- The Washington Times - Friday, December 9, 2011

ANALYSIS/OPINION:

Every once in a while in Washington, you see a power grab so blatant and unabashed that it shocks the consciences of even Beltway veterans who make their livelihood in the government game. This brings me to a recent opinion column featured in Politico in which venture capitalist Joe Horowitz, a Solyndra investor, argued that the U.S. government actually needs to invest in more … Solyndras.

Many Americans are concerned that federal bailouts have resulted in a transfer of wealth from taxpayers to big banks and businesses. In the case of the Department of Energy’s loan guarantee program for clean-energy projects like Solyndra’s, however, the wealth transfer is both more egregious and more evident: from taxpayers to political contributors.

The Solyndra scandal demonstrates that often, the real beneficiaries of government interference, be it subsidization or regulation, are elected officials and their preferred interest groups. Additionally, unnecessary government involvement in marketplaces, like that for “green” energy, stifles competition and inhibits companies from producing novel, moneymaking ideas and instead encourages them to expend resources keeping their government supporters happy.

Economists call the payments that politicians get from conferring government-provided benefits onto certain companies “rents.” The best way to succinctly describe rent-seeking behavior is simple: The big players in an industry enjoy profits they don’t deserve and earn only because of their access to politicians. Subsidies, cheap loans and regulations that favor some companies over others are the most frequent ways this happens.

Solyndra represents an almost perfect case of rent-seeking behavior by political insiders. The resulting direct losses caused by this rent-seeking is also easy to identify in a loss of more than $500 million in taxpayer money. The indirect losses could be far higher.

Once the rent-seeking culture infects a company, the accountability and moral fiber of its executive leadership begin to atrophy quickly. Rather than a sleek incentive to make the business work, the executives focus on maximizing their ability to manipulate the Beltway rent-seeking culture. The poster children for this problem, Fannie Mae and Freddie Mac, have sucked more than $100 billion from taxpayers and continue to live on like immortal vampires feasting on America’s gross domestic product.

In the normal course of business, outside the Washington Beltway, the revenue line on a company’s income statement provides a logical discipline. It reflects a precise measure of how much the world values the goods a company is producing. But in the case of Solyndra and other companies like it, their revenue numbers reflected imaginary demand created by a combination of government subsidies and preferential treatment by government regulators. In short, the revenue line on Solyndra’s income statement didn’t reflect real demand, it only reflected short-lived and unjust government rents.

In fact, I wrote a paper two years before the Solyndra fiasco in which I warned that government ownership of businesses and government provision of subsidized loans to businesses would result in highly inefficient allocation of resources, and I specifically referenced the Energy Department’s energy loan program. I shouldn’t - but I can’t resist: Energy Secretary Steven Chu, I told you so.

Evidence brought forward in the congressional investigation surrounding Solyndra’s $535 million loan guarantee from the department suggests that political pressure may have motivated both the original funding of Solyndra and the department’s agreement allowing new investors to get paid out first in the case of the company becoming insolvent, as well as the department’s continued support of Solyndra in the press even in the face of troubling financial reports from the company.

However, even if the loan guarantee program hadn’t worked to benefit political interests, it represents a bigger and, perhaps, more pervasive government folly: government interference in the private marketplace for innovation.

Not only should Energy not be gambling with taxpayer money, but this gamble serves only to hurt the future ability of solar power and other green energy to compete with traditional sources. The department’s guarantee program caused much of the venture-capital industry to focus on those firms able to obtain funding through negotiations with the government rather than on firms able to germinate profitable ideas.

J.W. Verret is an assistant law professor at the George Mason University School of Law and a scholar at the Mercatus Center.

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