The Milken Institute’s Matt Horton on Reigniting California’s Innovation Economy

Matt Horton

Facing significant revenue shortfalls at the outset of the COVID-19 pandemic, California legislators in June 2020 paused the state's R&D and other business tax credits. In his latest budget request to state legislators, Governor Newsom has sent an encouraging and strong message that seeks to boost investment in California’s innovation-based economy by setting out to restore the provisions related to R&D.  VX News interviews Matt Horton, Director of the Milken Institute’s Center for Regional Economics and California Center, who elaborates on Milken's latest report on the opportunity for reigniting the state’s innovation-based economy to boost regional competitiveness and encourage higher-paying job opportunities for communities in Southern California.

The Milken Institute's latest report focuses on how California can reignite its innovation-based economy and state investment in industry R&D. Let’s begin by having you elaborate on the challenge and what the Institute is now prioritizing; as well as, on how Covid has impacted this work?

What we've seen during Covid is an amplification of some of the forces that existed pre-covid. Those forces and those dynamics really center around opportunity, inequality, and inequity in our economic landscape. So, we ask, who has access to higher paying jobs and job growth in emerging tech sectors? Where are those jobs concentrated versus low paying jobs and service jobs that are bouncing back slower? Identifying forces are keeping people from being able to go back to those jobs safely in terms of lack of childcare and other related Covid restraints, as well as, simply, the lack of adequate pay. From a demographic analysis, who typically works in those lower pay job growth areas and in the service industry and retail, versus who is in the high tech and the high skill sectors? It tends to look blacker and browner on the lower end versus the higher end of job growth spectrum.

 When we talk about reigniting the innovation-based economy, we aim to identify or operationalize a better distributive model that can invest in and incubate higher sector jobs or high-tech jobs in different parts of the state that are largely missing out on some of that past growth.  When you look at LA and the Southern California region, we graduate a high number of engineers employed across tech sectors. Our problem is that those jobs and that talent doesn't stay in LA. They move to other parts of the state. How do we facilitate a model around economic development that cultivates business formation around those sectors, so that those folks can stay, live, and work to grow opportunities in these different sectors locally? For example, there are sector clusters in biotech in San Diego, Orange County and in NorCal, and the famous entertainment sector in LA and software and tech sector in NorCal. I think LA and southern California definitely incubates some of sectors but can do more especially related to cultivating further investment in talent, infrastructure development, while incentivizing broader business formation to establish a stronger and more competitive presence across sectors. 

For those readers who might not be aware—what’s the mission and your role at the Milken Institute?

The Milken Institute is a nonprofit, nonpartisan economic policy think tank. There's a number of centers, but I work in our Center for Regional Economics and California Center. So, I focus mostly on California issues related to housing development, infrastructure finance, workforce development, and the future of work. Figuring out how we can engage in research that informs how best to accelerate housing supplies in strategic areas like workforce, how we realize infrastructure development through governance, finance and capital markets solutions, and how we prepare for the future work in terms of increasing access to the jobs of the future, which has all seek to uncover an underlying equity component, is really my focus in terms of the work I do.

Matt, in past conversations you’ve often advanced place-based innovation strategies and new investment tools to support supply-side innovation. Please elaborate on both.

When we talk about place-based innovation, what we're trying to produce out of the work at the Milken Institute is how do we generate a broader capacity that supports supply side investments throughout communities in the development continuum? Identifying strategies that can catalyze investment in under-served communities and harness short-term returns by leveraging regional assets as well as promoting long-term growth in terms of identifying and bridging structural deficiencies at the regional level. We tend to ask; how does government and the public sector participate in terms directing incentives and accelerating municipal finance strategies that supports pre-development for prioritized projects? I think as a community, we all want to make sure that we're developing the type of infrastructure in housing and mobility and in business formation that can attract jobs, that can support workers, or create a landscape that can provide a broader equity stake throughout the economic landscape. That's largely a function of access and supply and or a lack thereof and identifying what steps government and the public sector can take to help invest and support the development pipeline. 

What sectors hold the greatest promise for ensuring a resilient, equitable, and sustainable recovery in both metropolitan Los Angeles and California?

Well, just look to our past from an R&D perspective, that helped establish LA’s historic advantages in aerospace and aerospace industries, spaceflight, biotech, software engineering, the Internet, and entertainment. Now we're looking at new opportunities with the green and blue economy and what that means in terms of jobs and industries growth that are focused around the ocean, advanced manufacturing and around renewable energies. The sky is the limit when you look at places like Los Angeles and Southern California in general, not just with our size, but with the innovation, talent and historical investments that have been made here over time. How we concentrate future growth from a governance and operational standpoint, I think, is the only lingering question in term of coordinating and marshalling political leadership that can invest and capture the spillover effects resulting from growth in these sectors and build more opportunities locally.

