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.