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Friday, September 16, 2011

The real problem with the Solyndra story

We're finding out all sorts of unsavory details of how the administration somewhat blithely committed the US government for half a billion dollars to guarantee loans for Solyndra. That in of itself is a scandal. The administration seems too think that the policy was a good idea and Solyndra was just one bad story in the midst of many wonderful successes.

But the real scandal is the administration's blind support for the whole concept of federal support for selected industries. This sort of planned industrial policy has for years been appealing for liberals and some conservatives but the government is not the best determiner of what will succeed in the marketplace. And the results from the President's push for investment in so-called "green jobs" is now being revealed for the massive failure that conservatives were predicting from the beginning. We already had the example of the terrible problems in Spain's investment in green technology, yet Obama insisted on following that failed example.
Obama’s efforts to create green jobs are lagging behind expectations at a time of persistently high unemployment. Many economists say that because alternative-­energy projects are so expensive and slow to ramp up, they are not the most efficient way to stimulate the economy.

“There are good reasons to create green jobs, but they have more to do with green than with jobs,” Princeton University economics professor and former Federal Reserve vice chairman Alan Blinder has said.
The administration is claiming that they've "saved" 33,000 jobs at Ford because it guaranteed loans of $5.9 billion in loans for Ford to upgrade plants to create more energy-efficient vehicles. But not so fast.
Several economists said they doubt the loan program saved 33,000 jobs at Ford.

“I always take these job estimates with a big grain of salt,” Josh Lerner, a Harvard Business School professor who has written about failed government efforts to stimulate targeted industries, said in an e-mail. “There tends to be a lot of fuzzy math when it comes to calculating these benefits (regardless of the party taking credit for the program).”

A Ford spokeswoman said the loans helped “transform what were primarily truck/SUV plants into flexible manufacturing plants capable of building more fuel-efficient vehicles.” That flexibility is key to “helping retain the 33,000 jobs by ensuring our employees can build the fuel-efficient cars people want to drive,” said Meghan Keck, who handles government relations for Ford.

Mark Muro, a Brookings Institution fellow who researches the clean-tech industry, said the agency appears to be counting every employee working in upgraded plants, when the more relevant question is how many workers would have been laid off without the loans.
Despite all these sunny announcements from the administration, the evidence is not there for the claims of thousands of jobs "created or saved" through stimulus funds.
Still, agency projections indicate that creating jobs is a laborious process. If the 20 companies that have won loans so far deliver all the new jobs they have promised, they will hire a total of 8,050 new workers for permanent positions. Half of those 20 companies have neither created nor saved any permanent jobs yet; several won their loans only recently. Even the BrightSource project, which employs 700 construction workers now, will employ only 86 people on a permanent basis.

Obama administration officials say the jobs are high-quality and will improve the economy’s productivity. In addition to the loan guarantee program, the Obama administration has targeted “green jobs” through cash grants for wind farms and weatherization grants to state agencies.

Muro said administration-supported projects “that may have been honorable investments in technology were sold as short-term job creators for political reasons,” he said. “Exaggerated expectations about jobs were set.”

The eventual cost of the loan guarantee program for taxpayers remains unclear. If the revised 60,000 target is reached, it would work out to about $640,000 in loan guarantees for every job created or saved. These financing guarantees were approved by Congress as part of the American Recovery and Reinvestment Act.

If the companies do well, they won’t need to draw on the guarantees and won’t cost the government anything. But if the companies go bankrupt, as Solyndra did, taxpayers will be on the hook. Moreover, the Treasury Department’s Federal Financing Bank has been directly lending — at extremely low, subsidized rates — to companies that win Energy Department guarantees. Congress and the administration assumed a failure rate of 5 to 10 percent for the program. Solyndra represents about 3 percent of the loan guarantees made so far.
Jim Hoft at Gateway Pundit has run the math based on the Department of Energy data and come out with an astonishing result.
The Obama Administration spent nearly half of the $38.6 billion ($17.2 billion) set aside for his green energy programs and was only able to create 3,545 permanent green jobs.

This comes out to a staggering $4,853,000 per job.
If only the administration realized that a bunch of bureaucrats and politicians are not the optimal ones to figure out which companies should be given millions of dollars in support from the federal treasury and which companies should have to go out on their own. But, alas, no. Failure has not brought enlightenment. Instead, they want to double down continuing such misguided priorities.

Republicans aren't clean on this entrepreneurial hubris. Rick Perry has funded favored jobs in Texas through his own government handouts.
The Emerging Technology Fund was created at Mr. Perry's behest in 2005 to act as a kind of public-sector venture capital firm, largely to provide funding for tech start-ups in Texas. Since then, the fund has committed nearly $200 million of taxpayer money to fund 133 companies. Mr. Perry told a group of CEOs in May that the fund's "strategic investments are what's helping us keep groundbreaking innovations in the state." The governor, together with the lieutenant governor and the speaker of the Texas House, enjoys ultimate decision-making power over the fund's investments.

Among the companies that the Emerging Technology Fund has invested in is Convergen LifeSciences, Inc. It received a $4.5 million grant last year—the second largest grant in the history of the fund. The founder and executive chairman of Convergen is David G. Nance.

In 2009, when Mr. Nance submitted his application for a $4.5 million Emerging Technology Fund grant for Convergen, he and his partners had invested only $1,000 of their own money into their new company, according to documentation prepared by the governor's office in February 2010. But over the years, Mr. Nance managed to invest a lot more than $1,000 in Mr. Perry. Texas Ethics Commission records show that Mr. Nance donated $75,000 to Mr. Perry's campaigns between 2001 and 2006.

The regional panel that reviewed Convergen's application turned down the company's $4.5 million request when it presented its proposal on Oct. 7, 2009. But Mr. Nance appealed that decision directly to a statewide advisory committee (of which Mr. Nance was once a member) appointed by Mr. Perry. Just eight days later, on Oct. 15, a subcommittee unanimously recommended approval by the full statewide committee. On Oct. 29, the full advisory committee unanimously recommended the approval of Convergen's application.
Mitt Romney has a major weakness with his Romneycare policy failure in Massachusetts. If Perry starts twitting him about how he initiated the same policy that Republicans are objecting to from Obama, Romney would have a natural rejoinder that Perry initiated in Texas the same sort of mistaken industrial policy that lead to Solyndra.

Conservatives should oppose any attempt from state and federal government officials to be the ones to pick and choose which companies should receive their largesse. It's bad economics and eventually leads to all sorts not-to-believed coincidences of money going to major donors. It's bad policy even if Solyndra had never gone bankrupt. But it did and perhaps we can learn from that example.

(h/t Hot Air)

1 comment:

pumping-irony said...

"Communism failed for a reason: Government is a horrible capital allocator."
- Soviet expatriate and current US money manager Vitaliy N. Katsenelson