Coyote Blog

David Roberts (via Kevin Drum) gives us a simply outstanding view of the mind of a statist:

In these grim economic times, one U.S. industry has defied gravity. Not only is it growing, it's thefastest growing industry in the country. It now employs 100,000 Americans at 5,000 mostly small businesses spread across all 50 states. Unlike in so many others, in this industry the U.S. has a positive trade balance with China; it is a net exporter of high-tech manufactured products....

The startling counter-cyclical growth of this industry had been unleashed by a modest bit of economic stimulus: a cash grant program that helps project developers compensate for the crippling credit crunch. In contrast to the familiar tax credits -- which tend to go to large, mature companies that have enough profit to benefit from them -- cash grants help small, innovative, growing businesses that are plowing revenue into growth. In fact, a recent study found that they work twice as well as tax credits. In 2009, this cash grant program pulled in $4.50 of private capital for every public dollar it invested.

The cash grant program expires at the end of the year. Extending it for a single year could support 37,000 additional jobs over and above the industry's baseline. And here's the capper: Since the cash grant program is simply repurposing money that's already devoted to a tax credit program, it requires no new federal revenue.

So you'd think this would be a home run, right? At a time when jobs are at the top of every politician's mind, surely a bit of low-cost economic stimulus that doesn't increase the deficit and leverages tons of private capital and creates tens of thousands of jobs can serve as the rare locus of bipartisan cooperation. Right?

Except the industry in question is the solar industry. And because this industry involves clean energy rather than, I dunno, tractor parts, it has been sucked into conservatives' endless culture war. Rather than lining up to support the recession's rare economic success story, Republicans are trying to use the failure of a single company -- Solyndra -- as a wedge to crush support for the whole industry. Odds are they're going to succeed and the cash grant program (Sec. 1603) won't be renewed next year.

Do you see the basic assumption -- if we don't take money from taxpayers and give it to businesses in a certain industry, that means we don't like that business.  Really?  That means that there is not a single industry in this country that I like, since I don't support subsidies for any of them.   Unless you believe the state is mother and father to us all, the fact that I don't support state subsidies does not mean that I don't like the industry somehow.  Kevin Drum even goes so far as to say that opposition to solar power subsidies is an aspect of the culture wars.  Huh?   Oh and by the way, the politicization of this loan process is just amazing to me.  More and more people at Solyndra seem to be fund raisers for Obama, and here is a story of how a cleaning products company turned donations to Democratic candidates into taxpayers subsidies for themselves.

It is interesting that he would mention tractor parts.  Guess what, folks who don't like the solar subsidies probably don't support subsidies for tractor parts either.  I was going to say something like, "guess what, we don't subsidize tractor parts" but in our screwed up corporate state, we probably do at some level, like with some special export program snagged by a John Deere lobbyist.  But I can pretty much guarantee that we don't subsidize anywhere near the total value of the tractor parts industry like we do the solar industry.

In one silly passage, he says

"In addition to being successful, this industry is wildly popular with the American public, across regions, demographics, and political parties. It has been embraced by mainstream institutions from Walmart to the U.S. military"

I could say the same thing for iPods too, but no one is rushing to provide grant programs for their manufacture.  If it is so wildly popular, why does its use require so many government incentives and subsidies.  Because the author pulls the trick of looking at one narrow solar program, and attributing the entire solar industry growth to that one program.  And then he says, see, look how much benefit we get from this tiny sensible expenditure.

But solar's growth (I don't have the data, but I am willing to be real money that his "fastest growing industry" claim is BS) is due not to just this tiny programs but to a plethora of federal, state, and local subsidies and mandates.  The government gives money to capitalize companies, and then then provides tax credits for up to 30-50% of their customer's purchase, and then through public utility commissions enforce above-market feed-in tariff rates for solar power.  One reason we export so much (the export market for US solar is nearly entirely to Europe) is that European governments have feed-in tariffs for solar power more than 5 times higher than the market rate for electricity.   They are paying something like 70 cents a kilowatt for solar electricity.

So of course solar is growing.  If the government were to buy small cars for $150,000 each, there would be big growth in car manufacturing. This does not mean the product makes sense -- in fact, the necessity for so many government supports at every step of the process means almost by definition that it does not make sense economically.  Look at corn ethanol.  Corn ethanol is the stupidest product ever, but it has grown like crazy due to the same combination of government subsidies, price floors, and mandates.

By the way, I am a huge fan of solar, in theory.  I honestly think that solar will some day be the power system of choice in this country, as companies figure out how to roll solar sheets out of the factory as cheaply and quickly as carpet comes out of Dalton, Georgia.  We are not there yet, and I am not at all convinced that the current approaches are anything but dead end technologies.  Beyond wasting a lot of money, there is a real risk the government actually slow ultimate implementation of sensible and economic solar, just as I would argue they did by forcing manned space flight and the transcontinental railroad ahead of their time.

Or maybe it is more correct to say that the taxpayer is being set up to keep BofA counter-parties whole. From Bloomberg, via Zero Hedge:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Obviously I am not a huge fan of bank regulation, but if the taxpayer is going to insure deposits, then the government has got to set and enforce capital restrictions on how those deposits are invested.  How many times do we have to learn this lesson?  The S&L crisis and the Texas bank collapse of the 1980's was caused by the exact same BS, investing taxpayer insured deposits in increasingly risky investments.

Normally, in a free economy, we expect lenders to enforce rules and discipline on those to whom they lend, just as fire insurers in the 19th century developed the first building codes and inspections to protect their themselves.  But if depositors are insured, they are not going to get worked up too much about BofA -- I am a depositor but I know the Feds will make me whole if the bank crashes.  Deposit insurance provides comfort to depositors and pays some dividends in heading off bank panics, but at the same time it relieves the bank of any accountability for how the deposits are invested unless the US government takes on that role.  Of all the BS regulations financial firms have to put up with, this is the one that should actually exist, and the implication in this article is that despite thousands of pages of new regulation, these basic protections still don't exist.  Sure, they exist in law, but there seems to be nothing to stop an agency from issuing exemptions, and this Administration has shown itself to love giving exemptions.

