The Solyndra bankruptcy thrilled Republicans in several ways. Beneath the non-scandal is a deeper argument on the role of government itself. (More)

Picking Winners and Losers, Part I – Industrial Policy

This week Morning Feature considers the conservative talking point of “government picking winners and losers.” Today we see that phrase used to argue against an innovative industrial policy. Tomorrow we’ll consider how that phrase is applied to social welfare policy. Saturday we’ll conclude with how to discuss “government picking winners and losers” with Fred, our archetypal median voter.

The Solyndra non-scandal

Republicans were thrilled by the failure of Solyndra, a California solar panel company that received a $585 million federal loan in 2009 and went bankrupt this past August. The Solyndra failure was “crony capitalism at its worst,” according to Rep. Paul Ryan (R-WI). Never mind that the Solyndra deal was begun and almost completed by the Bush administration, or that some the investors were Republican supporters. The deal was finalized after President Obama took office, and some investors were Obama supporters. So it’s a scandal because, well, Republicans need it to be a scandal.

Republicans also love the story because Solyndra was a green energy company. “Drill, baby drill!” was a Republican chant in 2008, and anything that casts suspicion on green energy alternatives fits nicely with their donor base. Never mind that the Solyndra loan represented just 1.3% of the federal government’s green energy program, or that other companies in the program are doing well. Green energy is a “boondoggle.”

And Republicans love the Solyndra story because it fits a deeper conservative narrative: government should not be “picking winners and losers.” The market should do that instead.

Anything worth doing….

I was watching MSNBC several years ago, and Tucker Carlson was discussing a political candidate. I don’t remember the year or the candidate, but Carlson said the candidate understood the essential ideals of conservatism. Among those ideals, Carlson said, was: “Anything worth doing is worth doing for a profit.”

I’ve searched many times for Carlson’s quote. Apparently it never made its way into a Google-searchable database. I did find the Ferengi, who were supposed to be the arch-villains of Star Trek: The Next Generation, like the Klingons of the original series. But audiences didn’t think they looked threatening enough, so the Ferengi became a mere nuisance. Of course, that was before the Great Recession. The Ferengi Rules of Acquisition read like a Wall Street or Chamber of Commerce business guidebook, especially Rule 13: “Anything worth doing is worth doing for money.”

It turns out neither Carlson nor the Star Trek writers created that line. The character of Gordon Gekko said something similar in the 1987 movie Wall Street, and the phrase apparently dates to at least 1958. But I still associate the statement with Carlson and his ideals of conservatism.

Magical markets

Carlson’s statement implies a converse – Anything that cannot be done for a profit is not worth doing – and that lies at the core of the conservative talking point about “government picking winners and losers.” Nicolas Loris at the Heritage Foundation makes the argument clearly:

When the government decides to favor a technology with subsidies, it’s a good bet that subsidy “winner” is a loser in the marketplace. Political decisions to provide subsidies distort the marketplace at the expense of economic growth and prosperity. That’s exactly what has happened – and what continues to happen – with America’s energy tax policy. Reversing this practice will benefit American consumers and taxpayers.
First, special tax credits for cherry-picked technologies artificially reduce the price for consumers. This makes them seem far more competitive than they actually are. Rather than increase competition, the artificial market distortion gives these technologies an unfair price advantage over other technologies. The more concentrated the subsidy or preferential treatment, the worse the policy is because the crowding-out effect for other technologies is larger.

If subsidized technologies are market viable, then the tax break merely offsets private-sector costs for investments that would have been made either way. This creates industry complacency and perpetuates economic inefficiency by disconnecting market success from production costs.

The argument sounds sensible, if you believe in magical markets. Those would be markets without research inefficiencies, product development lags, existing structures, economies of scale, or cost externalities. Research is an inherently inefficient process, often with many failures on the path to success. Once a working concept is identified, it takes time to develop production and distribution lines. There are few truly ‘new’ products; most would do something already being done by other products, and those other products already have market structures in place. Existing producers will usually have evolved economies of scale to reduce their per-unit production cost. And they’ve usually been able to externalize some costs, often with laws that limit their liability for environmental and other damages.

Incumbency capitalism

Venture capitalist Vinod Khosla describes the result:

This is one of my big beefs with the way we think about capitalism in this country: We fundamentally support what I call incumbency capitalism. We don’t support innovation capitalism. What’s the difference? Every rule around tax credits in the oil industry is set up by, and influenced by, the lobbyist from the oil industry. The royalty rates aren’t free auctions for offshore drilling; they are influenced by the oil industry. Depreciation policy is incumbency policy meant to benefit large capital expenditures instead of R&D investments. So, we can easily change a few of the rules, encourage more R&D and maybe less capital investment or other things. And almost all policy, because it is influenced by incumbents – and not just in oil and gas, but in nuclear, in solar, in wind – is influenced and shaped by incumbents. And I call that incumbency capitalism.

In non-magical markets, the big producers of established products have a big profit edge. That doesn’t make them more worthwhile. It makes them the beneficiaries of history. And as BPI reader Norbrook noted at Blue Wave News, that history often includes the very subsidies conservatives now decry. Not surprisingly, Loris finds an incumbency capitalism loophole for fossil fuel subsidies:

Lately, high gas prices and high profits for oil companies have tempted some lawmakers to propose removing “subsidies” for oil and gas companies. The problem is, the tax provisions they target are not special interest subsidies at all.

Take the domestic manufacturer’s tax credit. It applies to any number of U.S. producers – clothing manufacturers, road builders, electricity generators, water companies and more. Making oil and gas production companies ineligible for this credit neither removes a subsidy nor closes a tax loophole. It merely imposes a targeted tax hike on oil and gas producers.

Those subsidies don’t go only to oil companies. Many other already-established domestic producers are eligible. That makes it okay. Which means Loris’ real point is that history should pick winners and losers, and government should defend the already-established. Those pesky upstarts should make it or fail on their own.

And we wonder why we can’t innovate anymore….