door price controls on drug companies. State leaders can also focus their energy on addressing the regulatory and permitting issues that make Massachusetts unattractive to biotech manufacturers; by doing so, they could help expand the reach of the biotech industry beyond Route 128.

To his credit, Baker is putting more emphasis on workforce training. But there is a lot of fuzziness in the early-stage company lending, research grant, and capital investment components of his plan. Moreover, any tax-credit-for job-creation strategy must come with clawback provisions if the jobs do not remain in place for a determined period of time.

Two final thoughts: One is that the ability to attract talent is the real game in biotech, and it just happens to be an area where state government can play a determinant role. The second is that the lion yet to roar is New York as it begins to establish new institutional strength, including the creation of Cornell Tech, a collaboration of Cornell and Technion (Israel’s Institute of Technology), which begins opening its campus on Roosevelt Island this summer. Former New York Mayor Michael Bloomberg alone invested $100 million in the campus.

What New York represents is a huge competitor for young talent. And, perhaps counterintuitively, I would argue that for the Greater Boston area to maintain and reinforce its competitive position among young people, the place to invest $500 million is not in a broad swath of small investments in biotech but rather in transforming the MBTA. Modernizing the MBTA’s signal and electrical systems alone would improve mobility immeasurably, helping to strengthen the region and all industries and improve the quality of life for hundreds of thousands of employees. For all of the smart young people in the biosciences and other knowledge-based industries, it would make the Greater Boston area far more attractive and could ease some of the housing cost issues that keep them from setting down roots here. Along with the cost of housing, the unreliability of the T is the number one issue I hear from young people.

The billion-dollar biotech giveaway of 2009 was an expensive mistake. Baker’s proposal may cost half as much, but it amounts to doubling down on failed strategy. Baker’s forte has always been his desire and ability to develop policy starting from data. The data on this initiative should have made the governor’s life sciences do-over dead on arrival.

Jim Stergios is the executive director at the Pioneer Institute, a free-market-oriented think tank.