This reminds me a ton of the AIG bailout.  For some reason, there are a group of Wall Street companies (cough Goldman cough) that seem to have immense political power to protect investments in which they are a counter-party.  To this point, people have been expecting that the BofA holding company might soon fail, but the underlying banks would be fine and just sold off in pretty good shape.  Most of the trash is apparently at the holding company level.

The losers in all this are the counter-parties to these various derivatives, who would rather have a better set of assets to grab if the ship starts sinking.  Of course, they don't have any right to this -- they didn't make these original deals with the depository banks, they made them with Merrill Lynch and other trash BofA has bought.  But never-the-less, the Fed seems fired up to give these guys a special deal.  It reminds me of the Solyndra deal where the Administration allowed certain private parties to move ahead of the US Government on the creditor list, though at least in Solyndra's case these parties actually put some money into the pot for the privilege.  This seems to be a straight giveaway, and it is no surprise that the FDIC is apoplectic.

Megan McArdle looks into where all that green seed capital is going.  It turns out it is going the same place most other government "investments" go -- to large, well-connected companies who don't actually need the money but will sure appreciate it come election time.

But I have highlighted what jumped out at me: most of the money has gone to enormous companies that should have no trouble accessing capital.  Established utilities, large multinational auto manufacturers, a global warehouse owner.  The bulk of these funds are not going to rectify some gap in the capital markets.  They're straight subsidies to huge corporations.  Even some of the smaller firms/deals are owned by large corporations like Total SA.

Giving large, established companies extra-cheap loans to build power plants, run transmission lines, and fix up the roofs of their warehouses is, in the immortal words of P.J. O'Rourke, like paying a Dairy Queen owner to keep his ice cream freezers on.

I am sympathetic to the OWS hatred for bailouts and crony capitalism, but struggle to understand how they intend to fix the consequences of the exercise of government power in the private world with yet more exercise of government power in the private world.

Apropos of very little, I found this bit from Matt Taibi funny (emphasis added)

1. Break up the monopolies. The so-called "Too Big to Fail" financial companies – now sometimes called by the more accurate term "Systemically Dangerous Institutions" – are a direct threat to national security. They are above the law and above market consequence, making them more dangerous and unaccountable than a thousand mafias combined. There are about 20 such firms in America, and they need to be dismantled

I am pretty sure that, by definition, a single industry cannot have 20 monopolies.

Though I share the same concern, my solution is to just let them fail.  Right now, the cost of capital for these large companies is lower than the cost of capital for smaller companies because, even though many of them have far worse balance sheets than smaller banks, investors feel they have too big to fail protection.  Let a few fail and have the cost of capital shoot up for larger companies and you can be pretty damn sure they market itself will break up these companies.

In some ways it reminds me of the market premium given in the 1960's to multi-industry conglomerates like ITT.  When the capital markets made their cost of capital low, everyone tried to copy their conglomerate strategies.  When these strategies started failing and companies like RJ Reynolds found their diversification into shipping and shower curtains was a business disaster, capital dried up for these Frankenstein monsters and most of them were broken up.  All without a hint of government intervention, either to save them or kill them.

Its telling that no one on the Left or with OWS who gives this advice for financial institutions takes their own advice with, say, auto companies.  GM should have failed and likely been broken up as well.

Had Obama been around 10 years earlier with his green jobs program, Enron might never have gone bust - it could have just gotten DOE loans

Do you remember back in the late 70's, when the economy sucked, and no private entity would fund new technologies like computer startups Apple and Microsoft, so the government had to step in to provide the needed investment?  Yeah, neither do I.

From my own state of Arizona (emphasis added)

A group of small-business proponents is asking the Legislature to guarantee startup money for Arizona enterprises.

The backers of a so-called Arizona Fund of Funds made their pitch to a handful of lawmakers Monday, saying businesses need government help to start hiring again.

That help should come in the form of tax credits, said John Kowalski, who is promoting the idea through the Arizona Growth Foundation, a group of venture capitalists working to bring more investment to the state.

The credits would be a safety net to encourage venture capitalists to invest in a pool of money that would be distributed to emerging businesses, said Kowalski, a former executive with the Arizona Small Business Association....

The government's role is to serve as a guarantor, through the tax credits, in case the investments don't yield the projected results.

While this is being sold as something for small business, what it looks like to me is just more of the same socialization of bankers' losses that helped get us into this financial mess.  I suppose this "profits are mine if it makes money, losses are the governments if it loses money" never grows old for investment bankers and VC's, but why is anyone taking this seriously anymore?

Faced with serious questions after the Solyndra failure as to their ability to make intelligent investments, the government is reacting by.... accelerating the approval of other green energy loans.  Again, the difference with the private sector is not that the private sector makes no mistakes, but there is real accountability for those mistakes which lead to changes in behavior.

I was going to leave this topic behind, but I just couldn't resist after Krugman's bit of snark on the topic.   Please see my new Forbes column here.  One bit, actually off topic from the rest of the article, that I added as a postscript:

Perhaps the worst Administration decision of the entire Solyndra affair has yet to receive adequate scrutiny.  Just 6 months before Solyndra failed, the Administration allowed Argonaut, the largest shareholder, to grab the senior debtor position from the US taxpayer in exchange for $75 million in new financing.  The Administration’s argument was the loan was needed to buy time, but buy time for what?  Solyndra’s relative cost position was getting worse, and it was experiencing a huge loss on every unit sold.  No one involved has been able to say what the company was counting on to save it in the 6 months this loan bought it, except perhaps the opportunity to cajole another half billion out of the US taxpayer.

