Topic: Energy and Environment

Solyndra: Crooked Politics or Just Bad Economics?

Amy Harder has a good take on the Solyndra issue in National Journal Daily (subscription required):

Lesser evil: crony capitalism or bad policy?

Energy Secretary Steven Chu is about to find out when he testifies before a House panel on Thursday about the $535 million loan guarantee his department awarded to Solyndra, the now-bankrupt solar-energy company that was, before its demise, the poster child for America’s renewable-energy industry and President Obama’s 2009 Recovery Act.

The White House and the Energy Department say the influence of political donors such as Oklahoma oil billionaire George Kaiser, whose venture-capital firm was the major investor in Solyndra, did not sway any of the administration’s decisions on Solyndra’s loan guarantee, which was funded from the stimulus package.

By denying politics was involved, the administration is saying that its top officials genuinely and continuously thought Solyndra was a good bet—despite numerous warnings raised both inside and outside of the administration—and that the loan-guarantee program was being carefully managed despite oversight reports and an internal West Wing memo that said otherwise.

“As time went on, there was a growing concern because of the cash-flow,” Chu said in an interview with NPR on Tuesday. “And so we certainly were watching this and looking at this very closely. And eventually we recognized they were in deep trouble.”

Yet, throughout the two years Solyndra was borrowing money from federal coffers, the DOE essentially stayed the path right up until the bitter end when the California-based manufacturer went bankrupt in September. When Solyndra was on the brink of bankruptcy in late 2010, DOE decided to restructure the loan to try to keep the company afloat.

Meanwhile, in today’s congressional hearing, Energy Secretary Steven Chu insisted that “the final decisions on Solyndra were mine, and I made them with the best interest of the taxpayer in mind… . I did not make any decision based on political considerations.” This came on a day when the front page of the Washington Post reported:

In the two years preceding its collapse, Solyndra and its biggest investor aggressively asserted themselves in dealings with the Obama administration, pushing Energy Secretary Steven Chu to visit the company’s headquarters to help it raise private money and later suggesting it would file for bankruptcy if the Energy Department rejected its proposed rescue plan… .

“The DOE really thinks politically before it thinks economically,” a Solyndra board member wrote in December to George Kaiser, an Obama fundraiser whose family funds owned a third of the company.

Another Shoe Drops: Solyndra Layoff Was Delayed until after Election Day

The Solyndra story just keeps unfolding. Even as Secretary Chu tells NPR that “no decision we made in the loan program had anything to do with who is investing in this company,” today’s papers report that the Energy Department pressured Solyndra not to announce impending layoffs until the day after the crucial 2010 election. From the Washington Post:

The Obama administration, which gave the solar company Solyndra a half-billion-dollar loan to help create jobs, asked the company to delay announcing it would lay off workers until after the hotly contested November 2010 midterm elections that imperiled Democratic control of Congress, newly released e-mails show….

A Solyndra investment adviser wrote in an Oct. 30, 2010, e-mail — without explaining the reason — that Energy Department officials were pushing “very hard” to delay making the layoffs public until the day after the elections.

The announcement ultimately was made on Nov. 3, 2010 — immediately following the Nov. 2 vote.

More than a month ago, I listed some of the earlier shoes in the unfolding story. But as a friend of mine asks about the Penn State scandal, is this the “other shoe,” or is this story a centipede with lots more shoes to come?

Jerry Taylor and Peter Van Doren ignored the politics and looked at the economics of Solyndra and energy subsidies in Forbes.

Federal Energy Failures

In the Washington Post, Steven Mufson does a nice job describing how Solyndra is just one of many energy subsidy failures of recent decades.

I covered some of the same topics as Mufson–including the Clinch River Breeder Reactor and the Synthetic Fuels Corporation–in this study at Downsizing Government. However, I presented the politics of these two projects a bit differently than Mufson. He sort of suggests that the Reagan administration was gunning to kill the Clinch River project, and that only the Carter administration was to blame for Synthetic Fuels.

Regarding Clinch River, President Carter should be credited with trying hard to kill it, but Congress blocked him. The Reagan administration initially supported the project, but that changed as the bad news mounted over time. I noted:  “The combination of bad economics, environmental problems, and cost overruns gave the upper hand to project opponents in Congress, and funding was cut off by a fairly narrow vote in the Senate.”

Regarding Synthetic Fuels, the Reagan administration was once again initially supportive, and it only later changed course due to falling oil prices and numerous scandals in the program. When it became clear that the political winds were changing, I noted that ”there was a mad dash to hand out subsidies before Congress shut the project down.”

