Surprise, surprise: Companies aren’t lining up to become the next Solyndra. Imagine that.
The Wall Street Journal reports that companies are hesitating to take loan guarantees from the Department of Energy, where up to $40 billion remains available “for companies developing certain kinds of clean-energy technologies.” The Journal article hints at everything that’s wrong with the government trying to play investment banker.
In a free market, investors calculate a number of risks when making decisions to obtain financing. When the federal government provides a loan guarantee, it enters into a contract with private creditors to assume the debt if the borrower defaults, thereby transferring some of that risk to the taxpayer.
By doing so, the federal government reduces the incentive for the energy investor or business to properly manage risk. Without the loan guarantee, the investor may innovate or find alternative ways to secure private financing or simply pass on the project if the investor ultimately thinks it’s too risky or not economically viable. But if a company defaults on a federally backed loan guarantee, the taxpayer is on the hook.
And that’s certainly occurred in the past, costing taxpayers hundreds of millions of dollars in the process. The Energy Department’s loan and loan guarantee programs have several black eyes resulting in taxpayer money down the drain–the most notorious being Solyndra, which lost $535 million after the solar firm filed for bankruptcy.
But as painful as the wasted taxpayer dollars are, that’s only the tip of the iceberg in terms of lost economic welfare. The other problem is the private dollars that follow government dollars. Government financing reduces the risk for companies and creates opportunities for private investors to use political leverage to hedge their bets on projects they might consider an economic loser without the Department of Energy loan program. But if the project fails, that’s then a waste of private sector resources that could have gone to other, more viable projects.
For instance, private investors sank $1.1 billion into Solyndra–but much of the private financing came after the Department of Energy announced Solyndra was one of 16 companies eligible for a loan guarantee in 2007.
Proponents of the Department of Energy playing green banker argue the successes of the program dwarf the few failures. Peter Davidson, director of the Loan Programs Office said that when you compare the program “to a commercial bank, it’s a very good number.” Whether the companies that received a loan guarantee from the Department of Energy maintain profitability remains to be seen.
But even if a company receives government money, it is a mistake to attribute that company’s success to the federal government’s “investment.”
There are companies that would, and often do, receive investment from the private sector because their technology is profitable or because investors find their technology promising and want to pursue the risk. In these cases, the government’s investment partially offsets private-sector investments that would have been made without the federal backing. In other words, it’s a pure subsidy.
Although it remains to be seen if the electric vehicle company Tesla will be profitable in the long run, the automaker may be a prime example of this. Tesla, the recipient of a $465 million loan through the Advanced Technology Vehicles Manufacturing loan program, had its initial public offering in June 2010 and paid off its loan early.
But why did the government need to be involved? If Tesla’s electric vehicles are the wave of the future, they should have and could have secured investment and loans through the private sector.
If the federal government can’t give money away, one would think it’s about time to close the books on it.
