What’s the Deal With Government Investments Gone Wrong?

Hello all, and welcome to another edition of “What’s the Deal?” The blog that teaches you how to tolerate reading about politics, if you just add a dash of history.

note: dashes of history should be taken with a grain of salt

In this weeks blog, we discuss the recent bankruptcies of solar panel manufacturers in the U.S., and how the U.S. government’s investment in these companies was an example of a failed attempt at stimulating the economy through a chosen industry, and how this may hurt President Obama’s reelection chances in 2012.

The age old debate in the U.S. is how much federal government should be involved in the lives of its citizens, and especially how much the government should be involved in the U.S. Economy.  In the wake of the 2008 recession, the Obama administration as part of the economic recovery plan, attempted to build American jobs by investing federal dollars in “alternative energy industries” such as solar and wind.  Solyndra, a photovoltaic cell manufacturer was slated to be a creator of hundreds of jobs, and an example of how new “green” technology was going to be the vanguard of new American industrial might and job creation.  On September 1st, the company announced it would shut its doors and cease operations.

Turns out, Solyndra was not as dependable as the sun rising

Before the company even shut down, the number of jobs it promised to create was not even close to being reached and Solyndra’s closing followed the bankruptcy filings of two other solar companies, Evergreen Solar and SpectraWatt in August.  So the Obama administration bet wrong, and bet with (in Solyndra’s case) $527 million in tax payer dollars.  The jobs weren’t created, and it turned out that the industry couldn’t compete with Chinese companies despite the best environmental and economic intentions of government subsidies.

This is a huge blow to the Obama administration and the President’s chances of being re-elected next year, but more importantly, it is a piece of evidence to the argument that federal investments should not be used to stimulate the economy.

Has this happened before?  What other Presidents have attempted to stimulate the economy through private sector investments that failed in their goal to create jobs and rejuvenate industries?  Is this a significant argument against government investment in specific industries and business?

  • FDR’s Agriculture Adjustment Act (AAA) paid farmers not to plant certain crops

    It's a great year not to grow corn!

    so that prices would rise on certain commodities.  This backfired for the small farmer, as large-scale farming operations grabbed the profits from higher prices of the reduced crop spread.

  • Cleveland/McKinley’s subsidies to protect American sugar growers (actually growing sugar in Hawaii before it was a state) raised prices for American buyers.  Similar measures for textiles and manufactured fibers under Reagan.
  • The Department of Defense lost big money from the government over the Reagan

    I hope I don't get an SDI

    administration’s inability to build anti-nuclear missile defense systems (SDI).

  •  Under Obama, failing department of defense funded aircraft project at Lockheed Martin that cost that taxpayers $320 million, but barely received news.

Not all of these examples are directly from a government attempt at stimulating an industry, but we can see how in certain situations, government protection or purposeful intervention in an industry aimed at improving it can hurt the industry directly, or indirectly hurt the overall economy.  For all of the examples of negative government intervention (and there are plenty more) there are many that deserve lasting credit and that absolutely completed their objective or went beyond it.

  • Subsidies to ship companies and builders helped to build the Erie Canal and reshape the shipping industry to connect the midwest hubs to the East Coast.
  • Millions of acres of land were given to railroad companies in the 1860s and 1870s to begin the construction of railroad.  ( an incentive, like a government subsidy)  This obviously transformed the transportation and distribution network of the U.S.

The heat is on Obama, so we’ll look at the 2009 recovery and reinvestment act to see the positives of it.

I'd buy that if I had stimulus money

Firstly, the Obama Administration’s 2009 Recovery and Reinvestment Act did exactly as it planned to do when it came to rescuing and recovering the U.S. auto industry.  Under the auspices of the government, GM was forced to turn their vehicles in a direction that American consumers were looking (ie. smaller cars, fuel efficient, stylish, better conditions).  The stimulus package (for better or for worse) also put rescued Wall St. companies in a position to rebound right away and prevent a greater economic collapse than did occur in 2008.   Also part of that stimulus package was $40 billion to be used for the utilities and energy sectors (a majority of which was tagged for renewable projects, ex. Solyndra), but some remained for the preexisting energy infrastructure. That means that some of the stimulus money is slated for improving the coal, natural gas, and oil industries and how they currently deliver energy across the country.  This will prove to be (and already has proven to be) a positive step for the economic status of these industries.

You can argue about the preceding material a great deal to say how “positive” these steps were, but the bottom line is, the auto industry and financial institutions are in a better place than they would be if the Recovery Act had not been enacted.

Ok, let’s get a conclusion out of all this fluff.