But the loan did accomplish two things.  First, it gave Solyndra time to sell every liquid asset it owned that might have been of value to…. Argonaut.  And once this bit of self-dealing was complete and the company was cleaned out, the bankruptcy process could be entirely controlled by Argonaut such that it will likely end up with all the assets, most important of which seems to be a $500 million dollar tax loss carryforward.  If Argonaut can take advantage of these tax shelters, it will end up costing the US taxpayer an additional $150 million or so.

In short, the taxpayer got rolled.  Again.

Update:  Marc Morano:

 'When we had (Gulf) oil spill, we immediately had moratorium on off shore drilling. The oil industry was demonized & literally shut down'

'But after the green energy debacle, they are being feted and rewarded -- $9 billion more is being sent out to 14 more companies...Solar power is less than 1% of our electricity, yet this is being feted'

Krugman snarks:

But [Solyndra] is indeed a terrible scandal, because the private sector never ever puts money into ventures that end up failing:

And then he puts up an ad from Pets.com, a very famous private equity disaster.  My quick thoughts

• As I have said over and over (specifically comparing Solyndra to Pets.com weeks before Krugman thought to) Pets.com did not take my money.  Solyndra did, and without my permission too.  Yes, the fact that it was my wealth Solyndra destroyed matters.
• If my money manager had invested in Pets.com, I would have been pissed at him and demanded accountability.  In fact, the entire VC sector and most of the stock market started to entirely rethink their approach to Internet investing after Pets.com blew up so spectacularly.  So it is odd that Krugman would use the Pets.com example as an excuse that this Administration NOT face any accountability for Solyndra and NOT rethink its approach to investing in private companies.
• Pets.com was an investment made after hundreds of other Internet companies had been funded - it was the marginal investment, in some sense, after the low-hanging fruit had been funded.  Solyndra, on the other hand, was the first company funded by this Administration under this program.  It was their #1 choice.
• Public loan guarantees are always going to go systematically to the worstinvestments.  As I wrote in the article linked above

...government loan guarantees go only to those companies who the free market has chosen NOT to fund.  If the free market was willing to toss another half billion into Solyndra, its owners would not have been burning a path back and forth to Washington.  So by definition, every single government loan guarantee in this program is to a company or a technology that the free market, knowledgeable investors, and industry insiders have rejected as a bad investment.  For the program to work, one has to believe that Obama, Chu, and some career energy department bureaucrats have a better understanding of commercializing technologies than do private investors (who are investing with their own money) and industry experts.

• If it were the job of the President to be the venture-capitalist-in-chief, would you have chosen Barack Obama for this position?  Would he even be in your top, say, 20 million choices?  If I gave you a choice of Barack Obama or a random person snatched off the street of lower Manhattan, who would you choose to make these investment choices?

I thought this article from Zero Hedge was a pretty good window into the bankruptcy process for those of us unfamiliar with what goes on.  The most interesting point is that by allowing Argonaut to cut ahead of taxpayers as the senior creditor, the Obama Administration virtually ceded control of the bankruptcy process to Argonaut.  Argonaut has put up the debtor-in-possession financing as well, and the combination of these two positions gives it pretty tight control of the process going forward

The plan put forward is a four-week sale of the company. The logic behind this very rapid schedule is that Solyndra is still burning cash at the rate of $1mm a week. How long will the $4mm DIP financing last? Four weeks. The terms of the DIP makes it a sure thing that Solyndra is going to be sold ASAP. That sounds good. But not for the DOE.

The one-month period is a very short time frame. The likely result will be that no serious alternative buyer will appear. Should that happen, the senior creditor will get all of the assets of the company at the end of 30 days. That would be Argonaut. It's possible that Argonaut will end up owning a company that lists $850mm in assets for less than $100mm.

I am not sure taxpayers were ever going to get anything out of this mess -- the combination of a high-cost manufacturing plant with me-too technology in a commoditized business was never going to be wildly valuable -- but the Administrations decision to allow Argonaut to jump the seniority line has pretty much assured that whatever value that might be there will go to Argonaut and not the taxpayers.

Postscript:  Someone might argue that the decision in February to allow Argnaut the senior position was required to get them to put up the $75 million that was necessary at the time to keep operating.  I am positive this is true, given the condition of Solyndra finances at the time.  However, the right answer at the time was to shut the thing down then, while the US had seniority and before Argonaut cleaned out all the assets of value (as they did this summer, selling inventories and receivables to themselves).  The company had no real prospects of ever making money when it was first financed two years ago and certainly did not in February.  The $75 million in February was less financing and more a pre-emptive bid for the company's carcass in the inevitable bankruptcy, and it will likely play out exactly this way.

Update:  I have read that Argonaut may be interested in the $500 million of tax losses.  These are tricky to use, and only Argonaut of all potential buyers could reasonably make use of them.  These might be worth $150 million in avoided taxes, so the $75 million price might make sense.  If Argonaut pulls this off, it would mean that the decision to accept their $75 million in financing is even more costly to the taxpayers.  Not only did they miss out on whatever value might be in the company, but it also created the opportunity for $150 million in tax avoidance that comes right out of Uncle Sam's coffers.

My new column is up at Forbes, and discusses why politicians, particularly this administration, think they can allocate capital better than the market

The problem is that this top-down override of market capital allocations is almost certain to destroy wealth, because there are at least two problems with it (beyond the obvious liberty and property rights issues).

First, the decisions are being made by, at most, a few hundred government workers.  There is no possible way these workers can ever gather the knowledge and information posessed by millions of private actors making similar investment decisions.  Like monkeys throwing darts, some of the investments will work out, but on average their success rate has to be far lower than the network of individuals in the broader economy.

Second, and probably more important, government decisions-makers have terrible incentives when making these investments.  Seldom, if ever, are government re-allocations of capital made with an expectation of earning a return.  In fact, many of these programs promote themselves explicitly as shifting capital to investments no rational private investor would touch.  These investments are undertaken because they promote some sexy technology, or create jobs among a favored constituency, or even just because they make for a nice bullet point on a politician’s reelection web site.

