Hooray for federal loans
JOE NOCERA The New York Times | October 05,2011
In the firestorm over Solyndra, three main criticisms have emerged.
The first is that Solyndra wasn’t ready for prime time and that the Energy Department, which gave it a $535 million federally guaranteed loan, should have known as much. The second is that Solyndra used political influence to land a loan that was destined to blow up. And the third is that Solyndra’s bankruptcy case shows why government bureaucrats shouldn’t be picking technology winners and losers — or making risky investments that the private sector won’t.
I think we can now safely concede the first point. Although what sank Solyndra was the unsustainably high price of its innovative solar panels, The Washington Post, The Los Angeles Times and Megan McArdle’s blog at The Atlantic’s website have all made a convincing case that, internally, the company was a mess.
The second argument, on the other hand, strikes me as utterly bogus. Yes, there are a few emails from inside the government that questioned the loan guarantee. And, yes, Solyndra hired — shocker! — lobbyists. But you can always find, after the fact, “bad documents” that can be twisted to make something innocent sound nefarious.
“I suspect that when all the information finally comes out, there will be very little that is scandalous,” said Jonathan Rothwell, who has studied the Solyndra case as a senior research analyst at the Brookings Institution. Although Republicans will surely try to keep Solyndra in the news until, oh, next November, the scandal will eventually evaporate because there is very little there.
The third criticism is the one that really matters: government “is a crappy vc,” as Obama’s former economic adviser, Larry Summers, put it in another embarrassing email that was recently released as part of a congressional investigation into Solyndra.
“VC,” of course, stands for venture capitalist; the notion is that government is not equipped to play that role. A corollary point, voiced by Holman Jenkins Jr. in The Wall Street Journal, is that solar projects that make financial sense get financed by the private sector and those that don’t are the ones that need federal backing.
But if you spend any time actually looking into how the Energy Department doles out the loan guarantees, you quickly realize that it’s not acting like a venture capitalist. Rather, it is funding projects that have attracted private capital — lots of it. The private sector, in other words, is still the one picking winners and losers.
What the program is essentially doing is moving alternative energy innovations to full-scale development. Why is the government doing this? Because this is precisely where the private sector fails. As Rothwell puts it, “The program is supposed to overcome the commercialization valley of death.”
In this country, it is relatively easy to get venture capital for a good idea — and alternative energy has attracted billions in the past few years. What is hard to come by is money to fund the far more expensive process of commercializing the innovation. Andy Grove, the former chief executive of Intel (and still one of the great business minds in America), has been sounding the alarm about this, pointing out that one reason so many American innovations wind up being manufactured in China is that the Chinese are more than happy to finance the commercialization process.
One company that has received three federally guaranteed loans, totaling more than $3 billion, is First Solar. That money is going to help the company build three solar power plants in California and Arizona. The plants already have long-term contracts with utilities. They have locked-in cash flows. The risk is minimal.
Shouldn’t banks be making these loans? Sure, but they are still paralyzed by the financial crisis and don’t understand the economics of solar power. Can you really argue that the government should, therefore, also sit on its hands? Indeed, one goal of the loan guarantee program is to show private capital that these loans make sense — so that the banks can eventually step in and replace the government.
The Republicans know all this, surely. In 2005, when the Energy Policy Act was proposed by the Bush administration, they made some of these same arguments in support of the loan guarantee program, which was part of the bill. The bill passed the House with overwhelming Republican support. Most Democrats voted no.
Today, the Republican-led Energy and Commerce Committee is investigating Solyndra, forcing its executives to take the Fifth Amendment, and releasing embarrassing White House emails. I looked it up: Every single Republican on that committee who was in office in 2005 voted for the loan guarantee program that they are now so gleefully condemning.
I wonder why.
Joe Nocera is a columnist for The New York Times.