  1. With Solyndra, SpectraWatt, and Evergreen, the Obama administration’s effort to stimulate the solar industry and create jobs at the same time failed.
  2. Government subsidies pay off big it seems for big infrastructure investments as well as emergency situations (ie. war, depression, bankruptcy).
  3. Government subsidies seem to lack foresight when they are aimed at stoking an industry that is already entrenched.

We shall see how this damaging news hurts Obama’s reelection chances, but it surely will be a piece of ammunition for his Republican detractors in reviewing his handling of the recession economy.

Well, until the next newsworthy article comes around, we’ll see you next time!

Your Faithful Historian,

Eric G. Prileson

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About eprileson

I am a historian and writer who wants to bring to light current events through a historical perspective. It is difficult to understand today's current events without having a grasp of what has occurred before. This is a running thread to help keep people informed about the present and remind everyone to not forget their past. Enjoy and please comment!
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2 Responses to What’s the Deal With Government Investments Gone Wrong?

  1. Lee Wright says:

    Good energy and enthusiasm, but some of the conclusions are based on the conventional and very incomplete understanding of two of the successes you site. A useful concept to consider is the difference between market entrepreneurs and political entrepreneurs, several example of which you site above. A closer look at the steamship and the railroads shows that the same underlying forces were at work then, and the results were little different.

    – Fulton was given a monopoly for 30 years enforced by the state of New York. Ten years later, in 1817, Thomas Gibbons hired Cornelius Vanderbilt to provide an alternative to passengers on this route. They lowered rates, running steamships that flew a flag reading “New Jersey must be free.” They were pursued by authorities and beloved by the public. Finally, in 1824 the monopoly was struck down by the Supreme Court and Chief Justice John Marshall, who ruled that only the Federal government can regulate interstate commerce.

    After the decision broke the state-enforced monopoly, steamboat traffic double in the first year and quadrupled in the second. These entrepreneurs did what the celebrated entrepreneurs of today do: Innovate to meet the needs of potential buyers. Tubular boilers were used instead of the expensive copper boilers Fulton used and anthracite coal cut fuel costs in half.

    Fares dropped significantly. On the NYC to Albany route, fares went from $7 pre-ruling to $3 after the monopoly broken. Fulton and his group were political entrepreneurs, and failed to innovate to offer a competitive product and went bankrupt.

    – The case of the railroads is even more extreme. Here the political entrepreneurs invested heavily in lobbying for ever higher payments and subsidies, with all of the market-distorting results one would expect. The Union Pacific and Central Pacific were given 20 sections of land for each mile completed and loans in the amount of $16,000 – $48,000 depending on the grade. And the result: Some of the routs were winding (and therefore longer) despite situations in which the winding route was less efficient and hurt the eventual operation of the trains; they used light wrought iron rails because it was cheaper, despite the fact that it was less durable; they sometimes used wood for bridges and culverts because doing so was cheaper and faster than masonry; they sometimes laid track on ice and snow despite the fact that this would have to be rebuilt later; they built through unsettled lands at the loss of hundreds of lives, forcing the government to pay to protect them; as they headed toward each other they eventually passed each other, grading tracks in parallel to get the subsidies. Some estimates are that the building of the lines cost 3x what it should have. Despite the huge subsidies and cash loans, the companies were almost bankrupt. Later outrage at the excesses brought Congressional intervention that reduced the ability of the lines to compete.

    Contrast all of this with a group of market entrepreneurs who bought the bankrupt St. Paul and Pacific RR. Originally built heavily with federal subsidies, when Hill and his group of investors took it over they faced track that was sometimes unconnected, was made up of 15 different patterns of iron, and materials and equipment strewn along the rights of way. Hill ran it differently, building at a slower pace to ensure that there would be an export market that would create demand for transportation over the line he was building. He used more durable, long-lasting rails, which initially had to be imported because the technology to build them had not yet been introduced to the US. There are many other examples, and throughout he had to compete in this region with the Northern Pacific, which received Federal subsidies and dispensation. Hill ran a market-based business with private capital and created a line that was faster than the NP and cheaper to run than the NP–and that didn’t require being bailed out and reorganized at further expense to the taxpayers.

    It all sounds pretty familiar, doesn’t it?

  2. eprileson says:

    Thank you so much Lee!
    I really appreciate the response, and I’m glad you made it. With this post, I unfortunately found myself mired within a topic that warranted much more research than I had time to do. I’m glad that historians such as yourself have my back in regards to historical accuracy and completeness.
    For now my goal with this blog is to delicately balance the writing on current events with enough broad historical material (the big ideas) and within enough time to still consider the events “current”.
    Thanks again for your response

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