That sounds familiar doesn’t it?

Increasing the Energy Independence Ante

Three weeks ago, Cato released my policy analysis, “The Gulf Oil Spill: Lessons for Public Policy”. I argued that governmental intervention in the energy market was ill-advised and documented the depressingly numerous efforts to do more of just that by those who should have known better. On October 31, a working paper that went far further than any I had criticized appeared on the Internet. That paper – written by Robert Ames, Anthony Corridore, Edward Hirs, and Paul MacAvoy, who curiously label themselves the Yale Graduates Energy Study Group – argues for a Presidential proclamation ordering a moratorium on all oil imports save those from Canada. The withdrawal from global oil markets would be phased in over a decade.

As one might expect, there are many problems with their argument.

First and foremost, their case depends upon far greater certainty than is justified on the danger of foreign-supply disruptions, the effects of an embargo on domestic consumption, and the timely emergence of various domestic alternatives to foreign crude, particularly coal-to-liquid technology and biofuels. This ignores horrendous prior experience (something the authors tacitly recognize at the end of their paper by listing the bad energy initiatives of the past).

Their bottom line, however, is that the supply response will be so great that it will generate producers’ profits that far exceed the losses to consumers. The calculation, however, is Orwellian in its premises and is an analytically invalid measure.

Standard international-trade theory indicates that trade restrictions almost always harm the country that imposes them. Trade, nationally and internationally, arises because it is cheaper to swap other goods to get, say, petroleum, than to produce petroleum at home. The Yale Graduates’ calculation covers only the lesser part of the effect – the gains in the import-replacing industry. The larger cost of losses in export industries is ignored.

The Yale Graduates, moreover, effectively assume away the result possible in theory, but not in practice, of an astute level of import control that produces a net gain from lowering import prices without, as the Yale Graduates propose, severely reducing import volume.

In a country already burdened with enormous costs of ill-advised government policies, the last thing we need is such another governmental plunge into a fantasy world. The resulting waste would make Obamacare seem a bargain.

A second, related technical concern is that their calculation of embargo costs departs from standard practice by including the direct cost to oil consumers. Such costs are generally excluded from such calculations because, if import disruption were as probable as the authors assert, people would hedge against them. If they hedge, the cost will be zero.

The hypothetical indirect costs from alleged inflationary and unemployment effects are the usual concerns regarding foreign-supply disruptions. The standard method is to translate these costs into an estimate of the appropriate offsetting level of defensive import restriction. However, while the vast relevant literature is inconclusive about the magnitude of the impacts, it has never before produced figures that imply total elimination of imports. Regardless, Chantale LaCasse and André Plourde pointed out in 1992 that as long as the United States is engaged in any international trade, it will be affected by any oil shock. There is simply no way to wall-off the United States from major economic events abroad.

Objections also arise at several more fundamental levels.

First, the effort would be a horrendous policy initiative. Decades have been spent since 1933 trying to restore international economic integration to its 1914 level. So drastic a step as embargoing oil imports would set a very bad example.

Second, the exclusion of Mexico would violate the North American Free Trade Agreement and, almost certainly, U.S. obligations to the World Trade Organization. Examination of present and prospective patterns of oil imports indicate that the total ban would hurt clear friends as well as actual or possible enemies.

Third, even if the Presidential power to impose oil-import moratoriums (last exercised by President Eisenhower) still exists, its exercise is even more inadvisable that it was in the Eisenhower case. Critics of President Eisenhower correctly argued that the national-defense rationale for keeping foreign oil out of the United States was a fig leaf designed to disguise the real aim of the policy - to protect the independent oil producers who were the prime beneficiary of state production controls. The proposed phased-in embargo would restore the nightmare of quota allocation that messed up the initial Eisenhower program and its implementation by the Kennedy and Johnson administrations.

Fourth, a presidential moratorium would be another unwise assumption of executive power. No president can be trusted correctly to implement such draconian import restrictions or, for that matter, any similar interventions into industry. To make matters worse, no President could be in office for the whole ten-year phase-in period.

It’s hard to believe that serious people could propose such a thing. Exposure to modern economics has greatly reduced errors as gross as this, but obviously not completely.

Note: The cited paper has a peculiar history. A precursor was Robert M. Ames, Anthony Corridore, and Paul W. MacAvoy, “National Defense, Oil Imports, and Bio-Energy Technology,” Journal of Applied Corporate Finance 16 no. 1 (Winter 2004) 28-50. The latest version was posted on the Social Science Research Network, but in four different browsers, the link refused to access the paper. A Google search yielded access to a substantially identical article (with the author order reversed) presented in 2010 to the United States Association of Energy Economists.