Obama’s investment of taxpayer money into Solyndra is a great example.  It is clear little due diligence was completed before the loan guarantees to Solyndra were rushed out the door in 2009 in time to meet Energy Secretary Steven Chu’s artificial target date for the first loan of Obama’s green jobs program.  A good, well-timed sound bite on the evening news was more important that the actual details of the investment.

But, in fact, little due dilligence should have been necessary. ....

When the Left has talked about oil and gas subsidies, I have generally nodded my head and agreed that any such things should be eliminated, just as they should be eliminated for all industries.   They have in the past thrown out huge numbers for such subsidies that seemed high, but I have not really questioned them.  But then I see this chart at Kevin Drum's site

Seriously, nearly half the "subsidy" number is the ability of a company to use LIFO accounting on inventory for their taxes?  Since the proposition is to eliminate these only for oil and gas, what is the logic that somehow LIFO accounting is wrong in Oil and Gas but OK in every other industry?   In fact, at least the first two largest items are both accounting rules that apply to all manufacturing industry.  So, rather than advocating for the elimination of special status for oil and gas, as I thought the argument was, they are in fact arguing that oil and gas going forward be treated in a unique and special way by the tax code, separate from every other manufacturing industry.

In fact, many of these are merely changes to the amortization and depreciation rate for up-front investments.  Typically, politicians of both parties have advocated for the current rules to encourage investment.  Now I suppose we are fine-tuning the rules, so that we encourage investment in the tax code in everything but oil and gas.  I will say this does seem to be consistent with Obama Administration jobs policy, which has been to try to stimulate businesses that are going nowhere and hold back the one business (oil and gas drilling) that is actually trying to grow.  I am fine with stopping the use of the tax code to try to channel private investment in politician-preferred directions.  But changing the decision rule from "using the tax code to encourage all manufacturing investment" to "using the tax code to encourage investment only in the industries we are personally sympathetic to" is just making the interventionism worse.

This is really weak.  Not to mention flawed.  Unless I am missing something, a change from LIFO to FIFO or some other inventory valuation rules will create a one-time change in income (and thus taxes) when the change is made.  LIFO only creates sustained reductions in taxable income, and thus taxes, if your raw materials prices are consistently rising (it actually increases taxes vs. FIFO if input prices are falling).  Given that oil and gas prices are volatile, its hard to see how this does much except extract a one-time tax payment from oil companies at the changeover.

By the way, I am pretty sure I would be all for ending government spending on "ultra-deepwater and unconventional natural gas and other petroleum research," though ironically this is exactly the kind of basic research the Left loves the government to perform.

It does not appear that Rick Perry is the guy to dismantle our growing corporate state.

The LA Times investigates the big-money culture of Texas politics, which has gotten even bigger and money-er since Rick Perry became governor:

Perry has received a total of $37 million over the last decade from just 150 individuals and couples, who are likely to form the backbone of his new effort to win the Republican presidential nomination....Nearly half of those mega-donors received hefty business contracts, tax breaks or appointments under Perry, according to a Los Angeles Times analysis.

Perry, campaigning Monday at the Iowa State Fair in Des Moines, declined to comment when asked how he separated the interests of his donors from the needs of his state. His aides vigorously dispute that his contributors received any perks. "They get the same thing that all Texans get," said spokesman Mark Miner.

Nearly half! And this doesn't even include anything about David Nance and the largesse Perry distributes via his $200 million state-managed venture capital slush fund. Doling out political favors in industrial quantities is obviously something that isn't frowned upon by Texas political culture, and Perry has taken it to whole new levels.

Kudos to the LA Times and folks like Kevin Drum for digging this up, but everyone involved should be embarrassed by just how partisan outrage on this kind of thing can be.  The same folks who are rightly upset at Perry actively cheered on Obama as he took ownership of GM away from the secured creditors and handed it to his major campaign supporters in the UAW.  His stimulus program has been a trillion dollar slush fund to pay off nearly every liberal constituency, and while I find the idea of a state-run venture capital fund horrifying, I see no difference here with Obama's green job investments, many of which have gone triends, campaign supporters, and even spouses of prominent administration officials.

As I asked the other day, if the President is really supposed to be our VC in chief (an absurd thought) who in the hell would pick Obama for the job?  As one random example out of my feed reader:

Last year, Seattle Mayor Mike McGinn announced the city had won a coveted $20 million federal grant to invest in weatherization. The unglamorous work of insulating crawl spaces and attics had emerged as a silver bullet in a bleak economy – able to create jobs and shrink carbon footprint – and the announcement came with great fanfare.

McGinn had joined Vice President Joe Biden in the White House to make it. It came on the eve of Earth Day. It had heady goals: creating 2,000 living-wage jobs in Seattle and retrofitting 2,000 homes in poorer neighborhoods.

But more than a year later, Seattle's numbers are lackluster. As of last week, only three homes had been retrofitted and just 14 new jobs have emerged from the program. Many of the jobs are administrative, and not the entry-level pathways once dreamed of for low-income workers. Some people wonder if the original goals are now achievable.

"The jobs haven't surfaced yet," said Michael Woo, director of Got Green, a Seattle community organizing group focused on the environment and social justice.

"It's been a very slow and tedious process. It's almost painful, the number of meetings people have gone to. Those are the people who got jobs. There's been no real investment for the broader public."

At the same time, heavily subsidized Evergreen Solar is going bankrupt.

Bloomberg News reports that the firm Evergreen Solar will file for bankruptcy and close its operation in Midland, Mich. The maker of solar cells cites over-capacity in the industry, competition from China and fewer government subsidies as contributing factors. According to Bloomberg, the firm has 133 employees worldwide.

Given a Michigan location and participation in a politically faddish industry, readers won't be surprised that Evergreen was the beneficiary of special state subsidies and a local tax break. Specifically, three years ago Evergreen Solar was offered a $1.8 million "refundable" tax credit by the Michigan Economic Growth Authority. For firms with little or no tax liability, this amounts to an outright cash subsidy, contingent on attaining certain employment and investment milestones. Evergreen Solar's specific tax liability is not public information.

