The White House blog announced that Barack Obama is engaging in several innovation-themed events during the week of June 20^th. One is the formal announcement of the winner of the ninth manufacturing hub competition: Smart Manufacturing Leadership Coalition in Los Angeles. The coalition will get $70 million of taxpayer money, and based on the work of similar winners it will be used to create a manufacturing organization that functions as a combination advocacy and networking group and research center that funds projects and engages in workforce education and training.

This sounds like a typical application of government largess aimed at helping the economy grow, but it’s doubtful that it will have much of an effect. Of course something will come out of it – after all they have $70 million to spend – but the impact is unlikely to meaningfully alter California’s or even L.A.’s economy. This is because most government officials are largely unaware of what spawns innovation, and as a result they do the wrong things.

The mindset of many government officials is stuck in the mid-20^thcentury, a time when most economists believed that physical investment in equipment and factories was the key to economic growth and prosperity. There was some acknowledgement that investing in research and development (R&D) was necessary as well, but it was taken for granted that any useful new ideas would be costlessly integrated into the economy.

With this worldview, giving $70 million dollars to a manufacturing coalition in L.A. seems like a good idea: The coalition will wisely allocate the funds to the “right” researchers and firms working on the “right” projects, those projects will scale and be implemented, the firms will grow and the local economy will benefit.

But real economic growth is not that easy. Sixty years of largely unsuccessful foreign aid has taught us that the rules and institutions – both formal and informal – that govern the economy can nurture or obstruct the benefits of new ideas and investment. Many policy makers and government officials accept this reality when it comes to countries, but far fewer recognize that it’s just as true at the local level.

The Smart Manufacturing Leadership Coalition will be primarily investing its resources in firms in the Greater Los Angeles area, an area that by its actions has revealed itself to be hostile towards innovation. For example, the Los Angeles planning commissionwants to restrict the use of Airbnb by charging homeowners a “hotel tax” and limiting the types of units that can be rented along with the number of days they can be rented.

In fact, Los Angeles’ local government incessantly interferes with the economy. L.A. officials have increased the minimum wage to $15 per hour, banned fast food restaurants in South L.A., and oftendrown entrepreneurs in a sea of red tape. These actions increase the cost of doing business and create an economic environment full of uncertainty, since one never knows what city officials will do next.

Moreover, California’s state government is also antagonistic towards innovation and entrepreneurship. California is ranked 49^thin the Mercatus Center’s Freedom in the 50 states index, which ranks states on measures of economic and personal freedom. It also has one of the worst tax climates in the country: The tax foundation ranks it 48^th in its business climate tax index.

California also followed Los Angeles’ lead by increasing the state minimum wage to $15 per hour, which will disproportionally harm the state’s poorer, rural counties, and environmental regulations such as Proposition 65 have become a source of countless frivolous lawsuits that increase the cost of doing business in the state.

As the White House blog says, “America’s capacity for creativity and invention is a major reason why our economy is the strongest and most durable in the world.” This is an accurate statement, but America’s economic success isn’t due to top-down investment in politically favored industries and firms. Instead, America’s ability to innovate is driven by risk-taking entrepreneurs who use their talent and ideas to provide us with new things that improve our lives.

We don’t need to take money out of private hands, funnel it through the inefficient government apparatus and then return it to firms in the form of government grants and subsidies in order to have an innovative economy. What we need are local governments that provide basic goods and services such as infrastructure, a police force and a court system and then get out of the way.

The Greek poet Alcaeus wrote “Not houses finely roofed, or stones of walls well built, nor canals nor dockyards makes the city, but men able to use their opportunity.” The idea that innovative people drive local economies has been echoed by modern urban economists such as Harvard’s Ed Glaeser who has written that “Private entrepreneurs, not public officials, power urban economies.”

To create real economic growth, public policy needs to allow for risky experimentation. There is evidence that urban areas that have an accepting attitude about risk are more innovative. Cities that want to gain a real competitive edge don’t need a government funded “manufacturing innovation institute.” They need risk-loving individuals who increase a city’s chances of innovating.

One way for a city to attract risk-loving entrepreneurs and foster innovation is to implement a policy of permissionless innovation. In his book, researcher Adam Thierer writes that permissionless innovation “is the notion that experimentation with new technologies and business models should generally be permitted by default.” This is an alternative to current city regulatory regimes, such as the one in L.A., that rely on the precautionary principle.

The precautionary principle is based on the idea that because some new products, services, or technologies may cause harm, the creators of these new things need to demonstrate that they are safe before they can be brought to the market. Local regulations that follow the precautionary principle include occupational licensing, business licensing, liquor licensing, and many zoning laws, all of which require entrepreneurs to get government permission before engaging in new endeavors.

Technological innovation is increasing at a faster pace than ever before, but local regulations force innovative entrepreneurs to fit their new products and services into a regulatory system designed for a slower-paced industrial economy rather than our modern, faster-paced service and technology economy.

No amount of federal or state money can overcome a regulatory regime based on the precautionary principle that stifles innovation by limiting the trial-and-error process. Instituting a climate of permissionless innovation is a better, cheaper and conspicuous way for a city to show that it’s truly interested in fostering real innovation.

Novel products and services will always have kinks that need to be worked out, but as Thierer notes, “trying to preemptively plan for every hypothetical worst case scenario means that many of the best-case scenarios will never come about.”