The bankruptcy of solar-energy company Solyndra, taking half-a-billion taxpayer dollars down with them, has been described as the “first major scandal of the Obama Administration.” E-mails are demonstrating the Office of Management and Budget (OMB) had reservations about the deal and even predicted, virtually to the day when Solyndra would go bankrupt.
Even after Obama took office on Jan. 20, 2009, analysts in the Energy Department and in the Office of Management and Budget were repeatedly questioning the wisdom of the loan. In one exchange, an Energy official wrote of “a major outstanding issue” — namely, that Solyndra’s numbers showed it would run out of cash in September 2011.
Since it was apparent that Solyndra would not likely survive even with a government loan guarantee, why did the Obama Administration push so hard to provide taxpayer support? The simple fact is that the power of eco-fads supplanted sound judgment.
Megan McArdle of The Atlantic offers this assessment:
For the government, there was no upside: they were on the hook if the loan failed, but all they got if the loan succeeded was the psychic benefit of a job well done.
If the company failed, which it did, taxpayers would be on the hook. If the company succeeded, taxpayers could receive nothing, but politicians would be able to point to a success. This is precisely what lies at the center of eco-fads. Politicians are willing to take foolish risks with taxpayer money in the hopes they can look “green.”
Not all companies with government loan guarantees end up bankrupt, of course. But the need for government loan guarantees tends to indicate the companies in question aren’t strong enough to receive traditional private support. Worse, loan decisions are made, as in the case of Solyndra, for political purposes which further obscure economic realities.
One Nobel-Prize winning economist has outlined why these types of politically chosen projects so often fail:
You can’t propose a one-size-fits-all policy for industries as different as aircraft, semiconductors, and telecommunications. Instead, you have to base interventionist proposals on detailed predictions about how firms will change their strategies in response to hypothetical policy changes, how these strategic moves will affect profits, wages, R&D, and so on, and finally, how all of these changes will spill over to the economy at large. To have any hope of doing all this you need lots of detail about the technology, history, and policy environment of an industry – and even then you may, if you admit it to yourself, be at a loss when it comes to making quantitative judgments.
Analysts point to this very dynamic in the Solyndra case. China became more competitive, making it hard for Solyndra to survive. It was difficult to predict this, and the decision to offer the loan guarantee was built more on wishful thinking and politics than sound finance.
Have politicians learned their lesson from this experience? Unlikely. The power of eco-fads is strong and there is an election on the horizon.
Oh, by the way, who was that Nobel Prize winning economist? Paul Krugman.