The tales of woe keep piling up. Barack Obama's ambitious “stimulus” plan was based on the Keynesian notion that when times are bad, government should incur debt to sustain “aggregate demand”.
It doesn't work, because in the end, someone has to pay for it. Either they get to pay more direct taxes, or they suffer indirect and invisible taxation because their currency gets devalued by printing money, or what the government euphemistically calls “quantitative easing”.
Demand stimulus during a crash slows down the process of repricing assets that turned out to be overvalued. It does this by keeping capital employed in unprofitable boom-time production, instead of allowing people's natural response to increase saving and reduce risk exposure do its job, namely to let unprofitable production fail in favour of production that does satisfy real demand. The health of an economy depends on what and how much it actually produces, not on how much it consumes.
This distortion of the market lays the foundation of future booms, which will simply go bust again. Deficit spending, far from alleviating economy downturns, is a major cause of the modern business cycle of booms and busts.
But enough of the economic theory against stimulus spending. There's another reason why it is a bad idea. It offers politicians an opportunity to support favoured industries and companies, many of whose executives are regularly spotted in political capitals, lobbying legislators for handouts.
Pigs at the trough. Cronyism. Pork barrel spending. Call it what you will, it is ultimately a waste of taxpayer money, and unfair competition against the companies (and countries) that do try to be productive even in the face of tough economic conditions, and even without political favouritism.
How do we know it's a waste? Well, look at the “green technology” initiatives that the Obama administration loves so dearly.
According to the Washington Post, a loan guarantee program worth over $35-billion has produced only 5% of the 65,000 jobs it was expected to create, and only half of it was allocated in the first two years of operation, because of capacity constraints in the bureaucracies that were supposed to dole out the largesse.
Wrote the paper: “President Obama has made 'green jobs' a showcase of his recovery plan, vowing to foster new jobs, new technologies and more competitive American industries.”
If that sounds familiar, it's because our own government has been saying exactly the same about the South African Renewables Initiative: “[It] aims to establish the financing arrangements needed to enable a critical mass of renewables to be developed, while optimising job creation and expansion of our manufacturing base.”
The most high-profile failure in the US involves Solyndra. On its website, you'll read, “Solyndra’s solar power solutions offer strong return on investment and make great business sense.”
If you read a little further, you'll discover: “Solyndra suspends operations to evaluate reorganisation options”.
Great business sense, indeed. You see, it went bankrupt in September last year. It laid off 1,100 people. That's almost a third of the measly 5% of jobs that green-tech stimulus money supposedly created, which demonstrates that even the few jobs government spending does “create” are usually illusory and transient in nature, and unsustainable in the long run. They're the artefacts of inefficiency, if you will.
Not only did Solyndra go spectacularly bust, but politicians were warned, in advance, that it was a very risky business. They knew it was a disaster waiting to happen when they arranged for president Obama to tour the plant and hold it up as a marvellous showcase of his green economy ambitions.
Solyndra blames a global oversupply of solar panels and foreign competition. Some bigots might be swayed by the notion that slant-eyed barbarian hordes steal jobs from God-fearing Americans, but in the real world, factories that produce stuff nobody wants are supposed to go under.
The Washington Post story notes that, “Obama’s efforts to create green jobs are lagging behind expectations at a time of persistently high unemployment. Many economists say that because alternative energy projects are so expensive and slow to ramp up, they are not the most efficient way to stimulate the economy.”
“[It is] 'terrifying' to consider that some of DOE's next projects would make Solyndra look 'better',” said a Wall Street Journal source at the White House Office of Management and Budget, which oversees government spending.
Stimulus-funded green energy projects are hitting the wall with almost monotonous regularity. Beacon Power filed for bankruptcy in October last year. Just last week, two more companies that received stimulus money closed their doors: Ener1 and Evergreen Energy.
Like Solyndra, Ener1 was the subject of high praise from high powers. On 26 January 2011, exactly one year before its bankruptcy filing, US vice president Joe Biden toured the company and declared that the stimulus was: “not just creating new jobs, but sparking whole new industries that will ensure our competitiveness for decades to come...”
It gets worse. In Congressional hearing documents provocatively headlined, “The Green Energy Debacle: Where Has All the Taxpayer Money Gone?”, testimony revealed over 100 criminal investigations, widespread capacity problems with spending budgeted funds, poor quality delivered by the projects that did get funded, and millions of dollars of overspending.
