They Would Have Failed Anyway

This Newsweek article reviews the amazing coincidence that so many Obama DOE loans and subsidies benefited heavy-duty Obama campaign supporters.  The author seems surprised:

...these were highly competitive grant and loan programs—not usually a hallmark of cronyism. Often fewer than 10 percent of applicants were deemed worthy.

Nevertheless, a large proportion of the winners were companies with Obama-campaign connections. Indeed, at least 10 members of Obama’s finance committee and more than a dozen of his campaign bundlers were big winners in getting your money.

But his first sentence misses an important aspect.  Sure, competitive contracts for, say, building a bridge may not be fraught with cronyism.  If so, it is likely because these contracts have pretty clear decision criteria - ie we will take the lowest bid by anyone with minimum qualifications.

But the DOE loans were all to companies with sketchy prospects -- if they had actual profits or even a reasonable hope of profits, someone would have funded them privately.  So these are all wild longshots no one in the private sphere would touch.  Given that, what objective criteria can possibly exist?  And even if one can imagine such a criteria - e.g. least dollars invested per ton of Co2 mitigation - it is clear that no such criteria existed or were applied.  So of course it was going to be a crony-fest.

But my point is this - even without fraud or cronyism.  Even if every choice were made by the best and the brightest in a politically color-blind fashion, the program would still be failing.  Because by definition the program's success would require a few folks in Washington to be smarter than, and to have more and better information than, the entire rest of the country which turned down the opportunity to invest in these companies.


  1. NL_:

    Even if we discount the possibility of intentional corruption (knowing graft to undeserving political contributors) the political support may have provided exposure to officials who talked up supporters' projects to the decision-makers.

    Also, it's interesting that people are analyzing this situation like there has to be a specific quid pro quo. If Bush had given a special tax break or subsidy program to all oil & gas companies, it would've been classed as a payoff to his supporters - even though the program was nominally legal and didn't pick between companies. By the same token, Obama promised to expend public resources on "green" projects, which means solar and other renewables, and the DOE loans are part of that gift to a group of companies that overhwelmingly supported him.

    Somehow journalists think "corruption" has to be in secret, ideally involving trenchcoats and suitcases exchanged at midnight. But there's plenty of open corruption, like Bush giving a steel tariff in a brazen attempt to curry favor in Pennsylvania and Ohio. Obama guaranteeing jobs and money to the "green" sector is another corrupt effort. The handover of GM to unions instead of the regular creditors was another act of open corruption.

  2. Benjamin Cole:

    DOE loans=Bad.
    USDA subsidies (grants)=Good.

  3. Another guy named Dan:

    To me the DoE programs were little more than an attempt to subsidise American companies so that they would be able to collect subsidies from European governments more readily than the companies that the Chinese government was subsidising.

    The whole thing was a negative-sum game that could exist only as long as the subsidies kept bringing in cash from the outside. There was no wealth creation here.

    Didn't Mr. Madoff go to Club Fed for running exacly this kind of operation?

  4. Anon:

    "Sure, competitive contracts for, say, building a bridge may not be fraught with cronyism."

    Then again, they may. The easiest trick is to tailor the requirements to meet a specific vendor.

    At least on the federal level, I'm not sure there is anything that remotely resembles what a "civilian" would consider a competitive bidding process.

  5. Ted Rado:

    I would have thought that after 70 years of Soviet experience, the idea that government bureaucrats are smarter than all the rest of us put together would have been buried for good. Apparently, we need to drive a stake through the idea's heart!

  6. me:

    LOL. @Ted: I used to work with a Russian coworker who had lived through quite a bit of Soviet history. In the late 90ies, he started to joke how much the events in the US (and in our workplace) reminded him of that time. In the last years, he has become increasingly bitter, because he says all the things that made the SU awful are quickly becoming just as bad here (he made his life here, so he's not going to move).

  7. a_random_guy:

    Actually, I think this is a far more important point: "...10 members of Obama’s finance committee and more than a dozen of his campaign bundlers were big winners in getting your money."

    That is, quite simply, evidence of fraud. This should be investigated and prosecuted.

  8. Anon 2:

    I work at a mid-sized government contractor. As far as we're concerned, if we're not actively assisting the design of the tender, it's not even worth the time to bid. The goal is to be the only vendor that could possibly provide a service. As such, the competition shifts to the tender design process, and making sure whoever is writing it is throwing you a bone.

    As far as the grant and loan projects, typically government agencies have a hell of a time trying to deploy the funds, as the biggest impediment is actually having the USG be your source of funds, and dealing with both their onerous timelines, and requirements. Basically anything that isn't clearly fraudulent or of the underwear gnomes variety will be funded. The sad part is what the other 90% of projects look like.

  9. Tom Nally:

    This post seems to touch on two Hayek ideas. One is the "fatal conceit": the belief that smart people in government can engineer markets that are more efficient than markets that arise spontaneously.

    The second Hayekian idea is the "knowledge problem". I think it is this: the knowledge needed to determine the "right" level of production is not concentrated in one person, one group, or one institution. Rather, it is dispersed in tiny bits throughout the total population of consumers and users. It's fluid. It's contradictory. It can never be aggregated to produce good decisions by central planners.

    Hey, I think I botched the "knowledge problem", but what the heck. Improvements humbly accepted.

    ---Tom Nally, New Orleans