Washington's Knack for Picking Losers
Former Obama adviser Larry Summers warned the administration against federal loan guarantees to Solyndra, writing in a 2009 email that 'the government is a crappy venture capitalist.'
By Michael J. Boskin
WSJ.com
Like the mythical monster Hydra—who grew two
heads every time Hercules cut one off—President
Obama, in both his State of the Union address and
his new budget, has defiantly doubled down on his
brand of industrial policy, the usually ill-advised
attempt by governments to promote particular
industries, companies and technologies at the
expense of broad, evenhanded competition.
Despite his record of picking losers—witness the failed "clean energy" projects Solyndra, Ener1 and Beacon Power—Mr. Obama appears determined to continue pushing his brew of federal spending, regulations, mandates, special waivers, loan guarantees, subsidies and tax breaks for companies he deems worthy.
Favoring key constituencies with taxpayer money appeals to politicians, who can claim to be helping the overall economy, but it usually does far more harm than good. It crowds out valuable competing investment efforts financed by private investors, and it warps decisions by bureaucratic diktats susceptible to political cronyism. Former Obama adviser Larry Summers echoed most economists' view when he warned the administration against federal loan guarantees to Solyndra, writing in a 2009 email that "the government is a crappy venture capitalist."
Markets function well when the returns are received and the risks borne by private owners. There are, of course, exceptions: Governments have a responsibility to fund defense R&D and other forms of pre-competitive, generic R&D—e.g., basic science and technology from nanoscience to batteries—but only when they pass rigorous cost-benefit tests and maintain a level playing field among alternative commercial applications.
For example, the computer-linking technology that created the Internet was funded by the Defense Department for defense purposes. But, like numerous defense technologies, it wound up with commercially valuable civilian applications. Yet it would be foolish for the government to subsidize a particular search engine or social-networking platform.
The previous peak for U.S. industrial policy was in the 1970s and 1980s, when many Democrats wanted to emulate the then-growing Japanese economy by managing trade and directing specific technology and investment outcomes. Japanese subsidies mostly went to old industries like agriculture, mining and heavy manufacturing. We now know that this misallocation of capital was one of the main reasons for Japan's stagnation over the past two decades.
Industrial-policy fever waned after the 1980s but never died. President George W. Bush expanded ethanol mandates and pushed hydrogen cars. Hydrogen's use for transportation must still overcome combustibility concerns, or we'll be driving mini-Hindenburgs. The Bush and Obama administrations bet big on ethanol and other biofuels, providing subsidies that distorted the global market for corn. The federal government was forced to drop its cellulosic ethanol quota by 97% last year because of a lack of viable biorefineries—and the quota still wasn't met.
Even under optimistic projections, heavily
subsidized wind and solar would each amount to a
tiny fraction of global energy by 2030 and thus
cannot be the main answer to energy-security or
environmental problems. The short-run focus of most
Department of Energy funding misses the main
strategic imperative: We need alternatives that can
scale to significance long-term without subsidies,
and we need a lot more North American oil and gas in
the meantime.
Mr. Obama is spending immense sums for subsidies
to particular industries and technologies, almost
$40 billion for clean-energy programs alone (some,
appropriately, for pre-competitive generic
technology.) Yet a large number of prominent
venture-capital funds are devoted to
alternative-energy providers. They should be
competing with each other and with the technologies
they seek to replace—not for government handouts.
Meanwhile, the administration blocks shovel-ready
private investment such as the Keystone XL pipeline
from Canada to the Gulf Coast, which would create
thousands of American jobs, increase energy
security, and even improve the environment. The
alternative is shipping the Canadian oil to China;
we can refine it more cleanly than the Chinese, and
pipelines are safer than shipping.
America certainly has energy-security and
possible environmental concerns that merit
diversifying energy sources. More domestic oil and
natural gas production will clearly play a large
role. The shale gas hydraulic fracturing
revolution—credit due to Halliburton and Mitchell
Energy; the government's role was minor—is rapidly
providing a piece of the intermediate-term solution.
The arguments to promote industrial policy—incubating industries, benefits of clustering and learning, more jobs, etc.—don't stand up to scrutiny. Echoing 1980s Japan-fear and envy, some claim we must enact industrial policies because China does. We should remember that Presidents Lyndon Johnson and Richard Nixon wanted the U.S. to build a supersonic transport (SST) plane because the British and French were doing so. The troubled Concorde was famously shut down after a quarter-century of subsidized travel for wealthy tourists and Wall Street types.
Instead of an industrial policy that fails
miserably to pick winners, a better response to
foreign competition should be:
• Remove our own major
competitive obstacles. We can do this with more
competitive corporate tax rates, more sensible
regulation, improved K-12 education, and better job
training for skills that the market demands such as
the computer literacy necessary even to operate
today's machinery. (Mr. Obama's green jobs training
program spent hundreds of millions but only 3% of
enrollees had the targeted jobs six months later.)
• Base trade and industrial policies on sound economics, not 'in-sourcing' protectionism. If another country has a comparative cost advantage, we gain from exchanging such products for those we produce relatively more efficiently. If we tried to produce everything in America, our standard of living would plummet.
• Pursue rapid redress for
illegal subsidization and protectionism by our
competitors. The appropriate venue for trade
complaints is the World Trade Organization, not the
campaign trail. We need to strengthen the WTO, not
threaten its legitimacy with protectionist rhetoric
that could spark a trade war.
Industrial policy failed in the 1970s and 1980s. Letting governments, rather than marketplace competition, pick winners and losers is just as bad an idea today. Still, the Obama administration is responsible for the biggest outbreak of American industrial policy since President Jimmy Carter's proposed $88 billion ($240 billion in 2012 dollars) synthetic-fuels program.
Mr. Carter was trounced in his 1980 re-election bid by free-marketer Ronald Reagan, who slashed marginal income-tax rates and regulations and lowered trade barriers. The result? The end of the "stagflation" of the Carter years and a return to strong economic growth.
Mr. Boskin, a professor of economics at Stanford and a senior fellow at the Hoover Institution, serves on the board of directors of Exxon Mobil Corp. He chaired the Council of Economic Advisers under President George H.W. Bush.