Continued from While Kentucky Slept (January 17, 2009)

“The history of the failure of war can almost be summed up in two words:  ‘too late.'”                              

                    General Douglas A. MacArthur

Lexington (Ky.) Herald-Leader writer Tom Eblen posed profound questions in his column of January 25, 2009:   Kentucky remains “near the bottom of many national rankings of social and economic progress, despite…decades of good work of many public-interest groups.   At the moment, we seem to have our hands full trying to survive the current economic slump.   But once this crisis has passed, what’s the next step, and the next?   What will it take to create the…climate in Kentucky to really invest for success in the 21st century and beyond?”

While no single  method is a cure-all, Mr. Eblen, one immensely helpful solution is there for the taking, if Kentuckians and their elected officials can get the ball rolling now.

Circa 2059: 

The Commonwealth of Kentucky is doing the best it has ever done.  It is still the epicenter of Thoroughbred horse breeding and sales in the United States, but has diversified its economy.   Lexington has lost numerous horse farms to development, but many remain and the State’s racetracks are viable entities as racetrack casinos.  Fifty years ago the governor, legislature, and business community put their personal disagreements aside and unified behind the concept of using tax revenues from full-scale racetrack casinos to fund long-range economic development initiatives that would enable the State to compete in the 21st century global high-tech economy.  Elected officials recognized that the money to educate, provide infrastructure, and supply incentives for companies to start-up and grow in Kentucky had to come from somewhere…and the State’s dominant industry, horse racing and breeding/sales, was the one best source of capital. 

The sagacious powers that were in 2009 also knew that simply allowing slot machines or video lottery terminals at racetracks would be a half measure, since the racetracks would still be disadvantaged in competing with Indiana and West Virginia casinos that offered a full-line, including video lottery terminals and table games.  In addition, how long slot machines would remain popular was questioned.

Consequently, voters were asked to pass (which they did) a constitutional amendment permitting full-scale casinos. The economic rationale for the amendment was carefully explained to the voters and the tax revenues were constitutionally dedicated to specific uses so that the funds could not be diverted to other programs. 

The casino legislation took into account that in order to be competitive in a knowledge-based world economy, a state needs at least four resources: prolific, big-thinking entrepreneurs, a skilled and well-educated workforce, capital to fund ventures, and commercially-feasible ideas and technologies for creating and growing businesses. As a result, racetrack casino tax revenues were dedicated for funding: 

1.  Promising research and development projects at the State’s colleges and universities.   The main criterion applied in allocating funds was whether the research output had the potential to be a significant commercial success, either as a product or a business.   The governing body for screening projects and granting funds was an independent private-sector board comprised of venture/angel capitalists, scientists, engineers, and business executives–with State oversight. 

2.  Start-up businesses and later-stage growth companies headquartered within Kentucky.   The Commonwealth took equity positions in all of these investments and cashed out whenever a company went public or sold out.   The governing board consisted of proven entrepreneurs, business executives, venture/angel capitalists and others with expertise in starting and growing for-profit enterprises with great potential. 

3.  Scholarships at the State’s colleges and universities for outstanding Kentucky students in math, science, engineering, and computers/software. 

4.  Employee training/retraining programs at the State’s community colleges in skills necessary for a technology-oriented society. 

5.  Programs for treating problem gamblers. 

Originally, it was suggested that the money derived by the State from taxing casinos go to reducing citizens’ taxes and other short-term uses.  Upon further thought, however, the money was channeled to Kentucky’s long-term competitiveness via economic development…and, in reprospect, this decision was prescient. 

In 1996, a colleague and I were working on a project commissioned by the Ewing Marion Kauffman Foundation (the largest philanthropic organization concentrating on the study and promotion of entrepreneurship).   The end product–a monograph titled “Stoking the Small Business Engine”–reported our research into why some communities do so well in economic development pertaining to start-up and growth enterprises and why others do not.   As part of the research process, we interviewed knowledgeable people in cities across the United States.  One was Greensboro, North Carolina. 

North Carolina was historically dependent on three industries–tobacco, textiles, and furniture manufacturing–all of which have declined dramatically.  The Piedmont Triad–around Greensboro, High Point, and Winston-Salem–was battered mightily by the fate of these industries.  Not only was Greensboro suffering from hard times, it also had to cope with perceptions lingering from the famous “sit in” in 1960 by four African-American college students, from North Carolina A&T, at a Woolworth’s lunch counter that sparked similar protests across the United States and helped to launch a Civil Rights movement.  Greensboro today is a progressive city that has diversified its economy and radiates a “can do” attitude about stimulating business and improving its quality of life. 

Greensboro welcomed me with open arms and assembled some of the city’s movers and shakers to meet with me and answer my questions about the city’s revival.  But it took more than a positive community attitude to counter the economic decline.  The city leaders early on decided where they wanted to go, how to get there, and how to fund the efforts.  And they were not provincial in their thinking.  For example, the Piedmont Triad Partnership is a joint economic development marketing venture among the 12 counties close to Greensboro, High Point, and Winston-Salem.  North Carolina’s Research Triangle (Raleigh, Durham, and Chapel Hill) is another well-known success story that combines private enterprise and university research.  Again, these do not happen by accident, but rather, result from a synergistic planting of ideas, research, and capital.

In 2003, I spent some time visiting Purdue University in West Lafayette, Indiana, and saw the same kinds of processes at work.  An impressive and well-thought-out public-sector/private-sector modus operandi for bringing research to market is creating a better future for Indiana.

All of the economic development successes across the United States are different but have the common ingredients of optimistic attitudes, entrepreneurs, ideas, teamwork, planning, and capital. 

Kentucky, by strengthening its horse racing and breeding enterprise instead of inhibiting its ability to compete on even terms, should be able to supply a plethora of capital to cultivate the industries and companies of tomorrow.  In addition, it will ensure that its number one (and most aesthetically-pleasing) tourist attraction is later rather than sooner replaced by shopping centers and housing developments. 

Dan Liebman, Editor-in-Chief of The Blood-Horse magazine, recently wrote:  “Unfortunately, many elected to represent the citizens of the state [Kentucky] continue to see the [horse racing and breeding] industry only as wealthy breeders, wealthy owners, and wealthy racetracks, despite study after study showing that not to be the case.”

Liebman is correct…but maybe, just maybe,  rational thinking about wealth creation and elevating everyone’s standard of living will prevail in the Kentucky legislature.

Adam Smith, the father of economics, explained in his 1776 opus The Wealth of Nations how people, by pursuing business opportunities in their own self interest–such as wealthy breeders, rich owners, and prosperous racetracks–raise the standard of living of society:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

The determinative question for Kentucky is whether the Colonels in the legislature will be “too late” in acting in the immediate self  interest of the horse racing and breeding industry.   The long-term vitality of the entire Commonwealth could be riding on the answer, provided that the tax revenues from racetrack casinos are properly channeled to investments in science/engineering education, technical job training, funding promising nascent products/businesses, and infrastructure needed in a high-technology economy.

Copyright © 2009, Horse Racing Business.

 Coming Attractions…

February 7:   Angels of Mercy.

February 14:  Racing’s Misguided Muhammad Ali Philosophy of Publicity.

February 28:  Churchill — Down or Up?