My dad told me he wants me to be able to explain economics to him when I come back from Yale. Here is an initial, probably clumsy, but at least topical, attempt to be a dutiful daughter. This is one of my first forays into the dismal science so please use the comment box to correct my mistakes.
I just had a class on green energy policy, where we explored the different ways of telling the story of Solyndra, a solar panel manufacturer based in California that just went bankrupt. Solyndra was one of the companies to do well out of Obama’s green jobs stimulus package a few years ago. It received a $535 million loan guarantee from the federal government. (Note: a loan guarantee means that the government only spends money if the company cannot pay the loan back; if the company thrives, there is no cost to the government.) This was a scheme set up under the Bush administration, but it began under Obama. Solyndra became an example of the green jobs scheme: both Obama and his deputy, Joe Biden, went to visit the company and deliver speeches. Biden declared Solyndra was an example of creating ‘permanent’ jobs.
Solyndra just went bankrupt because its business model didn’t work. It makes solar panels without using silicon, and it was betting that the price of silicon would keep rising so the Solyndra panels would get more and more competitive. But the price of silicon has been falling for a while, and Chinese companies especially are undercutting this US company. The interesting part of this is that there’s evidence to suggest the Department of Energy knew Solyndra would fail, but still allowed it to receive the federal loan guarantee. Other evidence also suggests a key Solyndra backer donated a lot of money to the Obama election campaign.
So, on to the principles we can draw out from the facts. Let’s pretend we’re Republicans, a nice place to be right now because they’re having a heyday with this story. The government does not make a good venture capitalist! we cry. It’s rubbish at picking winners, which shows we should leave these matters to the market, to the investors who really know what they’re doing, not the career bureaucrats. Real businesspeople would never have made such a schoolboy error. And also – what’s this about Solyndra paying lobbyists? Shocking, absolutely shocking: the government is obviously biased and we shouldn’t let it make these sorts of decisions in future.
Ok, now let’s stop pretending to be Republicans (unless you are one, in which case you could consider stop being one) and look at the bits of the story they missed out, which don’t make sense even on their capitalist terms. Firstly, it’s not easy being a start-up company. Most start-ups fail. Venture capitalists know they won’t see returns on all their investments, green or otherwise, which is why they have investment portfolios with lots of different companies. This particular portfolio of loans is worth roughly $30 billion, which means that if Solyndra is the only business to fail, the government will still have leveraged $30 billion of private capital with only Solyndra as a cost (remember, it was a loan guarantee from the government, not a loan).
The second non-Republican argument is that new technologies need a leg-up to be able to compete with more established ones, like oil. Oil companies have had decades to improve their efficiency, and new companies need some initial investment to help them reach a more efficient stage and be able to compete. Note that despite their mature age, oil companies still receive enormous amounts of US government subsidies: the Environmental Law Institute estimates traditional fossil fuels received $70 billion between 2002 and 2008, while traditional renewables got $12 billion.
The third rebuttal to the free-marketing Republicans, is that currently there is not a free market in energy. The prices of fossil fuels do not accurately reflect their real costs to society, which include costs to human health and the environment on which all human activity relies. This is the biggest subsidy we give to fossil fuels. For more on this, see the Hidden Costs of Energy report by the National Academy of Sciences. Giving subsidies to clean energy companies is a way of making price signals more accurate reflections of reality.
The only argument that holds any water is the one about lobbying, which I strongly agree is a real problem in US politics. I do not know, however, how Republicans can make that argument with a straight face because when it comes to dishing out political favours to their wealthy friends, they’re just as bad as the Democrats. But that’s a topic for another blog.
I’m also not an economist, but perhaps there is an additional issue to consider, if we believe in a Keynsian or post-Keynsian view of economics. In a recession, Governmet spending should be used to stimulate the economy, because private business are less willing to. This spending puts additional money into circulation creating jobs and boosting the economy. The ‘failed’ loan actually did it’s job just fine from this perspective. The solar company still spent the money. They still purchased a whole bunch of supplies, raw materials, equipment, etc. That money is therefore still circulating in economy. So from this perspective the important part of the loan guarantee scheme was spending the money, getting it back again later was just going to be an added bonus.
I agree that govt spending should be used to stimulate the economy, but from this perspective the Solyndra deal wasn’t a great one, because the jobs didn’t last very long. $535 million for 1100 jobs for a couple of years is a pretty costly stimulus – if you’re aim is to create jobs, perhaps it would have been better to invest in something that wasn’t going to crash so soon, to keep the money circulating in the economy for a more sustained length of time?
Also, what would the Republicans want to spent it on instead? They keep telling us it should be tax cuts for millionaires. Millionaires are far far more likely to save the money than spend it compared with ordinary Americans. Thus the Republican plan is far worse than a failed Govt loan, because the money would never even enter the economy in the first place!
Technical point: The Environmental Law Institute report shows those subsidy figures over the seven year period of 2002-2008, meaning a yearly subsidy for fossil fuels of $10bn, and renewables about $1.7bn!
More importantly, the fossil fuels subsidies are largely in the forms of permanent tax breaks, whereas the renewables subsidies are time-limited guarantees and other similar mechanisms.
I agree with your point about the human and environmental cost subsidies to fossil fuels, but it’s a tricky point to argue convincingly to sceptics.
Many renewable energy sources just seem straightforwardly more expensive at the moment.
Oops, thanks for correcting me Laurence! And yes, climate change denial is a whole other dimension to the debate which I didn’t tackle here, but which key to understanding the furore over Solyndra.
Presumably, if you are a Hayekian tea-party libertarian-type the issue is exactly one of opportunity cost (as Neil suggests) and the answer is that they don’t want the government to spend it on *anything* instead. They would answer that it isn’t about the money entering the economy (from the government) but about the government not having the money, because they’ve never taken it out of the economy in the first place
Doesn’t the negative externalities argument apply to this though?
of course the wider issue is one of the idea of free markets being fictional. Markets are always supported by both ideology, community and state-apparatus. Something that Elizabeth Warren put so eloquently recently and which misunderstandings about colour so much of the so called debate between free marketeers and their opponents
Quite. Everyone see here for the Elizabeth Warren’s comments: http://www.cbsnews.com/8301-503544_162-20110042-503544.html