With the bankruptcy of the California solar-gear manufacturer Solyndra, the Department of Energy (DOE)’s loan program has been excoriated for wasting tax payer money under suspicious circumstances. The program’s website refers to 63,000 jobs created with $38.6 billion of loans. Some, like those at the Washington Post, see this number and incorrectly conclude that the government has spent $600,000 per job. Others cite the size of the loan guarantee to Solyndra—$535 million—and mistakenly equate it with the taxpayer bill for one company’s failed enterprise.
To be sure, there are problems here, but one of them is that each of these attacks fundamentally misunderstands the nature of an imperfect but invaluable clean energy finance program. Such misunderstanding is unfortunate; it undercuts support for exactly the kind of prudent, targeted approach the United States should be using to scale up important new industries by deploying the nation’s sophisticated financial markets in ways that minimize taxpayer risk and maximize economic impact.
The reality is the DOE’s loan guarantee program will likely result in minimal costs and large gains for taxpayers—just like many other federal lending efforts.
Begin with the “costs.” The costs to the taxpayer of the Solyndra collapse are going to be far smaller than a reader of the Post or even the sympathetic New York Times editorial page may believe.
A loan guarantee is distinct from free money via a grant or a tax credit. A guarantee results in actual spending only if the borrower goes into default, at which point, the attorney general is obligated to recover the unpaid principal and interest by seizing the borrower’s assets.
In the clean energy case, the $38.6 billion in DOE direct loans and loan guarantees is spread across three different programs, all of which are dedicated to supporting technologies that reduce environmental harm or conserve energy.
The first two programs were signed into law by President Bush, but only one—the Advanced Technologies Vehicle Manufacturing program—has actually closed lending deals. This program is projected to return $700 million to the taxpayers next year through payments from auto-sector loan recipients. Overall, its long-run costs are projected to be $4.2 billion for supporting $16.2 billion of loans (or $4 in loans for every $1 of investment) and probably thousands of jobs in the auto sector during the recession. That’s not a bad rate of return.
The third alternative energy loan program, the 1705 loan guarantee program, is the one responsible for the present furor because it guaranteed loan to Solnydra. After reductions to the program, it was appropriated $2.5 billion, the amount the Office of Management and Budget (OMB) predicts the program will eventually cost taxpayers once the all the spending authority is used up (loans are allowed to have a maturity of 30 years). That cost projection assumes 12.85 percent of the loan value given out will end in default. So Solyndra’s guarantee, which represented 2.8 percent of the 1705 portfolio, leaves considerable room for further defaults without losses exceeding budget costs, even if the government recovered nothing. But that is highly improbable. The federal government owns the assets of borrowers that default and can manage or sell them. OMB expects the program to recover almost half of its losses in such cases. Solyndra’s assets are reportedly worth $859 million, so it’s conceivable that taxpayers will not lose any money.
For as much as $2.5 billion spent over decades and almost nothing spent as of today, the guarantee program generated $18.8 billion in loans and created thousands of jobs during a major recession. Most of those jobs have been construction related—building both factories and generation facilities—at a time when those workers are disproportionately unemployed. Many others are manufacturing jobs. The DOE appears to have only counted “permanent” jobs as those working for the borrower, but its loan guarantees stimulated additional spending across the U.S. supply chain in the rapidly-growing clean energy sector. Xyratex, for example, is a U.S. company that built the advanced machines for Solyndra’s factory. Its website lists dozens of job openings across the United States. The bottom line: The loan programs have been solid initiatives that have created jobs in a recession, generated $4 to $8 of private lending for every $1 of public investment, begun to scale up important clean energy technologies, and begun the work of financing the long-term restructuring of the U.S. economy.
There is a broader justification for programs like the DOE’s Loan Guarantee Program. These programs are a proven, targeted, low-cost way of addressing critical market failures—like externalities from pollution, asymmetric information—through the use of market-oriented financial tools. Consider this: The U.S. government runs some 70 loan guarantee programs and 63 lending programs that catalyze the financing of everything from transportation infrastructure and rural housing to science parks. More than $3 trillion of taxpayer money is at risk in these programs—$3 trillion some might deem a scandalous form of government intrusion into markets for education, housing, agriculture, exports, and entrepreneurship. Yet it’s hard to find evidence the guarantees waste taxpayer dollars. Indeed, OMB estimates that, on balance, these programs will return $46 billion to taxpayers in 2011.
As to the future, one thing is sure: the nation should not walk away from the promise of loan guarantees like the DOE’s. If anything, we should expand their use and complement them with other deployment finance mechanisms.
The United States is failing to capture anything close to the full value of its many clean energy inventions many of which tend to be scaled up and manufactured abroad. So the choice is stark in the wake of Solyndra’s bankruptcy. State-directed capitalism a la China is neither effective in the long-run nor desirable at any point, but laissez-faire only guarantees market failure.