Senator Harry Reid (D–NV) and his Senate colleagues rejected the idea of cutting $1.5 billion unspent from a $7.5 billion advanced vehicle manufacturing technology loan program and another $100 million from the Department of Energy’s (DOE) loan guarantee program—the same program that funded bankrupt Solyndra. The political squabbling did not cause the partial government shutdown that many feared, but the real issue should be about the protection of these green programs.
The reality is that simply reducing the programs is not enough. By leaving them in place at all, the House is still promoting crony capitalism, just a little less of it. The better approach is to scrap these boondoggles completely.
There are two kinds of companies that seek loan guarantees: (1) those that are economically uncompetitive, and (2) those that can be competitive. The former need loan guarantees to stay alive. But as we’ve seen with Solyndra, even they will eventually fail. For those that can be competitive, loan guarantees are nothing more than handouts that pad their bottom lines. Neither case can be justified.
Looking at the recipients of DOE’s Advanced Technology Vehicle Manufacturing (ATVM) loan program, it’s easy to see why we should do away with it. First, bear in mind that this program is on top of the $7,500 subsidy that consumers already get when buying an electric car. But beyond that, consider two of the recipients, Tesla Motors and Fisker Automotive, which each make electric cars that sell for about $100,000—pricey for most of us, but these manufacturers shouldn’t be priced out of the market if they are building cars that people want.
Car manufacturers make (and people buy) $100,000 cars all the time. Tesla even now offers a Model S at a price of $50,000, which includes the tax credit. So if the price is right and the product is good, why do these companies need to be subsidized by the taxpayer?
Given how great electric cars are, according to their proponents, perhaps it’s Porsche and Mercedes that should be getting the help. After all, who would pay $100,000 for an antiquated gas-guzzling jalopy when they could get one of those fancy new electric cars?
This headline from two years ago says it all: “Fisker Promises Affordable Plug-In Cars in Two Years Flat (If DOE OK’s Loans).” If this company can make an affordable electric vehicle, and one of the conditions of the ATVM program is that the applicant must be “financially viable without the receipt of additional federal funding for the proposed project other than the ATVM loan,” then these companies should seek private capital, not government capital. The demand for the vehicle will determine if it’s affordable or not.
In July, the Obama Administration announced new auto efficiency regulations that will create stricter miles per gallon standards (average of 54.5 mpg) for cars and light-duty trucks for the model years 2017–2025. Other ATVM loans went to Severstal Dearborn—a manufacturer of light, high-strength steel—as well as Nissan and Ford to assist in meeting the new fuel efficiency standards. Thus, the federal government puts the cart before the horse in terms of technology and assumes that people want to buy more fuel-efficient cars, then uses taxpayer money to foot the bill.
The clean energy loan guarantee program is no better. DOE will tell you that they’re not in the business of picking winners and losers. In fact, DOE spokesman Damien LaVera said, “We don’t pick winners and losers. The private sector does.” Companies selected for loan guarantees have been “deeply, deeply, deeply capitalized by the private capital markets.”
But that’s exactly what they’re doing. The loan guarantee shifts the investment from private capital markets to the loan guarantee recipients and away from more competitive projects. Loan guarantees are subsidies. Recipients offset the higher interest rates that result from high-risk projects by transferring the financial risk to the taxpayer. This results in much lower capital costs.
Arguing that DOE isn’t picking winners and losers is like a referee setting one basketball rim at 10 feet and the other at six feet and saying that, because the score is even to start the game, the ref isn’t picking a winner or loser.
These clean energy loan and loan guarantee programs don’t just need to be cut. They need to be done away with entirely.