Why the government makes a poor investor

A chronicle of the failure of Solyndra–a “green energy” company that received half a billion dollars worth of government “investment”–demonstrates the larger point that government bureaucracies are just too ponderous to function as venture capitalists:

The Obama administration’s vaunted initiative to catalyze the U.S. clean-energy industry — under attack for betting half a billion dollars on the solar-panel manufacturer Solyndra, which closed last month — has become a case study of what can go wrong when a rigid government bureaucracy tries to play venture capitalist and jump-start a nascent, fast-changing market.

[Uwe] Schmidt [whose company scored a similar loan but turned it down] concluded in early 2011 that the influx of inexpensive flat solar panels was undercutting his company’s year-old proposal to use a field of mirrors that concentrated sunlight on a thermal tower. Despite market changes, however, the terms of the federal loan guarantee wouldn’t let Solar Trust switch in midstream to flat panels. So Solar Trust sought private financing.

“We look at a lot of technologies, and I don’t care which one we build — I want to build the one that makes the most financial sense,” Schmidt said.

The inflexibility of the terms for Schmidt’s project was just one of the troubles that have plagued the Energy Department’s $38.5 billion loan-guarantee program from its beginning in 2009. . . .

Solyndra, a solar-panel maker that went bankrupt in August with $535 million in federally backed loans, was riskier than many other proposals, industry executives say. Its cylindrical tubes captured a high percentage of the sun’s energy and its panels were easy to install, but they were expensive to make.

Silicon prices hurt, too. When Solyndra first sought financing during the Bush administration, which picked its proposal as one of 16 finalists, the price of silicon was soaring. Solyndra’s tubes didn’t use silicon, an advantage then. Since 2008, however, silicon prices have collapsed and Solyndra’s costs haven’t come down as much.

“The Solyndra project . . . assumed that the cost of materials, silicon, would remain high and that the cost of panels would not go down as fast as they did,” said a senior executive at a renewable-energy financing fund. “In the end, those assumptions were wrong.”

Many industry experts said the Energy Department should have anticipated that because projects were underway to bring more silicon onto world markets.

via Some clean-energy firms found U.S. loan guarantee program a bad bet – The Washington Post.

America’s decline and China’s rise?

Robert Kaplan sees President Obama’s refusal to sell the latest F-16s to Taiwan as a sign of America’s decline and China’s rise:

By 2020, the United States will not be able to defend Taiwan from a Chinese air attack, a 2009 Rand study found, even with America’s F-22s, two carrier strike groups in the region and continued access to the Kadena Air Base in Okinawa. Moreover, China is at the point of deploying anti-ship ballistic missiles that threaten U.S. surface warships, even as Taiwan’s F-16s, with or without upgrades, are outmatched by China’s 300 to 400 Russian-designed Su-27 and Su-30 fighters. Given that Taiwan is only 100 miles from China and the U.S. Navy and Air Force must deploy to the Pacific from half a world away, the idea that Washington could permanently guarantee Taipei’s de facto sovereignty has always been a diminishing proposition. Vice President Biden’s recent extensive talks with his Chinese counterpart, Xi Jinping (who is poised to succeed President Hu Jintao), may have reinforced the notion inside the administration that Taiwan is better defended by a closer American-Chinese diplomatic understanding than by an arms race.

Notice what is happening, though. The administration is not acting unreasonably. It is not altogether selling out to Beijing. Rather, it is adjusting its sails as the gusts of Chinese power, both economic and military, strengthen. Thus the decision to help Taiwan — but not too much — illustrates how decline itself is an overrated concept.

Decline is rarely sudden: Rather, it transpires quietly over decades, even as officialdom denies its existence and any contribution to it. The Royal Navy began its decline in the 1890s, Princeton University professor Aaron L. Friedberg writes in “The Weary Titan,” even as Britain went on to win two world wars over the next half-century. And so, China is gradually enveloping Taiwan as part of a transition toward military multipolarity in the western Pacific — away from the veritable American naval lake that the Pacific has constituted since the end of World War II. At the same time, however, the United States pushes back against this trend: This month, Obama administration officials — with China uppermost in their minds — updated a defense pact with Australia,giving the United States greater access to Australian military bases and ports near the confluence of the Pacific and Indian oceans. The United States is making room in Asian waters for the Chinese navy and air force, but only grudgingly.

