Should Government Help Fund Startups?

I've been running an ongoing, informal debate about the role government should play in encouraging entrepreneurship.

At the root, I believe that what a government chooses to spend its money on is a leading indicator of the health of a nation...is it historical or future-looking? Is it 'enjoying today', or delaying instant gratification and instead investing in the future?

And, is it putting money into things that: a) are productive; and b) leverage the country's strengths?

It's kind of like the old 'guns vs. butter' economic model that suggests any entity-- whether a country, company, or individual-- should produce that in which it has a competitive advantage, and use that output to trade for what it needs.

In other words, "play to your strengths". The U.S.'s strengths have increasingly been found in ideas and innovation, not in manufacturing.

So, I like the spirit of this Op-Ed piece in the New York Times. In short, it questions the logic of spending billions propping up GM and Chrysler, when we could be putting that money to work to launch the next tech startup or cleantech success.

http://www.nytimes.com/2009/02/22/opinion/22friedman.html?_r=1&scp=1&sq=startup&st=cse

I agree wholeheartedly. To be fair, however, it is a simplistic notion that overlooks a lot of real-world details. And my main objection is also why I have often voted libertarian: government is typically not an efficient allocator of resources. Bureaucracy, bloat, and general inefficiencies are the norm, not the exception. Here's an example:

http://www.chron.com/disp/story.mpl/editorial/outlook/6426549.html

Nonetheless, if the government is going to waste my tax dollars, I would still like it to be spent on something that has a chance of being a homerun, vs. propping up the icons of yesteryear, no?