Tears of the Sun

Acting on your best behavior
Turn your back on Mother Nature
Everybody wants to rule the world
--Tears for Fears

The Solyndra news demonstrates several problems associated with central planning. A week or so back Solyndra, a manufacturer of cylindrical solar panels for rooftops, filed for bankruptcy. In and of itself this is not unusual, as companies go bankrupt every day. In this case, unfortunately, the company had been the recipient of more than half a billion dollars in guaranteed loans as part of federal government programs targeting more alternative energy production.

What we have here is a default with US citizens out a cool $500 million.

In addition, there is growing evidence that Obama administration officials rushed the loan process in order to squeeze it into the 2009 federal stimulus package. It is also apparent that government controls did not provide adequate early warning signals. Indeed, program backers in Congress voiced surprise at the bankruptcy, claiming that the company told them that 'things were looking better' just two months back.

When the federal government takes money out of private hands and 'invests' it in a tech startup like Solyndra, it is basically saying that it knows how to allocate capital better than private investors. The absurdity of this propostion cannot be overstated.

In unhampered (free) market systems, capital is privately owned and controlled. The governing mechanism in private investment decisions is the economic assessment of risk vs reward. Projects with risk:reward profiles that are deemed favorable attract capital; those with unattractive profiles are shunned. 'Good' investments are rewarded with a positive return; 'bad' investments are penalized with material loss.

In contrast, the federal government's Alt E investment portfolio (which currently amounts to about $40 billion) represents a socialistic design. Property and decision-making control are in the hands of bureaucrats rather than private citizens. In this situation, it is the job of the planning bureau to allocate capital. But what precisely is the mechanism governing decision-making here? It obviously is not the economic risk:reward assessment governing private investment decisions. After all, the $500 million Solyndra loss is not coming out of the planners' pockets.

The governing mechanism of socialistic planning decisions is one of political economy. When bureaucrats have the power to allocate resources, a market is made for political favor. Politicians trade those resources in exchange for support from special interest groups (SIGs). Rather than assessing risk of capital loss, politicians assess risk of office loss, or the loss of power that comes with political office.

Clearly the different governing mechanisms will lead to different allocation decisions. An investment in Alt E deemed as unattractive to private investors may appear attractive to bureaucrats if it wins favor from SIGs who, for example, dream of a world built on 'green' technology.

The problem, of course, is that real economic resources are more likely to be squandered in unproductive projects. General standard of living is likely to fall when government gets involved in 'investing.'

The other issue raised by the Solyndra story is the government's chronic deficiency as a regulator. Lacking economic incentive, government controls are unlikely to detect problems early if at all. In contrast, private investors are highly motivated to construct sophisticated information systems that permit routine monitoring of investment projects.

The irony is that, although oversight is often viewed as a principal role of government, poor control systems are apt to result in regulatory failure. The Solyndra case is but one small example of regulatory failure that we witness time and time again.

The proper role of government is to help people protect their life, liberty, and property. When it violates those limits, government hinders, rather than advances, general standard of living.

The Solyndra case reflects the fractal nature of the general problem.