Commentary

A Teachable Moment Courtesy of Solyndra

Solyndra’s declaration last month that it intended to shut down manufacturing operations and declare bankruptcy has set off a political firestorm in Washington. And no wonder. The California-based solar panel manufacturer was the poster child of the Obama administration’s much-ballyhooed green jobs campaign and was the recipient of a staggering half billion dollars worth of taxpayer guaranteed loans.

The Government Accountability Office reports that those federal dollars were dispensed in the course of bypassing normal administrative protocols, which is all the more suspicious given that a major Democratic donor, George Kaiser, had a major stake in the firm. Meanwhile, a growing number of reports are finding that the advertised bonanza of new green jobs are not being delivered — findings that were put in stark relief with Solyndra’s bankruptcy filing.

Unfortunately, the bigger issues surrounding Solyndra and the president’s green jobs campaign are not getting the attention they deserve. And those issues go to the heart of why the president’s green jobs program is almost certainly doomed to fail no matter what one thinks of green energy or green jobs.

The fact that federal loan guarantees were even necessary for Solyndra tells us that few, if any, lenders thought that giving the firm money was a very good idea. Given the fact that lenders who bet “right” on companies with strong prospects but insufficient capital are lenders who will make money, we can rest assured that hundreds if not thousands of bank loan officers took a long, hard look at Solyandra and said … no thanks. Are we to believe that President Obama knows more than all of these profit-hungry capitalists about Solyndra’s real prospects in global solar energy markets? That President Obama has even stronger incentives than private investors to ensure that money parked in this company or that is money well spent? To ask these questions is to answer them.

There are three standard rejoinders. First, we’re told that the feds are right to stock up on a portfolio of high-risk high-reward investments because those are precisely the kind of investments that the market is likely to pass by. Perhaps. But there’s a good reason they are passed by; the odds are that they will all fail. We elect the president to be commander in chief, not lender in chief.

Second, we’re confronted repeatedly with anecdotes of successful government investments that would seem to put a lie to the contention that government doesn’t know what it’s doing when it comes to technology. But consider the anecdotes.

Did the feds “invent” the internet? Well, sort of. The researchers were not attempting to create a market or make a market work better. They were simply trying to create a system by which large expensive mainframes used by defense analysts in the government and large research universities could communicate with each other. Widespread private ownership of cheap computers and the network to allow them to communicate with each other would come much later.

Didn’t we create technological wonders in the course of putting a man on the moon? Yes we did. But the federal campaign to make renewable energy economically competitive is akin to an Apollo Project attempting to put a man on the moon at a profit; a very different sort of challenge.

Haven’t federal investments in energy technology proven successful in the past? No. While anecdotes abound here as well, systematic evaluations of federal programs find no evidence that 60 years of federal energy tech spending have produced more benefits than costs.

Of course, these defenses of the loan program pale before the deafening hue and cry surrounding the need to keep up with China, a nation allegedly “eating our lunch” in the supposedly vital global renewable energy market. While the U.S. attracted $34 billion in private green energy capital last year, the Chinese attracted $54 billion and Chinese firms dominate the global wind and solar energy business. All of this courtesy of Chinese subsidies and preferences that dwarf our own; proving, we’re told, that a federal campaign can well pay-off if we fully commit our treasury to green energy.

To be sure, in industries characterized by network effects or large economies of scale relative to the size of the world market, there are significant advantages for those countries that jump out to an early manufacturing lead. Early firms will expand rapidly and later entrants will not be able to achieve sufficient scale to become viable. In theory, then, subsidies to early entrants can lead, later, to excess profits. A country that hosts these “first movers” can permanently increase its welfare relative to the rest of the world through clever government intervention.

But can we be certain that there will eventually be a viable market for solar power or that solar panel manufacturing is in fact characterized by very large economies of scale? No, we cannot. As Prof. Vaclav Smil well documented some years ago, the track record of those who forecast energy markets has been little better than Jean Dixon’s record of forecasting the new year for National Enquirer. And if there is evidence that the economies of scale in solar power markets are great enough to fear that a first mover could coke off future competition in the market, we have not seen it.

Unfortunately, Republicans who are otherwise blasting the administration for the Solyndra fiasco are busily campaigning to expand federal loan guarantees for nuclear power plants. But if those loan guarantees are ever robust enough to actually get private investors to put their money in new nuclear power plants, they will likely produce a bevy of bankrupt “nuclear Solyndras.” Both the Congressional Budget Office and the Government Accountability Office expect about 50% of any future U.S. loan guarantees to the nuclear power industry to default.

The Left has a lot of explaining to do to justify going forward with existing green energy loan guarantee programs. And the Right would be well advised to learn a bigger lesson from the Solyndra experience and rethink it’s commitment to similar programs in other sectors of the energy economy.

Jerry Taylor and Peter Van Doren are senior fellows at the Cato Institute.