In January, I wrote an article on the government’s role in supporting basic science, invention and innovation. In the opening paragraph of that article I said: “The Obama administration claims the government can ‘create jobs’ through technology, particularly green technology. The president argues that the technology is there and all it needs is a ‘nudge’ from the government. He does not explain why private interest does not do the ‘nudging’ if that is in fact the case. Clearly, the private sector does not believe these technologies are ready for prime time.”
The Solyndra bankruptcy scandal is a textbook example of what is wrong with these policies. Solyndra was an energy company that planned to produce solar panels in California. In 2007, the company applied for a subsidized government loan. The loan application was slow-walked and ultimately put on hold by the Bush administration.
Immediately after taking office, the Obama administration released the hold and fast-walked the application, which resulted in a $527 million loan to Solyndra. One of the Solyndra principals was a major contributor and bundler for Obama’s presidential campaign. Before the loan was approved, the Solyndra principal met four times in the White House with senior Obama administration officials.
As part of the loan guarantee, some Energy Department officials were allowed to sit in on the company’s board meetings. Recent newly released emails reveal the loan was approved over objections by Energy Department and Office of Management and Budget analysts. Further, a few weeks before the company went bankrupt, the Obama administration restructured the loan so the government was no longer the first to be paid if the company went bankrupt.
It is important to remember, Solyndra could not get financing from the private sector, and that has significance. One of the venture capitalists (the people who are in the business of financing new technology ventures by putting their own money at risk, not the taxpayers) who reviewed the proposal noted the company’s expected cost per kilowatt hour was $6, but without subsidies, they could only sell it for $3 per kilowatt hour.
Clearly, the venture capitalists rejected the deal. Even if they had accepted it, can you imagine any circumstance under which they might restructure the loan so that they did not get paid first?
At another point in that January article I said: “The government can only make room for green energy by restricting existing energy sources; that is, limit exploration for oil/gas and prevent the building of nuclear power plants. If the government does not block these high-paying private jobs, the size of the subsidy required for green energy grows exponentially. The government can only make green energy work by reducing the supply of conventional energy. The opportunity cost of green jobs is the loss of conventional energy jobs.”
Consider how much better off we would be if we had not guaranteed the Solyndra loan and instead just removed the restrictions on domestic drilling and nuclear power.
Finally, I said: “When the government directs innovation it substitutes politics for economics. The intervention creates multiple opportunities for political corruption. If the government leans against market forces, it creates vested interests that profit by paying politicians to do what they want. If the government stands aside and lets the marketplace decide what works and what does not, the politicians lose control and then lose the opportunity for graft. Politicians are heavily biased against free market forces and towards government control.”
Bob Martin is emeritus Boles Professor of Economics at Centre College.