Coyote Blog

From South Bend Seven come a couple of comments I liked today.  The first was on the Left and current budget plans:

If I was on the Left I would look at these figures and then begin to think long and hard about whether knee-jerk opposition to things like Medicare block grants or defined-contribution public pensions is such a good idea. The biggest threat to redistribution to the poor is existing redistribution to the old.

To the last sentence, I would add "and redistribution to upper middle class public sector workers."  I am constantly amazed at the Left's drop-dead defense of above-market pay and benefits for public sector workers.  This already reduces funding for things like actual classroom instruction and infrastructure improvements, and almost certainly the looming public pension crisis will reduce resources for an array of programs much loved by the Left.

The second observation relates to a favorite topic of mine, on technocracy:

Often enough I think "you know, we need more scientists in charge of things." Then I remember that the scientists we get are Steven Chu and I think "yeah, maybe not so much."

Then I think about all the abominable committee meetings and discussion sessions I've been in with scientists and I think "perhaps best not to put scientists in charge."

Then I look over at my bookshelf, notice my cope of The Machinery of Freedom, and think "why are we putting anybody in charge at all?"

If this Administration has any one theme, it is a total confidence that a few people imposing solutions and optimizations top-down  is superior to bottom-up or emergent solutions.   Even the recent memo on targeted killings reflects this same philosophy, that one man with a few smart people in the White House can make better life-or-death decisions than all that messy stuff with courts and lawyers.   Those of us who understand our Hayek know that superior top-down decision-making is impossible, given that the decision-makers can never have the information or incentives to make the best decisions for complex systems, and because they tend to impose one single objective function when in fact we are a nation of individuals with 300 million different objective functions.  But the drone war / targeted killing memo demonstrates another problem:  technocrats hate due process.   Due process for them is just time-wasting review by lesser mortals of their decisions.  Just look at how Obama views Congress, or the courts.

Lost in the discussion of Dan Carol's criticism of Steven Chu and his conduct in the Energy Department was an amazing implicit assumption about the DOE's mission:

“Secretary Chu is a wonderful and brilliant man, but he is not perfect for the other critical DOE mission: deploying existing technologies at scale and creating jobs,”

Seriously, is this really their mission?

Apparently Obama is claiming:

“[Energy] Secretary [Steven] Chu has assured me that within five years, we can have a battery developed that will make a car with the equivalent of 130 miles per gallon.’”

The irony is that if you grade the equivalent mpg of electric cars by the methodology outlined by Chu's own energy department, the number would be about a third of that.  Only by the EPA's flawed methodology do we get equivalent MPG's for electric cars anywhere near 130.

I wrote about this whole sordid mess of inflated MPG numbers for electric cars here.

Most of you will know that the California solar company Solyndra has failed, burning through in less than two years nearly $535 million in taxpayer money.

I wrote in Forbes yesterday that it was a headscratcher why anyone thought this a sound investment

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 Solyndrawere rushed out the door in 2009 in time to meet Energy Secretary StevenChu’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 diligence should have been necessary.  Already in 2009 it was clear that the solar panel industry had commoditized, and low-cost manufacturing would be the key to succefully competing in the market.  Further, European countries whose subsidies and high feed-in tariffs for solar were driving most of the market growth were already in the process of dialing back those incentives.

Surely any reasonable investor would have been leary about entering such a market with an under-scale startup, much less one which chose California of all places to build their plant.  Most rational investors would cite California as a huge liability in a falling-price commodity market, but it was an asset for a company trying to compete in capturing taxpayer dollars, being the home of many of the most powerful politicians most likely to buy into the green jobs boondoggle (of course it did not hurt that Solyndra’s largest investor is a major Obama campaign contributor).

It turns out that the numbers were worse than I imagined, and reading ZeroHedge, it seems like some outright fraud may be involved (hat tip to a reader who I cannot never figure out if he wants to have his name mentioned or not)

What was in the prospectus was, no doubt, the real reason that investor chose to take a ‘pass’ on the deal. There were revenue/expense numbers for the nine months preceding the proposed deal:

Revenue: $58.8mm

Cost of Goods Sold: $108.0mm

That is an absolute complete disaster. This is a low margin business to begin with. At Solyndra they were losing 84 cents for every dollar of sales. Adding in SG&A and CapEx the losses and cash drain had to be very heavy.

Wow, that is really a fail.  Even in the worst run late 90's Internet company I ever encountered, they were not selling dollars for 50 cents.  One wonders what numbers Steven Chu and company saw before they funded this dog, and whether from the very beginning these guys were counting on a steady stream of 9-figure government subsidy checks.

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. ....

Every study I have ever seen has said that corn ethanol is only marginally energy-positive when its growing and production costs are considered and barely breakeven on CO2.  In other words, it costs a lot and does nothing, even before one considers negative effects to food prices and land use.

So of course, the Obama administration may soon demand that we subsidize more of it

Burdened by falling gasoline consumption and excess production capacity, ethanol producers appealed to the government on Friday to raise the 10 percent limit on ethanol in most gasoline blends to as high as 15 percent.

Ethanol plants are closing across the country and some ethanol producers are declaring bankruptcy. The appeal will require the Obama administration to decide whether to increase federal support for the industry, which has already benefited from an array of subsidies, tax credits and Congressional production mandates.

"Approving the use of ethanol blends up to 15 percent is a necessary and positive step," said Bob Dinneen, president of the Renewable Fuels Association, an industry lobbying group, "to ensure the full potential of a robust domestic ethanol industry."

The Environmental Protection Agency and the Energy Department have been testing higher ethanol blends. The E.P.A. has nine months to review the request, but it could decide before that to increase the blend cap slightly, to 12 or 13 percent.

Energy Secretary Steven Chu has indicated that he would favor at least a small increase in ethanol levels unless auto companies said there was a risk the change would damage their products.

At least the article is marginally honest - its starts with the true reason for the mandate - improving the bottom line of favored businesses, not energy or environmental policy.  Chu seems to be joining Krugman as another Nobel prize winner turned political hack.  In the past I have had Chu's supposed gravitas thrown at me in climate debates -- I think this should settle just how Chu makes choices between what science tells him vs. what politcal pressures are demanding.