The deal was based on crystal-ball projections from the Michigan Economic Development Corporation using a software program known as REMI, which predicted that an Evergreen deal would create exactly 596 direct and "spin-off" jobs by 2018, producing $18.5 million in new state tax revenue.

The city of Midland also granted property tax abatements worth $3.9 million over 12 years, according to Mlive.com. It's not known how much, if any, of these subsidies and tax breaks were ever collected by the company.

This actually understates the total subsidies, as it ignores subsidies to its customers, incoluding above market geed-in tariffs, to buy the solar panels.

Closer to home, a Tucson solar panel manufacturer that was opened to great fanfare with the help of Janet Napolitano and Gabby Giffords just closed after being open barely 2 years.  They scored some subsidies, got some large government and utility contracts on the promise of local employment, and then packed up shop for China.  Apparently they were attempting to compete in the commodity solar panel market on a strategy of having a higher fit and finish on their product, a product that sits on the roof and no one ever looks at.  Good plan.

This sort of thing drives me crazy:

Before 2009, the U.S. was supplying less than 2% of a tiny global market in advanced batteries. When the stimulus-funded factories are all complete, they’ll have the capacity to supply 40% of a rapidly growing global market, about 500,000 batteries a year. The stimulus will also boost our supply of electric-vehicle charging stations by more than 3,000%. And the Obama administration has provided loans to help Tesla, Fisker and Nissan build electric-car factories in the U.S., all part of Obama’s pledge to put 1 million plug-ins on the road by 2015. That is what change looks like, even if the President doesn’t beat his chest and call for mass beheadings on Wall Street while it happens

A few random thoughts

1. Doesn't this sound like an old Soviet press release about the highlights of their last 5-year plan?
2. This is a kind of weird economic nationalism that drove a lot of the bad behaviors in the 19th century.  Who cares what percentage of world battery output our country controls?  Don't we just care that there is an adequate supply at good cost from somewhere?  This sounds like chest-thumping for the American Raj.
3. Left unquestioned is why we should care or be excited.  Consider it this way -- a guy with no business experience is making major investments of our money in companies that were not able to get private investment.  Did you really elect Obama to be venture-capitalist-in-chief?  And if that were truly the President's job descriptions, how many tens of millions of people would you consider more qualified for the job than Obama?  Would you let Obama manage your retirement portfolio for you?
4. No government investment is at all interesting to me unless I am told what private use of the money was foregone.   All such public investments use money that is taken from private actors and would have been used for some private function.  How many jobs, and what market outcomes, would have occurred if the money had remained in private hands?
5. Let's see how many Democrats are claiming these successes in a few years when these ventures start going bankrupt.  I expect a lot of this stuff to mysteriously disappear from poloitician's web sites in a few years.
6. This is the corporate state in spades.  The government creates an industry, and in the future will create protectionist laws for it, and customer subsidies, and bail it out when necessary.  In return, all of its employees and managers know they owe their jobs to the party that sponsored the industry, rather than to any competitive prowess.

In my Forbes column this week, I publish an essay I wrote for an Americans for Prosperity event commemorating Milton Friedman's birthday.  A brief excerpt:

Having once been successful through excellence, leading businesses typically get lazy and senescent, and become vulnerable to more innovative, lower-cost or more nimble new competitors.  Sears lost its electronics sales to Circuit City, which in turn succumbed to Best Buy, which is now struggling to compete with Wal-Mart, who is being challenged by Amazon.com.

Unfortunately, businesses that were once successful can feel a sense of entitlement, believing that this new competition is somehow unfair, or that consumers are somehow misguided in taking their business elsewhere.  When they have money or political connections, these businesses may run to Congress and beg for special protections against competition, or even new subsidies, mandates, stimulus projects, and bailouts.

Where is the threat to capitalism and individual liberty coming from today?  Is it from some aggrieved proletariat, or is the threat from bailed out Wall Street firms, and AIG, and GM, and Chrysler, and ethanol manufacturers, and electric car makers, and windmill builders?

 

The progressive argument for a larger state has, for over a hundred years, rested in part on the premise that smart people at the top in government can better optimize the allocation of resources and make better investment choices.

This premise always has been ludicrous.  Government officials have neither the information nor incentives to perform this function, and lacking such, decisions always get made based on political rather than economic or other objective functions.

Ethanol is such a great example, it will almost be a shame when its mandates and subsidies are repealed.  As a reminder, corn-based ethanol production get the trifecta of state sponsorship -- mandates for its use, subsidies for its protections, and stiff tariffs to prevent lower-cost imports.

The result is a classic government fail.  The economic subsidies benefit only a small number of the politically connected, while hurting the great mass of humanity, even outside the US, through higher food and fuel prices.  Because ethanol takes as much fuel to produce as it provides, it does nothing to change the amount of fossil fuels we use.  And as a result, it does nothing to affect CO2 production and in fact has a number of environmentally negative effects, particularly in land and water use.

I am reminded of all this by these staggering figures, via Carpe Diem

"U.S. ethanol refiners are consuming more domestic corn than livestock and poultry farmers for the first time, underscoring how a government-supported biofuels industry has contributed to surging grain demand.

The U.S. Department of Agriculture estimated that in the year to August 31 ethanol producers will have consumed 5.05 billion bushels of corn, or more than 40% of last year’s harvest. Animal feed and residual demand accounted for 5 billion bushels."

As Mark Perry shows in his blog, US ethanol policy has also pushed corn prices up from $2 a bushel in 2007 to over $8 today.

I have argued many times that publicly-funded stadiums are a huge part of sports profits and team valuations.  For example, here in Glendale AZ, the town's stadium subsidies represent over a third of the value of the Cardinals and almost 200% of the value of the Coyotes.