Decline is also relative. So to talk of American decline without knowing the destiny of a power like China is rash. What if China were to have a political and economic upheaval with adverse repercussions for its defense budget? Then history would turn out a lot more complicated than a simple Chinese rise and an American fall.

Because we cannot know the future, all we can do is note the trend line. The trend line suggests that China will annex Taiwan by, in effect, going around it: by adjusting the correlation of forces in its favor so that China will never have to fight for what it will soon possess. Not only does China have some more than 1,500 short-range ballistic missiles focused on Taiwan, but there are 270 commercial flights per week between Taiwan and the mainland, even as close to a third of Taiwan’s exports go to China. Such is independence melting away. And as China’s strategic planners need to concentrate less on capturing Taiwan, they will be free to focus on projecting power into the energy-rich South China Sea and, later, into the adjoining Indian Ocean — hence America’s heightened interest in its Australian allies.

This is a power shift. Subtle and indirect though it may be, it is a clearer story line than what is occurring in the chaotic Middle East, a region less prosperous and less dynamic than East Asia in economic and military terms, and therefore less important. Taiwan tells us where we are, and very likely where we’re going.

via A power shift in Asia – The Washington Post.

I would say that it is absurd to speak of America’s military decline in relation to China or anyone else.   It isn’t simply that America’s military has a huge technological advantage.  That alone is significant.  But America’s military also has something that is priceless when it comes to an advantage over an enemy:  combat experience.  Our wars in Iraq and Afghanistan have given us that, at least.

Still, decline is not just a matter of military prowess.  Certainly our nation is weakened economically and culturally.  Also politically and in our national mood.  Does anyone think we would defend Taiwan even if we could?  China is resurgent and energetic, with its particular hybrid of communism and capitalism seemingly carrying the day.  Do you think Kaplan is right?  If so, should anything be done, or should Americans just get used to a second-tier status?

Europe’s problem and our problem

Economics columnist Robert J. Samuelson gives a good explanation of what’s going on in the European economy:

Europe’s banking crisis — and “crisis” is used advisedly — tells us how much and how little has changed since the onset of global financial turmoil in September 2008. Then, people worried about the viability of major American banks, loaded with “toxic” mortgage-backed securities whose value was difficult to determine. Now, people worry about major European banks, loaded with government (a.k.a. “sovereign”) bonds whose value is difficult to determine. We are flirting with another financial crisis not unlike the post-Lehman Brothers panic.

So American financial institutions were pulled down because of bad loans on houses.  European institutions are on the verge of being pulled down because of bad loans on whole countries.

Read the column for the details:   Is another financial crisis looming in Europe? – The Washington Post.

More on the great Ponzi scheme

Charles Krauthammer explains in detail why Social Security is indeed a Ponzi scheme, as we discussed here in an earlier post:  “In a Ponzi scheme, the people who invest early get their money out with dividends. But these dividends don’t come from any profitable or productive activity — they consist entirely of money paid in by later participants.  This cannot go on forever because at some point there just aren’t enough new investors to support the earlier entrants.” This is exactly what the pay-as-you-go funding of Social Security involves.

He goes on to say that the mandatory nature of Social Security makes it work longer than the Bernie Madoff schemes.  Then he gives some interesting statistics:

You can force young people into Social Security, but if there just aren’t enough young people in existence to support current beneficiaries, the system will collapse anyway.

When Social Security began making monthly distributions in 1940, there were 160 workers for every senior receiving benefits. In 1950, there were 16.5; today, three; in 20 years, there will be but two.

Now, the average senior receives in Social Security about a third of what the average worker makes. Applying that ratio retroactively, this means that in 1940, the average worker had to pay only 0.2 percent of his salary to sustain the older folks of his time; in 1950, 2 percent; today, 11 percent; in 20 years, 17 percent. This is a staggering sum, considering that it is in addition to all the other taxes he pays to sustain other functions of government, such as Medicare, whose costs are exploding.

The Treasury already steps in and borrows the money required to cover the gap between what workers pay into Social Security and what seniors take out. When young people were plentiful, Social Security produced a surplus. Starting now and for decades to come, it will add to the deficit, increasingly so as the population ages.

