Thursday, June 28, 2012

Government shouldn't pick winners: lessons from Solyndra

Cleaning out my inbox I was reminded of this NY Times article about Solyndra, the solar panel company that got on the order of a $billion in loan guarantees that went bankrupt. One of the guiding principles of our policy proposals when I was at the White House was that government shouldn't be picking winners, which makes government loan guarantee programs a bad form of government policy. Politicians like loan guarantees because if all goes well they appear to be "free" but of course they are only free if company doesn't go bankrupt. If the company does go bankrupt, then the government is out half a billion dollars (by point of comparison, adjusted for inflation, the Manhattan Project only cost around $4 billion). In the end, we reluctantly did endorse the loan guarantee in the 2007 Energy Act, because we were convinced that maybe there was a capital market failure in the financing of large energy products, but only with a lot of reluctance because we never fully believed that the capital market failures existed. Now it seems perfectly reasonable that companies like Solyndra couldn't borrow money from the markets, not because of a market failure but because it was a bad investment.
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