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Diving Into The Political Trees


As a result we can expect Republicans to line up and begin hammering on the bankruptcy as yet another example of an out-of-control administration that is wasting taxpayer money as it seeks to socialize the nation’s economy. It is essentially the same rhetoric that followed the bankruptcy of solar panel maker Solyndra in 2011.

I try to be a truly non-partisan economist, and for the most part this isn’t too difficult. The rhetoric from both our major political parties is often out of touch with basic economic realities and, frankly, the back room dealing with special interests that occurs on both sides of the aisle is patently offensive. Yet in this circumstance I am firmly in the White House’s camp. Not only is this bankruptcy not a big issue—but in many ways, it is a good signal that our government is going about things the right way.

First—this situation is in no way evidence that there is something awful happening in the Energy Department. The DOE has given out hundreds, if not thousands, of grants of this size in recent years and so far we have only heard about three bankruptcies. One bad outcome is not evidence of a broken process. If we see a pattern of abuse among a large portion of such grants, then we need to talk.

Second—the amount of money involved is chump change. The $118 million dollar grant is an amount that wouldn’t qualify as pork worth bothering with for the typical congressman. It is tiny compared to the enormous tax breaks and subsidies received by the big oil companies and mining operations, or the alleged waste by some government contractors who work in various war zones in which the United States is engaged.

And bear in mind that it isn’t clear how much grant funding has actually been received by the subsidiary of Ener1 to date, nor whether the money paid out should be considered wasted. The subsidiary that received the grant is not being liquidated—only the parent company is being reorganized. They have fresh capital and say they plan on being out of bankruptcy in short order.

Third—investing in the sort of fundamental research Ener1 is involved in is risky business. Sometimes things go very wrong. That is why investors, whether public or private, are paid extra by the market (on average) for they risk they shoulder. Did every investment of Bain Capital pay off for their investors (even if it paid off for Romney)? Does every venture capital investment lead to another Facebook or Google? Of course not. To hold the government to a standard that is impossible to achieve in the private sector is ridiculous.

Public investment in new technologies often occurs because the venture is too risky or has too many positive externalities, for the private sector to tackle on its own. As such, the chance of a project’s failure is even greater in some ways. Consider all the public money poured into researching drugs that don’t result in a workable remedy, or into testing various aspects of the physical world that don’t lead to advancements in knowledge, or even the occasional satellite that crashes back to earth before reaching orbit. It is the nature of exploratory enterprise.

Fourth—in the past the government might have taken a different – less accountable – role in such projects. As opposed to giving selective grants to private firms like Ener1, they can instead offer ‘cost plus contracts’ as they do in the defense arena. Similarly they can award grants to non-profit projects that have no market enforced rules for profitability as happens in the health research arena, or they can create a government agency, like NASA, to do the work in-house.

The danger with these options is not that projects can fail. The danger is that they will fail, and there won’t be any consequences. A crashed satellite or a new fighter jet that doesn’t meet its expected potential does not incur market punishment such as bankruptcy for the companies that built them. Instead taxpayers are left holding the bag as losses mount. The project will likely go way beyond where it should, because there is no financial incentive for the players involved to pull the plug. The firms in question have little incentive to control costs, since their funding does not depend on it.

In contrast, by using selective grants, the government can help support certain exploratory processes, but also allows for market pressure to improve efficiency, and ultimately stop the losses if the project can’t seem to earn revenues that are larger than costs.

Add it up, and it appears that this is an example of energy policy moving in the right direction. The bankruptcy of Ener1 is a minor setback, but ultimately the process of supporting ventures in clean energy will create winners – along with the losers. Turning this into a referendum on the Obama administration or on tax policies in general is a classic case of trying to score political points with sound bites that miss the whole economic forest but for one tiny tree.

I would end this short piece by suggesting that pundits try to focus on what is really important in the upcoming election—but why waste my breath.

CATEGORY: Economic Policy

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