Learning from Solyndra

Mon, 26 Sep 2011 14:52:29 +0000

The brewing scandal regarding Solyndra is an opportunity to consider which roles the federal government can and should play in developing alternative energy and which roles it should not.  Take as a starting point the friendly column by Joe Nocera in Friday's New York Times:

But if we could just stop playing gotcha for a second, we might realize that federal loan programs — especially loans for innovative energy technologies — virtually require the government to take risks the private sector won’t take. Indeed, risk-taking is what these programs are all about. Sometimes, the risks pay off. Other times, they don’t. It’s not a taxpayer ripoff if you don’t bat 1.000; on the contrary, a zero failure rate likely means that the program is too risk-averse. Thus, the real question the Solyndra case poses is this: Are the potential successes significant enough to negate the inevitable failures?

If you have a risk that the private sector won't take, it is because the private sector does not see it as a profitable risk to take.  It does not get more profitable if the government takes it.  It only formally shifts the risk of losses to the taxpayers. 

The real question is not whether this program may pick more winners than losers.  The real question is why, if we believe that social policy should be promoting alternative energy, have we not priced energy from fossil fuels at a higher price that reflects the social costs of using them?  With the higher price of fossil fuels,  investments in alternative energy like this one would be more profitable to private sector investors who would reap the gains or bear the losses.  It is better policy to have the government's involvement at the macro level -- setting the price -- rather than at the micro level -- picking the winners.  The Solyndra scandal is a good example of why.