As some of you may know, the NBA is heading into a protracted labor negotiation, with both parties acknowledging that the economics of the game have turned against owners.  Henry Abbot at ESPN argues that a large part of that economic change has been increasing taxpayer reluctance to subsidize sweetheart stadium deals for teams

Public money for stadiums has become scarce, and I have to believe that's part of the owners' pleas for financial relief from players. Huge moneymaking buildings for free or cheap have been no small part of what makes owning a team a no-brainer. Now teams in need of stadiums -- like the Kings and whatever team may one day relocate to Seattle -- face tough economics. Getting either deal done requires some kind of miracle. And in that context, if you ever fantasized about a world where taxpayers didn't contribute so much to buildings -- even if it meant players earned a little less -- well, your time is now.

To his latter point, I hope he is right.

I was thinking this weekend that one reason the US recovery may be slow is related to labor and capital mobility.

One substantial avenue to recovery in a recession has always been labor and capital mobility.  The fast labor and capital can be redeployed from losing industries to improving ones, the faster a recovery occurs.  One reasons Japan and certain European countries have had slower recoveries in the past than the US is that our mobility was higher and barriers to entrepreneurship lower.

But it strikes me that two things are going on in the US to endanger this advantage we have always enjoyed

1. The government push for home ownership has turned out to be a trap.  Not only did it help create the bubble, whose bursting destroyed a lot of real and paper wealth, but it has greatly reduced labor mobility.  Home ownership makes labor mobility much harder even in a good housing market when one can sell his or her home easily.  In a bad market like today, very few feel they can pick up and move.  I might want to give up on the construction industry in Michigan and move to the oil patch of North Dakota, but how can I do that if I own a home that I can't sell?  A number of other actions, most notably the repeated extension of unemployment benefits, contributes to the lack of mobility.
2. The government seems hell bent on doing everything it can to prevent, even reverse the tide, of capital mobility.  The government shifted tends of billions of capital into auto industry hands that had destroyed value for decades.  It continues to put the brakes on what should be an oil and gas exploration and production boom.  It kills health industries like light bulbs and shifts billions into useless politically powerful hands making ethanol.  The NLRB is preventing major American manufacturers from making factory investments in southern states.

In the late 1970's, the auto industry was in trouble but the oil patch was booming.  The Houston newspapers sold well in Michigan, popular for their help wanted ads.  From space, the Interstate highways between the Detroit and Texas probably looked orange from all the U-haul trailers.

The exact same dynamics could and should be occurring today.  Capital and labor should be shifting from, for example, the failing auto industry to the growing energy sector.  But the government today stands to block this reallocation. It is raising taxes on oil companies and placing barriers to their growth, while giving tax money to the auto industry and using every bit of power it can to sustain it.  Combine this type of barrier to capital flows (and auto/energy is but a couple of examples) with rising barriers to entrepreneurship, and it should be no surprise that growth is abysmal.

This is what happens in a corporate state.  Past winners retain huge amounts of power in the government long after their companies have become senescent in the marketplace.  Politicians argue for the power to pick winners and losers in the economy but generally use it only to protect current competitors and stand in the way of progress.

Here is an amazing example of how far the state will go to protect entrenched competitors from new competition.  Because it is far more important to make absolutely, 100% sure (precautionary principle, you know) that no one is competing in the Minneapolis market without a license than it is to encourage volunteer-ism in the wake of a natural disaster.

Tree trimmers who work in Minneapolis need to be licensed with the city. It’s a regulation in place throughout many cities, and something Haege knows all about. He’s licensed in Hastings and several area cities. Since he doesn’t work in Minneapolis, he isn’t licensed there.

All that was moot, of course. He was just going to volunteer and was not charging residents for his services.

He had brought a bucket truck to get high if needed, and he brought a wood chipper to dispose of fallen trees. He and the volunteers got to work on homes where the resident didn’t have insurance.

“We were removing stuff so people could get out of their driveways and out of their doors,” he said. “The place was a pretty big disaster.”

What happened next shocked Haege.

A city inspector arrived at the scene. She told Haege he had to leave. Immediately.

“You have to leave right now,” the inspector told Haege. “You’re not licensed to be here.”

“I said, ‘I’m just a volunteer,’ and she didn’t believe me.”

Haege went back to his truck and got his volunteer paperwork. Still, that did little to get the inspector off his back.

“I don’t want to see you up here,” she told him.

“She just didn’t believe me,” he said.

A volunteer from the Urban Homeworks, who had been with Haege since he signed up to volunteer that morning, did his best to convince the inspector that Haege wasn’t charging for his services.

Residents then came out of their doors in his defense, telling the inspector that he had just performed work at their house and hadn’t charged them a dime. Still, the defense fell on deaf ears.

The inspector told him to get out of the city, so Haege left with the volunteer. As they were on their way back to the volunteer area, residents waved down Haege, pleading for help. He pulled over and helped get a tree out of the way for them.

Haege had no idea police officers were behind him in a sort of unofficial escort out of town. He said they stopped traffic for about two hours while they figured out what to do with him. At one point, officers threatened to throw him in jail, he said.

All the while, residents continued defending him, screaming in his defense.

Officers told him to leave. They told him he was going to receive a “hefty fine” in the mail, and that if he stopped on the way out, the fine would be doubled.

I read this article three times to see if it made any sense, and it still does not, except as an incredibly ballsy attempt by a member in good standing of the corporate state to get more revenues out of its customers by government fiat.

A major shift in business is occurring at Arizona Public Service Co. and other regulated utilities in the state.

APS, Southwest Gas and other utilities are beginning to ask regulators to "decouple" their prices from the volume of their sales, which proponents said will encourage conservation.

If approved by the five-member Arizona Corporation Commission, decoupling would allow APS to collect a certain amount of revenue per customer regardless of how much energy was sold.

It would wipe out utilities' incentive to sell more power and be akin to a fast-food restaurant paying loyal customers to go on a diet.

