September 15, 2011
The Economic Fallout of Solyndra
“Government should not be picking winners and losers.” I have a philosophical bias against government using its power to tilt the playing field in the economy. As an economist, I believe a free market, restrained by government to not externalize its costs onto the public, is more fruitful than a planned economy. The headlines seem to bear that out.
This month’s ‘Exhibit A’ is Solyndra, Inc, a California-based solar panel manufacturer. Solyndra is in the news for having received federal government loan guarantees of $535 million, funded by the big stimulus bill of 2009. Now, the company shuttered its doors late last month and declared bankruptcy. The day after Solyndra closed, I called a former classmate of mine from the Tuck School who co-founded a solar panel company with a couple of MIT-trained engineers. I asked him about it, and his response was chilling:
“Christian, 9 out of 10 engineers in my industry could have told you how this was going to end. By the time the government stepped into that company’s path, it was pretty clear to most of us that the technology simply wasn’t competitive.”
My friend described the fallout of the decision in 2009:
“When the government decided it was going with that technology, it made it really hard for the rest of us. If the government is going to give a half-billion dollars to that firm, why should a venture capital firm give the next round of funding to an alternate technology, even if the technology is better? Who really wants to be the one fighting the US Government? There were so many technologies that failed to get funded, and a lot of jobs lost at firms that couldn’t fight that sort of headwind and closed down. Not because of the industry, not because of the Chinese, but because of what that loan guarantee said to the market about how the US Government was going to “help” the industry.”
Most people do not need an MBA to figure out what went wrong here. Governments should not pick winners and losers because they are not very good at it. I’d encourage people who believe they are great at picking market winners to go join a venture capital firm or start a hedge fund. Those who are good at leveling the playing field and have the temperment to be willing to get out of the way, please run for Congress.