GOP Hypocrisy on Energy Subsidies?

When the Solyndra scandal broke in September, I wrote that “Republicans should be careful when casting stones given their past and present support for energy subsidies.” The left has been ripping congressional Republicans for making political hay of the Solyndra affair after having lobbied the Department of Energy to bestow their constituents with similar taxpayer handouts.

ThinkProgress released a report that documents letters sent by 62 Republican members of Congress to Energy officials groveling for subsidies. Are these Republicans hypocrites? I’d say that it depends. I think the members who justified their request on the basis of “job creation” while criticizing the Obama administration for justifying its stimulus packages on the same grounds belong in the “yes” column. Also belonging in the “yes” column are those subsidy-seeking members who have chastised the administration for engaging in “crony capitalism” and “picking winners and losers.” On the other hand, I don’t think the sole act of criticizing the Solyndra deal while begging Energy for money necessarily makes one a hypocrite.

According to ThinkProgress, “Republicans are on a war path to defund all clean energy programs – despite the fact that these Republicans previously were proponents of the program when it helped clean energy companies in their districts.” Even if it were true that Republicans now want to “defund all clean energy programs” (I wish), I wouldn’t have a problem with policymakers suddenly finding religion on the issue. As far as I can tell, all of the letters that ThinkProgress lists were sent pre-Solyndra, which means that the “sinners” now have a chance to repent.

Sen. Jim DeMint (R-SC) recently did this when he called for the abolition of the Economic Development Administration while acknowledging that he wrongly supported the program in the past. Prominent Republicans cited in the report (e.g., Sen. Jeff Sessions (R-AL), Rep. Mike Pence (R-IN), and Republican Study Committee chairman Jim Jordan (R-OH)) now have an opportunity to admit that they were wrong and atone for their mistake by working to eliminate the programs they sought to benefit from.

My expectations for this happening are admittedly very low. Instead, I expect most – if not all – of the Republicans in question to respond with a combination of silence and excuse-making. The chief excuse will be that the money was already appropriated so they might as well try to secure a piece of the pie for their taxpaying constituents. That excuse might fly with some folks on the right, but I think it’s absolute hogwash: you’re either part of the solution or you’re part of the problem.

See this Cato essay for more on why energy subsidies should be abolished.

Big Sky, Big Buses, and Big Bill Niskanen

I first met Bill Niskanen at a conference in Big Sky, Montana soon after he had left the Reagan administration. At the time I was an environmentalist with free-market leanings rather than (as is the case for many of my Cato colleagues) a free marketeer who cared about the environment. Mainly because of James Watt, environmentalists weren’t too happy with the Reagan administration, and all I knew about Bill was that he had chaired Reagan’s Council of Economic Advisers. I must have been intimidated: in my memory he was about 6’-4” tall, and I was surprised later to find he was only a little taller than my 5’-7”.

I didn’t know it at the time, but Bill’s 1971 book, Bureaucracy and Representative Government, would prove to be a major influence on my 1988 book, Reforming the Forest Service. Bill was the first to suggest that government agencies work mainly to maximize their own budgets rather than serve some social good, and the budget maximization hypothesis was the only explanation I could find that fit all of the Forest Service’s behaviors I had observed since the early 1970s.

Years later, when I renewed my acquaintance with Bill, I was surprised to learn he had grown up in Bend, Oregon, a few miles from where I live. The last time I saw Bill, he graciously agreed to chair a policy forum on transportation issues, which I knew interested him because his father (also named William) owned Pacific Trailways and had won a major anti-monopoly lawsuit against Greyhound. Coincidentally, earlier this week I attended the annual meeting of the California Bus Association, many of whose members remembered Bill and asked me to say “hello” for them. Sadly, I won’t get a chance.

Bill’s lifelong habit of putting principle before self-interest is an inspiration for everyone at Cato and in the free-market movement in general. I am proud to have known him.

Solyndra: Peeling Back the Layers

As I noted previously, the story of the taxpayers’ failed $535 million subsidy to the Solyndra company just keeps building as reporters keep digging. When the Democrats on the House and Energy Commerce Committee released selected emails from the Obama administration, I asked one reporter:

If OMB and Obama’s California campaign co-chair, the former California state treasurer, were trying to put the brakes on the Solyndra enthusiasm, who had his foot on the gas?