Wow, what a fabulous business concept!   It's obviously a holdover from some horrible past wherein we pay for services based on, you know, actually getting those services.  End the tyranny of giving consumers something in return for their money!  In the modern corporate state, everyone knows a corporation earns revenue in proportion to how much influence it has with the government, and how much that government can be cajoled to let the company take by fiat from consumers.  Silly old me, actually charging people in my business for camping when they actually camp.  I should have been running to the government to get them to let me charge everyone in the country whether they camp or not.  By all means, let's let McDonald's decouple taking your money from actually giving you a Big Mac in return.

Seriously, beyond the fact that this concept is obscene, it makes zero sense even against its stated goal of conservation.   They are basically talking about shifting the consumer's marginal cost for electricity to zero.  How in the hell is that going to spur conservation?  Charge me the same amount each month for gas whether I drive or not, and that is going to cause me to drive less??

Apparently, in the weird mental world of utilities, conservation only results form utility subsidies of  efficient appliances.  So the big benefit here is utilities can somehow better afford their subsidies for more efficient appliances.  Left unexplained is why anyone would want to buy even a subsidized such device once their marginal cost for electricity goes to zero.  This is such a typical government-think, assigning much more value to government intervention and choice of winners in balancing supply and demand than they do to the operation of markets and prices.

Here is an idea -- just freaking stop subsidizing this stuff.  See, problem solved.   We now no longer need a new pricing model.  Either a conservation makes sense for the end user to invest in or it doesn't.  Here is an example they cite

An example of how APS promotes efficiency is found at the 250-student Metropolitan Arts Institute in Phoenix, which replaced $23,000 in lights last year. APS contributed $20,000 to the project.

The school said it saves about $2,000 a month in energy costs with the new lights and recovered its costs for the project in two months.

The new lights use less energy and produce less heat, reducing the air-conditioning needed.

Why the hell is our utility using my money to subsidize this particular institution?  If the numbers are right, the investment, without a subsidy has a 12-month payback.   Very respectable.  So why does this even need to be subsidized in the first place? Why is my money needed to give the Arts Institute a 1.5 month payback instead of a 12-month payback?

This is a total ripoff.  I can't possibly believe they are even considering giving this to these guys.

on this blog of how Glendale, Arizona has been throwing wads of taxpayer money at the Phoenix Coyotes hockey team and at any rich person who might be willing to buy the team.  The city of 225,000 citizens spent nearly $200 million on a stadium, promised to hand a buyer of the team $100 million to help with the purchase, plus hand the new buyer a stadium contract worth about $100 million over five years.  While this all plays out, Glendale paid the NHL $25 million last year to help cover the team's losses and has agreed to pay another $25 million this year.

Wow.  This is just amazing, written all in one place.  But its not just hockey that the small corporate-state suburb on Phoenix wants to subsidize.  Here is the latest recipient of largess:

Bechtel Corp., one of Glendale's largest employers, has agreed to stay until 2018 after city officials offered the company about $1 million in incentives.

By next year, the global engineering and construction company, with the city's financial help, will move from north Glendale to a new, vacant building not far from the city's sports district called the Glendale Corporate Center....

Under the agreement, Glendale would give $576,000 over the next two years to Bechtel for its costs to outfit the building shell for offices.

The incentive package also includes a waiver of $50,000 in city permit fees and a job-retention incentive of $1,250 per employee, up to $400,000. Each eligible employee must earn a salary of at least $50,000 per year.

Glendale offered a sports perk as well.

Bechtel can use the city's suites, both at Camelback Ranch Glendale and Jobing.com Arena, for free twice.

LOL, Jobing.com arena is the hockey rink the city built, so it is giving tickets from its subsidized hockey club to its subsidized engineering firm.  The article includes the usual consultant figures who reliably take money from cities to report on all the indirect benefits and revenues and economic activity that result from their subsidies.

However, these are not the first subsidies paid to Bechtel by Glendale

The corporation first came to Glendale in 2002. Bechtel moved to Talavi Corporate Center from Phoenix after Glendale promised $1 million in incentives. The staff at the time was expected to grow to 500 from 300.

Bechtel's staffing is only at 320 today, not 500, but this failure to actually grow jobs after getting subsidies for job growth is pretty typical of these deals.    My interpretation of this is that this is yet another move to get more tenants around its sports complex, to raise the stakes and apparent costs if the hockey team moves.  Glendale will cry that they can't lost the hockey team, think of all the tenants in the surrounding real estate, when it was the city itself that spent money to put all its eggs in this one basket.

The only funny part of the article is the Talavi real estate folks.  They were thrilled to gain a new tenant in 2002 due to the city's relocation subsidies, but now suddenly think such subsidies are unfair.

Bechtel's landlords at Talavi aren't happy about the move.

"We were actually a little surprised to hear Glendale was offering incentives," said Damon Elder, spokesman for Daymark Realty Advisers, which was negotiating a lease extension with Bechtel for Talavi's owners.

"We would think the city would be fair-minded with all of their corporate citizens. . . . I don't know why the city would be pitting one location against another."

For those of us who simply think of ourselves as residents of the Phoenix metropolitan area, or even broader just as Americans, we are surprised about the earlier subsidy as well, wondering why taxpayers of a small suburb are paying big bucks to move businesses back and forth a few miles across the town line.

But of course, this is not the worst example. A few years ago, Phoenix tried to spend $100 million in subsidies to move a Nordstrom and a Bloomingdales one mile and one freeway exit (out of Scottsdale).

By the way, Glendale's economic development director has made it official, we live in a corporate state:

"[government relocation incentives are] just a modern, Fortune 100 corporate expectation," Friedman said. "If you have a top-notch, world-class company in your community, your absolute goal should be to make sure they are successful and are content in your community and want to remain."

Don Boudreaux had these two rejoinders to the notion that the GM bailout is a success simply because GM is making a profit.