Coming from one of the most sophisticated economies in the world, it makes for stunning reading. South Africa's record of capacity constraints and crony corruption doesn't fill one with confidence that our own green energy subsidies will be any more successful.
The politicians that doled out all this money aren't the only ones with stars in their eyes.
“We're broke, but we're no Solyndra,” said the CEO of Beacon Power.
“Ener1 Is No Solyndra... This is no failure,” wrote die-hard green-energy boosters.
The sole reason for this Pollyanna syndrome is that it remained possible for the companies to come out of bankruptcy protection and continue operating. It takes true believers to spin the last sip of warm beer as a glass half full.
Does all this failure, even in the richest economy on the planet, not make one a little sceptical of South Africa's New Growth Path, which identified the “green economy” as one of five key “jobs drivers”?
Here's the grandiose promise: “Technological innovation opens the opportunity for substantial employment creation. The New Growth Path targets 300,000 additional direct jobs by 2020 to green the economy, with 80,000 in manufacturing and the rest in construction, operations and maintenance of new environmentally friendly infrastructure. The potential for job creation rises to well over 400,000 by 2030. ”
Yeah, right. If you have a problem delivering on promises, dear ANC policy-makers, stop promising the moon and stars. It's one thing to be ambitious and optimistic. It's quite another to be delusional. (Or cynical, to be less kind.)
If the US failed to create the jobs politicians were promising in return for their massive investment of public money, why would SA do any better?
Why are our politicians so keen to repeat the obvious failure in the US to establish a globally competitive “green technology” industry? If the US doesn't have the capacity to spend budgeted stimulus money, will our own “capacity-building” institutions succeed? Why, if the best minds at the US Treasury and the US Department of Energy can't distinguish a promising green venture from a corrupt dud that exists only to pay executives and consultants large wads of risk-free taxpayer money, should South Africans expect their own politicians to prove better at picking winners?
When economists say that government should not be in the business of picking winners, they don't mean to say that government should pick losers, instead. They mean that government should not allocate capital at all. If companies can't make money on the open market, subsidising them through grants, discount-rated loans, or loan guarantees only doubles down on a losing bet.
In his State of the Union address last week, US President Obama said he intends to do exactly that: “double down” on a losing bet. “It's time to end the taxpayer giveaways to an industry that rarely has been more profitable, and double down on a clean energy industry that never has been more promising.”
The smart thing is not to move subsidies from successful, productive industries and giving it to wasteful, unproductive companies. The smart thing is to stop wasting public money on corrupt cronyism altogether.
After all, even in the event that subsidies help a “green energy” company survive (or go to a productive oil and gas firm instead), it only serves to enrich the company's executive and shareholders. It diverts capital from productive uses to unproductive waste. A company that is profitable is a boon to the economy. But even if it makes a profit, if it also receives subsidies it is a white elephant that costs the economy more than the benefits it produces.
South Africa's energy (and jobs) policy should be much simpler, much cheaper, and much less risky.
Let green energy companies offer buyers a price. (“Buyers” will usually mean the Eskom distribution monopoly, but could also be large industrial users of electricity, or even independent municipalities.)
If the buyer agrees to a contract at a given price, let those companies use that commitment to raise private funding from shareholder equity or bank loans to fund the development of the energy to supply the contract. Let private investors try to pick the winners and bear the risk of failure, rather than expecting bureaucrats to do so and forcing powerless taxpayers to take the inevitable losses.
Energy producers that compete among each other on a level playing field will quickly weed out badly run companies and inefficient technology. This will avoid expensive boondoggles that drain South Africa's limited economic resources. It will reduce the price of electricity to consumers, whether they're poor households, or commercial users trying to compete for local or international business.
If inefficient technologies and business failures are protected, by contrast, they can only raise the ultimate cost of energy.
Who's side is the government on? Ordinary citizens and consumers of energy, or rich cronies who gorge themselves at the trough of subsidies and loan guarantees, while producing neither green energy nor profit?
Let's learn lessons from the failures of others, rather than repeating them ourselves. The sooner the South African Renewables Initiative is scrapped, the less harm it will do to our struggling economy. DM
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