In the spirit of Christmas, I thought I would take an opportunity this holiday season to tell the embattled Secretary of the Energy Department “I told you so” over the Solyndra solar development loan debacle. Here’s my op-ed in the Washington Times today (also available here):
VERRET: No, dude, we don’t need more Solyndras
Beltway rent-seekers will always find business failureBy J.W. Verret
The Washington Times
Friday, December 9, 2011Illustration: Burning money by John Camejo for The Washington Times
Every once in a while in Washington, you see a power grab so blatant and unabashed that it shocks the consciences of even Beltway veterans who make their livelihood in the government game. This brings me to a recent opinion column featured in Politico in which venture capitalist Joe Horowitz, a Solyndra investor, argued that the U.S. government actually needs to invest in more … Solyndras.
Many Americans are concerned that federal bailouts have resulted in a transfer of wealth from taxpayers to big banks and businesses. In the case of the Department of Energy’s loan guarantee program for clean-energy projects like Solyndra’s, however, the wealth transfer is both more egregious and more evident: from taxpayers to political contributors.
The Solyndra scandal demonstrates that often, the real beneficiaries of government interference, be it subsidization or regulation, are elected officials and their preferred interest groups. Additionally, unnecessary government involvement in marketplaces, like that for “green” energy, stifles competition and inhibits companies from producing novel, moneymaking ideas and instead encourages them to expend resources keeping their government supporters happy.
Economists call the payments that politicians get from conferring government-provided benefits onto certain companies “rents.” The best way to succinctly describe rent-seeking behavior is simple: The big players in an industry enjoy profits they don’t deserve and earn only because of their access to politicians. Subsidies, cheap loans and regulations that favor some companies over others are the most frequent ways this happens.
Solyndra represents an almost perfect case of rent-seeking behavior by political insiders. The resulting direct losses caused by this rent-seeking is also easy to identify in a loss of more than $500 million in taxpayer money. The indirect losses could be far higher.
Once the rent-seeking culture infects a company, the accountability and moral fiber of its executive leadership begin to atrophy quickly. Rather than a sleek incentive to make the business work, the executives focus on maximizing their ability to manipulate the Beltway rent-seeking culture. The poster children for this problem, Fannie Mae and Freddie Mac, have sucked more than $100 billion from taxpayers and continue to live on like immortal vampires feasting on America’s gross domestic product.
In the normal course of business, outside the Washington Beltway, the revenue line on a company’s income statement provides a logical discipline. It reflects a precise measure of how much the world values the goods a company is producing. But in the case of Solyndra and other companies like it, their revenue numbers reflected imaginary demand created by a combination of government subsidies and preferential treatment by government regulators. In short, the revenue line on Solyndra’s income statement didn’t reflect real demand, it only reflected short-lived and unjust government rents.
In fact, I wrote a paper two years before the Solyndra fiasco in which I warned that government ownership of businesses and government provision of subsidized loans to businesses would result in highly inefficient allocation of resources, and I specifically referenced theEnergy Department’s energy loan program. I shouldn’t – but I can’t resist: Energy Secretary Steven Chu, I told you so.
Evidence brought forward in the congressional investigation surrounding Solyndra’s $535 million loan guarantee from the department suggests that political pressure may have motivated both the original funding of Solyndra and the department’s agreement allowing new investors to get paid out first in the case of the company becoming insolvent, as well as the department’s continued support of Solyndra in the press even in the face of troubling financial reports from the company.
However, even if the loan guarantee program hadn’t worked to benefit political interests, it represents a bigger and, perhaps, more pervasive government folly: government interference in the private marketplace for innovation.
Not only should Energy not be gambling with taxpayer money, but this gamble serves only to hurt the future ability of solar power and other green energy to compete with traditional sources. The department’s guarantee program caused much of the venture-capital industry to focus on those firms able to obtain funding through negotiations with the government rather than on firms able to germinate profitable ideas.
J.W. Verret is an assistant law professor at the George Mason University School of Law and a scholar at the Mercatus Center.
The “I told you so” comes from a piece I published in the Seton Hall Law Review last year and submitted in 2009, “The Bailout Through A Public Choice Lens: Government Controlled Corporations as a Mechanism for Rent Transfer” available here. The article’s primary focus was the bailout and government control through equity holdings, but it also referenced the DOE’s alternative energy loan program and the government’s control through debt. Here’s the abstract:
Through the Troubled Assets Relief Program (TARP) bailout, the government took a controlling interest in a number of companies that remain publicly traded. There is significant prior debate over the consequences of government control of private-sector resources, but the present dynamic of government ownership through voting equity in publicly traded equity is fairly novel in the modern U.S. economy. This Article considers how the government is likely to put political pressure on firms taking bailout support through its equity voting power to cater to politically influential interest groups.
This Article first explores a number of instances of government pressure at bailed-out firms that have worked in favor of politically influential interest groups. It then explains the process by which this occurs through a novel contribution to public choice theory. This contribution treats rent-seeking as a two-step process by which government-controlled firms use their politically conferred rents to subsidize transfers to interest groups. The Article also examines the incentives facing bureaucrats in overseeing the government’s investment.
This Article then considers the constraints of administrative law and reveals how in this context they offer little remedy against the public choice conflicts of government-controlled firms. In part this is due to the exceptions to administrative law constraints found in the bailout legislation, but in larger part it is due to the fact that the government’s power is often implicit in this context.
This Article closes with an examination of the TARP Recipient Ownership Trust Act, which would house the government’s investment in a number of trusts governed by independent trustees, which among other provisions is designed to serve as a buffer between political pressure and private industry. This Article also offers criticism of a counter-proposal from Professor Emma Coleman Jordan, issued through the Center for American Progress, that requires nomination of “public directors” to the Boards of bailout recipients who are accountable directly to the government.
The result is a thorough understanding of how public choice theory offers some predictions for how the government will use its controlling investment in bailout recipients and an understanding of whether, and to what extent, properly designed trusts can limit some of these costs.