Market Loser Is a Political Winner

COMMENTARY Energy Economics

Market Loser Is a Political Winner

Jul 19th, 2010 3 min read

Former Senior Research Fellow, Labor Markets and Trade

David Kreutzer researched and wrote about labor markets and trade.

President Obama has picked another “winner” among green technologies meant to portend an energy revolution. This time it is a Korean-owned battery factory in Michigan, part of a $2.4 billion government investment in electric car battery technology in spite of a global glut of battery supply. However, the question is not really whether the technology is a good or bad idea but rather why the federal government is making these investment choices in the first place.

Perhaps it is because the government has a valuable role to play in spotting and investing in the companies that can deliver the technologies of the future. Looking at the recent record suggests that the government is less adept at picking winners and losers than just picking losers.

A case in point is Solyndra, a California solar panel manufacturer. The company was one of the early beneficiaries of loan guarantees under the stimulus bill, to the tune of $535 million. Vice President Joe Biden said that the investment was “exactly what the [stimulus bill] is all about.” Given Solyndra’s record, that statement is an admission of what a raw deal the bill may turn out to be.

Solyndra, in spite of government largesse, was forced to cancel a $300 million initial public offering because of a bad audit by Pricewaterhouse Coopers, which raised concerns about the firm’s viability. The concerns are understandable given that Solyndra’s production costs are six times those of other producers.

So, what’s a firm to do when private capital markets give it a thumbs down twice? How about asking the government to double down on their losing bet and ante up another $469 million in government loan guarantees? Yes, a firm that recorded a net loss of $172.5 million in 2009 and couldn’t raise $300 million in equity wants to have taxpayers guarantee over $1 billion in loans.

According to some in Washington, it’s not so important whether spending is efficient. They say government spending, even on companies with dubious business models, is beneficial because it has a stimulating effect on the economy. This argument is also at odds with reality. The government doesn’t earn money; it redistributes it. So when it spends money to subsidize a company like Solyndra, some private spending is foregone. This is called opportunity cost. Public spending and lending necessarily crowds out private spending and investment.

The effects of this crowding out are substantial, which is in large measure why the Obama stimulus plan has thus far failed to create jobs and foster recovery. Recent Heritage Foundation analysis shows that current unemployment is actually higher than Obama’s economic advisors predicted it would be without the stimulus. The Obama Administration had predicted it would stay below 8 percent with the stimulus and reach 9 percent without. With the stimulus, the unemployment rate peaked at 10.1 percent and is 9.5 percent even now. Job growth will only be slowed by continued misallocation of capital by trillion-dollar stimulus plans.

The fact of the matter is that public dollars are doled out according to political rates of return, not economic rates of return. This is why battery factories without a market and solar panel manufacturers that cannot post a profit can receive substantial sums. Solyndra apparently spent $140,000 on lobbyists in the first quarter of this year alone—and it’s very clear why. Firms need government investment only when they cannot pass the first market test of revenues versus costs. Private markets judged that Solyndra, which has posted net losses in excess of $400 million in the past two years alone, fails this test. It is a striking example of how a firm can sustain exorbitant economic losses while posting political profit. Don’t expect it to be an isolated incident as the government continues to increase its investment in the private sector.

This piece originally appeared in The Daily Signal