Posted by: bmeverett | September 7, 2011

What we can learn from Solyndra


Solyndra is a Silicon Valley company Fremont, California that developed an exciting new approach to solar energy. Rather than using silicon-based flat panels, the company’s product uses thin films rolled into cylinders. The cylindrical shape allows some part of the photovoltaic surface to be perpendicular to the Sun for most of the daylight hours. Founded in 2005, Solyndra promised solar energy with lower manufacturing and installation costs. The company raised nearly $1 billion from venture capital firms, including Redpoint Ventures, RockPort Capital, Argonaut, CMEA Capital, U.S. Venture Partners, the Walton family fund, Madrone Capital, Abu Dubai’s MASDAR and Richard Branson’s Virgin Green Fund.

So far, the story sounds like capitalism at its best. A new idea attracts private capital, voluntarily put at risk by wealthy investors looking for high returns. The Obama administration, however, decided that this high-risk venture was a good place to put your money. The US Department of Energy gave Solyndra a $535 million federal loan guarantee in 2009 to construct a factory in California (coincidentally a key democratic state). Why not? After all, we need new energy technologies and we need new jobs. This opportunity looked like a win-win.

Alas, on August 31, Solyndra filed for Chapter 11 bankruptcy. The company’s factories have been shut down and virtually the entire work force laid off. The green venture capitalists are likely to be out most if not all their money. Unfortunately, so are the taxpayers. There’s a good lesson here about the perils of central planning. In a free market society, investments are made by private individuals seeking returns on their money. What makes the process work is the care that individuals take in making these investments. Some projects succeed and make their investors rich. In many cases, however, the technology fails to work as expected, the business is poorly managed or market conditions deteriorate. Investors suffer the consequences, so they spend a lot of time and effort to get it right.

Not so with government. Politicians have two serious weaknesses in making what would ordinarily be private investments. The first is a tendency to make glib assumptions about likely success. The US government has invested by my estimate $125 billion ($2011) in new energy technologies for decades with zero tangible results. Yet the argument put forward for each new expenditure is the same: government money will result in lower costs through technological improvements and economies of scale. Politician seems to think that technological advancement is easy and that progress is directly related to dollars spent. We have seen this argument over the years with regard to solar and wind power, synthetic fuels from coal and shale, ethanol, fusion and others. None of these technologies is even close to commercialization despite years of effort and billions of wasted dollars.

The second problem is politics itself. The free market operates on money. Politics operates on voter perception. Private investors, such as venture capitalists, want to know whether the technology is proven, whether a real market exists and whether the product can be sold at a profit. Politicians just want to know if it looks like a “neat idea” to voters, creating an impression that the politicians are taking real steps to address the nation’s problems. Elected officials do not care if the project makes any money, because they are putting at risk your money, not theirs. The opening of Solyndra’s manufacturing facility in California was a great photo-op for Secretary of Energy Steven Chu and California Governor Arnold Schwarzenegger. President Obama himself visited the plant with great fanfare. In most cases, projects take years to fail, allowing elected officials to reap the short-term political rewards in the current election cycle, while hoping that failures occur on someone else’s watch.

Economists have always recognized the difference between public and private goods. Public goods carry equal benefits for all members of society, whether or not they pay their share of the cost. Government by default takes responsibility for providing public goods, since the private market cannot. National defense, parks, courts, roads and other infrastructure are generally regarded as public goods. The original proposition of 19th century socialism was the all goods are public goods and should be provided directly by government. Today’s American politicians have learned not to espouse this view publicly for fear of being labeled extremist. Many, however, seem to believe it in their hearts, arguing that energy, health care, communications, housing, transportation and virtually every other good or service can be provided better by government than by the private sector.

For some decades, we have enjoyed reasonable stability with the federal government taking roughly 20% of the GDP to spend on welfare and public goods, leaving the rest of the economy mainly in private hands. Much of government expenditure was wasted, but the private capital market was still large enough and strong enough to generate sustained economic growth. In the last few years, however, the federal government has made a grab for roughly 25% of GDP to “invest” in goods that had previously been regarded as private. The result has been economic stagnation and (thankfully) a strong public outcry against this change. The Solyndra case ought to remind us that the economy will be best served by limiting the federal government to the provision of public goods and allowing the free market to allocate investment capital for private goods. Government is simply not competent at making private sector choices, and there is a limit to how much waste the economy can tolerate.

By the way, as of September 7, Solyndra’s website states the following, “Solyndra’s solar power solutions offer strong return on investment and make great business sense.” Yeah, right. The Administration should be embarrassed.

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