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Home Publications Blogs Beat the Press The Government Is Not Perfect at Picking Winners In the Economy

The Government Is Not Perfect at Picking Winners In the Economy

Tuesday, 30 April 2013 05:10

All those people who thought the government puts Warren Buffett to shame in picking winning companies must be embarrassed after reading Charles Lane's column in the Washington Post this morning. Lane told readers what a disaster Fisker Automotive proved to be, an electric car company that received $529 million in low-interest loans from the government in 2009. The company is now at the edge of bankruptcy.

Lane tells us that that the mistake was compounded by the fact that the loan made it easier for Fisker to attract private capital:

"All told, Fisker attracted $1.1 billion in private investment, the vast majority of which took place after it got the DOE loan. ...

"In other words, that’s more than a billion dollars in capital that can’t create jobs elsewhere in the economy — but might have, if the government had not propped up and promoted Fisker."

There are two important points here. First, the economy was in a free fall in 2009. There was a ton of capital available for investment. The idea that the $1.1 billion that Fisker attracted from private investors was somehow pulled away from other investments is fanciful at best. In more normal times there is an argument that government subsidized loans are pulling capital away from other areas of the economy. That was not a plausible story in 2009 nor is it a plausible story now. (We have a way of measuring this problem, it's called "interest rates.")

The other point is that it was inevitable that Obama's green energy program would produce some losers. So does Warren Buffett's investment portfolio. If Lane felt the same way about Berkshire Hathaway as he does about the government's investments he would be running columns telling us that Warren Buffett is inept because of his large investments in the oil company ConocoPhillips at the peak of the boom in oil prices in 2008.

Government investments in promoting technology will always be a mixed bag with both winners and losers. Anyone who wants to look at the question seriously would have to look at all the companies that received support and do a cumulative cost-benefit analysis. This assessment would be broader than just the return on investment, it would also look at spillover effects. (Ever hear of the Internet?) Such an analysis would have to take into account timing. For example, the opportunity cost of investments made in 2009 was close to zero since the resources would have otherwise been wasted.

However government programs of this sort will always have to deal with the enormous ideological bias of the media. This means that it is inevitable that they will face a Charles Lane who will find a loser to highlight and tell people:

"The Fisker debacle proves once again that, in the immortal words of former White House economist Larry Summers, 'government is a crappy VC.'"

For this reason, caution in such programs is well-advised.

Comments (18)Add Comment
Missing Forest
written by Robert Salzberg, April 30, 2013 5:57
The largest subsidies come in the form of tax write offs for all forms of research and the loans we give to banks and financial institutions.

Does anyone think we got a good deal in the money we gave to AIG or BOA?
I see that bet and raise.
written by jhm, April 30, 2013 6:33
Perhaps this shows my abysmal economic illiteracy, but my thought that the private sector, which was under no obligation to do so, sank twice as much money into the venture as did the government, which did not in any way guarantee their investment. Now, they might not have done so otherwise, but they must have thought it at least a possible success, no? Is the writer saying that the private money assumed a continuing subsidy (a la TBTF banks)?
Does Charles Lane Think Drivers of Cars are More Stupid than Investors in Cars?
written by Last Mover, April 30, 2013 6:51
Funny how that works. Eager beaver pundits like Charles Lane cherry picking obvious failures like Fisker Automotive designed to highlight not only government itself as a failure but its uncanny power to lure in innocent private investors and wipe them out along with taxpayers.

For starters, think what that says about the private sector. If those investors were so naive not to understand government failure the way Charles Lane claims to understand it, why did they take the bait? As Charles Lane tells it, they're not any more worthy of investment savy skills than failed government itself.

Further, the story missed here by Charles Lane is the massive subsidies from government that keep all vehicles on roads and highways to the tune of $15-$20 on a per gallon basis. Add in negative externalities from carbon based vehicles, subsidies to oil companies and the cost of the Iraq war for oil, and total economic cost rises much higher.

Why doesn't Charles Lane condemn government for building roads and highways that lure in gullible drivers that use them unwittingly at enormous economic cost that eventually shows up in taxes. Does he think drivers are so much more stupid than investors they're not worth reporting?
VCs are (frequently) crappy VCs
written by Jennifer, April 30, 2013 7:50
It is amazing how much of a beating the federal government gets when it acts as an investor. (Never mind that China, everybody's favorite capitalist country, does this on a HUGE scale). First, as you point out, serious anaylsis would take all programs into account and look at a variety of issues to determine worthwhileness. But if the government is such a crappy VC what does that say about the 1.1 billion in private investment that Fisker attracted? If there were so many other opportunites at the time (not) it seems that money would have gone there instead.
Seward's Folly
written by this is me being generous, April 30, 2013 8:15
... new transformative technologies are often, not always slow out of the starting gate. Da Vinci invented the helicopter but it took 500 years to get from concept to working models, without government funding until the end.

And there were plenty of failures along the way. So? Conclusion: Lane is a short-sighted coward masquerading as a proponent of fiscal responsibility.
written by Union Member, April 30, 2013 8:28
Holy Externality!
However government programs of this sort will always have to deal with the enormous ideological bias of the media.