Could the answer have been merely Steven J. Spinner, “a senior Energy Department adviser … a major fundraiser for President Obama and a Silicon Valley investor tasked with helping the government invest in clean-technology companies [who] had an ethical conflict: His wife worked for Wilson Sonsini, a California law firm that represented Solyndra, the solar-panel maker, in its applications for the government loan”? Spinner is now a senior fellow at the Obama-adjunct Center for American Progress, where as recently as July he was writing, “Even the most controversial loan guarantee recipient—Solyndra, a solar manufacturer—is seeing an operational turnaround” in an article pushing for continued funding of the Department of Energy’s Loan Guarantee Program. But he’s not the sole source of the enthusiasm for “green energy” and stimulus spending, which obviously went to the top of the administration.

Some have tried to dismiss the Solyndra story. Private investors make plenty of mistakes, too, they point out. Companies fail, sometimes through no fault of their own. But this story has all the hallmarks of government decision making: officials spending other people’s money with little incentive to spend it prudently, political pressure to make decisions without proper vetting, the substitution of political judgment for the judgments of millions of investors, the enthusiastic embrace of fads like “green energy,” political officials ignoring warnings from civil servants, crony capitalism, close connections between politicians and the companies that benefit from government allocation of capital, the appearance — at least — of favors for political supporters, and the kind of promiscuous spending that has delivered us $14 trillion in national debt. It may end up being a case study in political economy.

Here’s an updated rundown of how the first rough draft of Solyndra history is playing out before our eyes:

Obama-backed green firm shuts down
The Washington Post, September 1, 2011

Solar firm to cease operations; Solyndra had received a $535-million loan guarantee. It plans to seek Chapter 11.
Los Angeles Times, September 1, 2011

A Third Solar Company Files for Bankruptcy
The New York Times, September 7, 2011

FBI raids offices of solar-panel firm
The Washington Post, September 9, 2011

E-mails cite rush on loan to solar firm
The Washington Post, September 14, 2011

Treasury to probe loan to Solyndra; The Federal Financing Bank’s role in the failed firm’s borrowing will be the focus.
Los Angeles Times, September 16, 2011

White House official: Funding Solyndra further was risky
The Washington Post, September 16, 2011

Amid Solyndra probe, Energy Dept. moving billions in loans
The Washington Post, September 17, 2011

SOLAR FIRM’S OBAMA LINKS PROBED; A fundraiser’s role in a loan program that aided Solyndra stokes concern about the company’s influence.
Los Angeles Times, September 17, 2011

Questions Raised Over Letting Another Lender Help a Failing Solar Company
The New York Times, September 17, 2011

Justice Dept. urged to probe Solyndra
The Washington Post, September 20, 2011

Solyndra officials to invoke Fifth before House panel
The Washington Post, September 21, 2011

Solyndra’s ex-employees tell of high spending, factory woes
The Washington Post, September 22, 2011

In Rush To Assist A Solar Company, U.S. Missed Signs
The New York Times, September 23, 2011

Government OKs new green loans; Two execs of bankrupt solar firm Solyndra plead the 5th before a congressional panel.
Los Angeles Times, September 24, 2011

A solar pariah had Republican parents, too
The Washington Post, September 27, 2011

Where Solyndra said yes, others demurred
The Washington Post, September 27, 2011

Obama aides voiced doubts about loans like Solyndra’s; A top concern was that the vetting process wasn’t rigorous enough.
Los Angeles Times, September 27, 2011

Energy Dept. knew Solyndra had violated its loan terms
The Washington Post, September 29, 2011

U.S. Backs New Loans For Projects On Energy
The New York Times, September 29, 2011

Energy chief cleared Solyndra loan breaks
The Washington Post, September 30, 2011

Trustee Is Sought For Records Of Solyndra
The New York Times, October 1, 2011

E-mails warned Obama of a shaky Solyndra
The Washington Post, October 4, 2011

E-Mails Suggest White House Weighed a 2nd Solyndra Loan Worth Almost Half a Billion Dollars
The New York Times, October 6, 2011

Solyndra loan deal: Warning about legality came from within Obama administration
The Washington Post, October 7, 2011

Obama fundraiser took active interest in Solyndra loan, emails show
Los Angeles Times, October 8, 2011

Government adviser defends Solyndra despite ethics agreement
Washington Post, October 8, 2011

Solyndra Collapse Sparks K Street Rush
Roll Call, October 12, 2011

I found these headlines on Nexis, but of course they can be found on the newspapers’ websites.