Economically literate opponents of the Detroit bailout never denied that pumping hundreds of millions of taxpayer dollars into Detroit automakers would restore those companies to health.  Instead, they argued, first, that bailing out Detroit takes resources from other valuable uses.  Because he doesn’t even recognize that other valuable uses were sacrificed by this bailout, Mr. Dionne offers no reason to think that the value of saving Detroit automakers exceeds the value of what was sacrificed to do so.  No legitimate declaration that the bailout is successful is possible, however, without evidence that the value of what was saved exceeds the value of what was sacrificed.

Economically literate bailout opponents argued also that it sets a bad precedent.  By signaling to big corporations that government stands ready to pay the tab for the consequences of their poor decisions, big corporations will more likely make poor decisions in the future.  It’s far too early for Mr. Dionne to conclude that this prediction is mistaken.

I would offer a third concern -- that the government has kept hundreds of thousands of skilled workers and billions of dollars of physical assets under the management of the same group that have decidedly underutilized these assets in the past.  A bankruptcy without Federal intervention would likely have shifted assets and skilled workers into new companies with different management teams and cultures pursuing different strategies with different information.

I always have trouble explaining this issue to people.   Think of a sports team with great players but a lousy coach and management team.  Having the government ensure that the lousy management stays in control of the great players is a waste for everyone.  I explained it more in depth in this post, where I concluded

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case – Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA...

So what if GM dies?  Letting the GM’s of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM’s DNA has a less than one multiplier, then releasing GM’s assets from GM’s control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe’s productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe’s most productive human and physical assets into organizations with DNA multipliers less than one.

The importance of government largess to sports, including publicly-funded stadiums, has been a frequent topic on this blog.  Recently, the CEO of the Fiesta Bowl John Junker was fired for a number of alleged violations related to campaign contributions and favors for politicians.  This story is virtually inevitable.

The Fiesta Bowl benefits enormously from being one of the four BCS bowl games.  In fact, the difference economically between being one of the four BCS bowl games and being one of the numerous other bowls is roughly the difference between the United States and, say, Peru.   To give one a sense, the prize money for winning a BCS bowl is about $18 million.  The prize money for all other bowl games varies from $325,000 to, at most, $4.25 million.

But the Fiesta Bowl would almost certainly not be one of the four BCS bowls were it not for the city of Glendale building a half billion dollar stadium to be shared by our NFL franchise and the Fiesta Bowl.  It would almost be shocking if a few tens of thousands of dollars were not directed to politicians given the stakes on the table.  And it should be no surprise that politicians in Glendale received many of the payments.

Postscript:  Junker's attorney's comments are telling.  This was all about doing what it takes to make the Fiesta Bowl a big player.   And I can tell you, from all the grief I have gotten for defending a Constitutional principle at the expense of holding on to a sports franchise, there is a strong public lobby for the ends justifying the means when sports are involved.  Anyway, here is the quote:

While Junker declined SI.com's request to be interviewed for this story, his lawyer, Stephen M. Dichter, could not resist issuing an e-mailed reminder that it was his client "who took the Fiesta Bowl from a postseason game created so [that] Frank Kush's ASU Sun Devils would have a game in which they could be showcased while they and the rest of the WAC were completely ignored by the national media to its present position as one of the four pillars of the Bowl Championship Series."

Todd Zwicki has a great article on the auto bailouts.  Here is a brief excerpt of a long and very comprehensive article.

Of the two proceedings, Chrysler's was clearly the more egregious. In the years leading up to the economic crisis, Chrysler had been unable to acquire routine financing and so had been forced to turn to so-called secured debt in order to fund its operations. Secured debt takes first priority in payment; it is also typically preserved during bankruptcy under what is referred to as the "absolute priority" rule — since the lender of secured debt offers a loan to a troubled borrower only because he is guaranteed first repayment when the loan is up. In the Chrysler case, however, creditors who held the company's secured bonds were steamrolled into accepting 29 cents on the dollar for their loans. Meanwhile, the underfunded pension plans of the United Auto Workers — unsecured creditors, but possessed of better political connections — received more than 40 cents on the dollar.

Moreover, in a typical bankruptcy case in which a secured creditor is not paid in full, he is entitled to a "deficiency claim" — the terms of which keep the bankrupt company liable for a portion of the unpaid debt. In both the Chrysler and GM bankruptcies, however, no deficiency claims were awarded to the wronged creditors. Were bankruptcy experts to comb through American history, they would be hard-pressed to identify any bankruptcy case with similar terms.

To make matters worse, both bankruptcies were orchestrated as so-called "section 363" sales. This meant that essentially all the assets of "old Chrysler" were sold to "new Chrysler" (and "old GM" to "new GM"), and were pushed through in a rush. These sales violated the longstanding bankruptcy principle that an asset sale should not be functionally equivalent to a plan of re-organization for an entire company — what bankruptcy lawyers call a "sub rosa plan." The reason is that the re-organization process offers all creditors the right to vote on the proposed plan as well as a chance to offer competing re-organization plans, while an asset sale can be carried out without such a vote.

In the cases of GM and Chrysler, however, the government essentially pushed through a re-organization disguised as a sale, and so denied the creditors their rights. As the University of Pennsylvania's David Skeel observed last year, "selling" an entire company of GM or Chrysler's size and complexity in this manner was unprecedented. Even on a smaller scale, it would have been highly irregular: While rush bankruptcy sales of much smaller companies were once common, the bankruptcy laws were overhauled in 1978 precisely to eliminate this practice.

At first, the fact that the companies' creditors (and especially Chrysler's creditors, who were so badly mistreated) put up with such terms and waived their property rights seems astonishing. But it becomes less so — and sheds more light on how this entire process imperils the rule of law — when one considers the enormous leverage the federal government had over most of these creditors. Many of Chrysler's secured-bond holders were large financial institutions — several of which had previously been saved from failure by TARP. Though there is no explicit evidence that support from TARP funds bought these bond holders' acquiescence in the Chrysler case, their silence in the face of a massive financial haircut is otherwise very difficult to explain.

Indeed, those secured-bond holders who were not supported by TARP did not go nearly as quietly.