What is the cost of Fox News and The Washington Post to the economy?
They owe 192 Out of 529
written by Jim, April 30, 2013 8:34
Overall I think you make a good point and caution should be used. But at the same time these programs are vital to innovation. It disappoints me there is over 50 billion of funds sitting in this very doe program unused. Like solyndra, we are discussing a couple percent of loans issued. I don't get why these failures are pounced on with such vigor as if Obama is sitting their himself picking the loans.
written by Jim, April 30, 2013 8:38
And yet republicans go on this week and meet the press and tout Medicare part d as a huge success because their is less demand for pharmas due to generics and lack of innovation and that cost us several degrees of magnitude larger than this figure. Great investment.
That's the problem with patents
written by Scott Dunn, April 30, 2013 9:29
The government is terrible at issuing patents. Each patent is a so-called designated winner. But most patents cost more jobs than they create, unless you're a lawyer.
Mackay called it right, Low-rated comment [Show]
written by liberal, April 30, 2013 1:09
pete blithered,
This democratic socialism idea, borrowed from the state capitalism of the 30s, is a very bad idea. He was referring to government control of our health care, but the issue is wider than that.

Given that there's a strong correlation between degree of government involvement in the health care sector, and the efficiency of said sector, I vote this to be the dumbest Intertubes comment of the day.
I'm with pete
written by Wisdom Seeker, April 30, 2013 2:17
"The issue isnt whether the govt. can get lucky or not, it is the intertwining of the players and the government, the inevitable corruption. The incentive for a government worker is far different than a business person."

The national system of checks and balances requires greater separation between the state and the private sector. Between regulatory capture, revolving door careers, handouts, subsidies and tax gimmies, the current system is a farce. Fifty years from now folks will look back in shame at the level of corruption in society today.

Would we tolerate tax collectors who were incentivized (bribed) to look the other way by businesses who hired them after they left federal service? Why do we tolerate generals, SEC regulators, Federal Reserve officials, cabinet officials across most departments, Congressmembers and so on who do the same thing? Bribery by another name still stinks!
Liberal, I think you prove my point..
written by pete, April 30, 2013 3:28
As Dean has pointed out, nurses and doctors are indeed receiving rents in the u.s., yet another special interest group benefiting from government. It would probably be more efficient in the u.s. to go back to a state run system, dumping medicare and medicaid. This would be comparable to Europe. While smaller governments are not free from corruption, the corruption is typically found out, as the last 20 or so governors of Illinois can atest to. With the stakes so high for a 300M pie, it is no wonder that our health care is inefficient.
more unnecessary negativity
written by NWsteve, April 30, 2013 6:42
we should expect Lane to be far more insightful...were his analysis and summary centered around excessive executive compensation and/or corruption or similar malfeasance, his singling out of Fisker might merit applause...

however, as others have noted above, his apparent cherry picking negates this possibility...
(what were his editors thinking, anyway?)

other commenters, too, clearly wonder why Lane does not equally question the private-investor's "folly" involved with Fisker...

indeed---no single venture can ever be guaranteed a success...
and if we continually wait for such an event to occur, nothing positive will ever be accomplished...

in the end, we the people, through our resources, current and cumulative, do have a need and a purpose in assigning these types of investments in exploration and discovery...

afterall, however we may chose to re-examine the end results, both the Lewis and Clark Expedition and the Apollo Moon Landings (among many) were possible only through the initiative and funding from the federal government...

sometimes the community is the best solution...
written by David, April 30, 2013 9:56
Pete says:
he issue isnt whether the govt. can get lucky or not, it is the intertwining of the players and the government, the inevitable corruption

But the players don't need no stinkin' government to be corrupt, they do it all on their own. In social democracy, there is the chance to staunch the flow of corruption on both the private and public sectors.

i would posit to you pete that it's not just the Feds you need to worry about but also national, multinational, and international corporations that are of huge size. I am grateful that in this social democracy which we're teetering toward out of necessity, we have an 800 lb gorilla to ignite innovation when private industry, as now, stagnates in spite of their cash surpluses; and that the gorilla can, in theory and sometimes in practice, bonk those puny corporations on the head when they get uppity.

I take it that the quote of pete above would also put pete on the side of getting rid of the patent system, where the players and the government get in the tightest cahoots altogether. True?
written by Fred Brack, May 01, 2013 1:36
"... $529 million in low-interest loans from the government in 2009."

Don't think that's accurate. It was more like a $529 million line of credit that Fisker could draw on if it met certain criteria. Without bothering to look it up, I seem to recall Fisker was cut off at about $292 million, and the government either got some back or will.

Dr. Baker's point, however, was sound. It's always amusing to witness anti-government zealots go nuts about government failures but ignore private-sector failures. Because we pay for it, we hold government to a higher standard. The zealots hold it to an impossible standard in order to advance their agenda.
written by liberal, May 01, 2013 1:43
It would probably be more efficient in the u.s. to go back to a state run system, dumping medicare and medicaid. This would be comparable to Europe. While smaller governments are not free from corruption, the corruption is typically found out, as the last 20 or so governors of Illinois can atest to.

You're out of your goard. State and local governments are far more corrupt.
written by McDruid, May 01, 2013 2:22
According to the NYT (http://dealbook.nytimes.com/20...rformance/) VC has only about a 6% return to capital over the last decade, and half of them make a loss.

On the other hand, the government should have more failures. They should be investing in areas that are too risky, too long term, or have too broadly diverse benefits to attract private capital. Something like the internet, or photocopy technology, for example.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.