Demography is destiny.

via A Ponzi scheme that should be fixed – The Washington Post.

Taxes & government manipulation

The Washington Post has a big story about tax breaks.

As President Obama and congressional Republicans argue over how to rewrite the U.S. tax code, the debate has revolved around “loopholes” for corporate jets and ending “carve-outs” for well-heeled special interests. But if the goal is debt reduction, that’s not where the money is.

Broad tax breaks granted to millions of families at all income levels dwarf the corporate giveaways. Over the past two years, largely because of these popular benefits in the federal income tax code, the government has reached a rare milestone in tax collection — it has given away nearly as much as it takes in.

The number of tax breaks has nearly doubled since the last major tax overhaul 25 years ago, with lawmakers adding new benefits for children, college tuition, retirement savings and investment. At the same time, some long-standing breaks have exploded in value, such as the deduction for mortgage interest and the tax-free treatment of health-insurance premiums paid by employers.

All told, federal taxpayers last year received $1.08 trillion in credits, deductions and other perks while paying $1.09 trillion in income taxes, according to government estimates.

Only about 8 percent of those benefits went to corporations. (The write-off for corporate jets equals about .03 percent of the total.) The bulk went to private households, primarily upper-middle-class families that Obama has vowed to protect from new taxes.

“The big money is in the middle-class subsidies,” said Syracuse University economist Leonard Burman, former director of the nonpartisan Tax Policy Center. “You’re not going to balance the budget by eliminating ethanol credits. You have to go after things that really matter to a lot of people.”

via Ever-increasing tax breaks for U.S. families eclipse benefits for special interests – The Washington Post.

I reject the way these tax breaks are called “tax expenditures,” since that implies that all money is the government’s and that letting us keep part of it is government largesse.  Still, it is definitely true that the tax code is one way the government tries to control the economy and to manipulate citizens according to one policy or the other.

The government wants to encourage home ownership, so it makes mortgage interest tax deductible.  It wants us to use alternative energy, so it not only gives the ethanol industry a big break, it gives consumers write-offs when they buy energy-efficient products.   It wants us to buy health insurance, so there are tax incentives towards that end. And there are lots more.   Add in the corporate tax incentives, which are aimed at nudging the economy in one direction or the other, and tax policy plays a major role–along with government spending–in the great Keynesian project of state control over the free market.

So should conservatives be in favor of every tax break, just because it means someone is paying less taxes, even if it is an attempt by the government to control the economy?

Should we just have a flat tax or a range of flat taxes?  What do you think of   Republican presidential candidate Herman Cain’s 9-9-9 plan (9% income tax; 9% corporate tax; 9% sales tax)?  Would that wreak too much havoc in the housing market?  With churches and other non-profits that depend on tax-deductible donations?

 

 

Liberals and their language

George Will, picking up on some themes we have blogged about here, notes not only the ineffectualness of liberal solutions to our economic woes, but how they are running away from their own language:

In societies governed by persuasion, politics is mostly talk, so liberals’ impoverishment of their vocabulary matters. Having damaged liberalism’s reputation, they call themselves progressives. Having made the federal government’s pretensions absurd, they have resurrected a supposed synonym for the government, the “federal family.” Having made federal spending suspect, they advocate “investments” — for “job creation,” a euphemism for stimulus, another word they have made toxic.

Barack Obama, a pitilessly rhetorical president, continues to grab the nation by its lapels, demanding its attention, and is paying the price: The nation is no longer listening. This matters because ominous portents are multiplying. [Will goes ahead and cites some of them, including the bright idea of the administration’s economic advisors to purposefully induce inflation]  . . .

It is a wonder, this faith-based (and often campus-based) conviction that the government that brought us the ethanol program can be trusted to precisely execute wise policies that will render the world predictable and progressive. . . .

The economic policy the “federal family” should adopt can be expressed in five one-syllable words: Get. Out. Of. The. Way. Instead, Energy Secretary Steven Chu, whose department has become a venture capital firm for crony capitalism and costly flops at creating “green jobs,” praises the policy of essentially banishing the incandescent light bulb as “taking away a choice that continues to let people waste their own money.” Better to let the experts in his department and the rest of the federal family waste other people’s money.

 

via Our floundering ‘federal family’ – The Washington Post.