Tuesday, September 06, 2011

Why the government shouldn't be picking winners and losers

Michael Grunwald in Time Magazine reports that the Obama administration recently restructured the loan guarantee to Solyndra so that the investors, one of whom was a big-time Obama campaign donor and the other was associated with the Walton family, would be paid out first ahead of the federal government in case of a bankruptcy. The administration doubled down on their original investment because they figured they'd already invested so much in the company, they had to keep on pumping in federal funds.
“We were already in deep,” one official recalls. “We looked at every relevant scenario to maximize the recovery for the taxpayer. We did due diligence as if this were a brand new transaction…The takeaway is, at every juncture we did whatever we could to ensure the best possible outcome for the taxpayer. I think we structured a pretty impressive deal.”

In other words: The operation was successful, but the patient died. Politically, it’s probably an impossible case to make. But that doesn’t mean it’s wrong.
Grunwald then goes on to absolve the Obama administration of fault in this case because they had good intentions and when you're spending billions of dollars investing in companies, some of them are just bound to fail.
This is sure to play out as a scandal, but based on what we know so far, it shouldn’t be. Private loans go south all the time. The federal loan guarantee program has budgeted $2.5 billion for failures like this; so far, the program has made about $30 billion worth of loans, and has leveraged another $20 billion in private financing.

The Obama administration has made bets on hundreds of clean-energy companies in dozens of clean-energy sectors; some of those bets in its portfolio are bound to go bad, just as Richard Branson picks an occasional lemon. It’s legitimate to question whether the government should have made this particular bet, or whether it overplayed a weak hand, or whether it should be making bets in the first place. But if we’re going to have a clean energy industry in this country, this kind of thing is going to happen. It doesn’t mean anyone cheated.
Nice try.

Even if this episode doesn't strike you as a particularly smarmy bit of crony capitalism, it should still make one doubt that the federal government should be in the business of picking companies to invest in. Let the private market do that. If we are going to have a viable clean energy industry it must be because there are profits to be made in doing it. If not, we'll just be throwing taxpayer money at all sorts of companies established to win those federal dollars rather than to make a profit selling something the American people want to buy. Since so many of the spending that the Obama administration has made in supposedly clean energy has turned into a big bust, it's time to reassess the whole proposition that Time's Grunwald accepts whole hog - that the government is the best allocator of scarce resources.