Pivoting to what our newsletters have focused on this last month, the newly created consortium of regional stakeholders, led by the LAEDC, that was recently selected as a finalist for the Build Back Better US Commerce Regional Grant Challenge. Address what that grant portends for the region, and how the Milken Institute could collaborate?

Well, with this grant challenge what we are looking at generally are ways that any regional economy can increase their competitiveness while looking at the most fundamental building blocks and needed investments that that could effectively lead them on a path of doing so. Academically, I think the Milken Institute is built around the premise that fundamental investments in infrastructure and people and talent lead to long term economic growth.

So, plug this scenario into that formula to ask, “how can the region look at some of its deficiencies in housing and mobility and jobs and attainment and opportunity to then provide the investments that can lead the region on an uptick or a course correction in terms of fixing some of those deficiencies?” I would say it's more about the formula, and it's more about devising a strategy or operation model capably of harnessing some of those market forces that lead to better outcomes.

No doubt, Matt, whatever happens with the Build Back Better federal legislation, there is a lot of federal funding coming in the form of infrastructure dollars to California, Southern California, and LA. Some have asked whether local government and regional governments have the capacity to manage those infrastructure investment dollars wisely. What’s your perspective on that capacity challenge?

With the prospects for increased funding coming to LA, to Southern California, and to California in general we should naturally ask: How can that money be best used and what should we prioritize (as a community) in terms of infrastructure and economic development needs.  To make best use of any potential funding we obviously need to plan, but practically we need to coordinate better across silos in terms of structuring a regional project pipeline that is shovel ready.

This will require capacity building and technical assistance needs, but I think what we also need think beyond funding and planning toward identifying a source of patient capital—pre-development capital to help galvanize a project pipeline, so that investors and other stakeholders in the development community can partner and see that LA, Southern California, and California in general, is sending a clear signal that they're ready to prioritize these investments and de-risk prioritize projects (e.g. housing, mobility, water, energy, research & development, good movement, etc., ) as a way towards building a more resilient economy. The prospect of using Build Back Better or any types of funds (e.g., ARPA and CERF?) in terms of incubating patient capital or pre-development capital attached to a de-risked project pipeline, I think is the work that's to be done around building the right capacities to  support the infrastructure and economic development imperative throughout California.

You've been advancing your policy priorities for years, often via VerdeXchange conference meetings with enterprise and legislative leaders, the state treasurer's office, and the Governor's office. What's the prospect for success this coming year?

Well, I think the adage, ‘all politics are local’ really holds when we talk about economic and infrastructure development. Looking at what we can do locally and regionally around identifying our needs, and what the necessary political will is to realize those infrastructure aspirations, it can't just be on the prospects of government funding alone. Government funding alone isn't going to be enough to deliver on the vast infrastructure needs and capital improvement projects.

So, I think we have to start somewhere, and we can help to build a system or framework locally that can leverage capital markets. Yes, I think that adds a level of complexity to the public financing scheme that will need some capacity building in terms of coordination and technical assistance tasks. What I'm hoping to see and work toward is how do we build that capacity and coordination into the frameworks of our local, regional, and state government.

With the likely appointment of Mayor Garcetti to be the Ambassador to India and resulting change of the guard in Los Angeles, what policy message do you want to convey to our local leadership—city, county, and regional? More specifically, how can Milken better collaborate with government?

I think the focus needs to be on collaboration and figuring out how government can play a more collaborative role in terms of bringing projects and people together and removing barriers around a shared vision of need and development is key. At the same time, how do we fit in the pieces in terms of realizing these project goals and working toward long-term vision on economic development? Blending these market forces together, I think is the role that the public side is readily able to step into.

There are operational models around this development collaborative idea that we can look to replicate parts of. New York's EDC Strategic Development Group, I think is a great model. I’m lucky to serve on the board of Lift to Rise, a community development organization in the Coachella Valley that has done a great job of working locally to not just plan and collaborate but assemble an investable pipeline of housing projects based on community specific needs. Even historically, the Tennessee Valley Authority (TVA) model, was designed to coordinate and invest in vital public works projects and improving the quality of life. Figuring out how the public sector, especially in southern California and California overall, can play a more active role in terms of accelerating public finance and project development support is the question to be answered as we look toward building a more equitable and resilient COVID recovery.

“How can that [Build Back Better] money be best used? ...Figuring out how the public sector, especially in southern California and California overall, can play a more active role in terms of accelerating public finance and project development support is the question to be answered as we look toward building a more equitable and resilient COVID recovery."