Subsidies are Cronyism

In a free market, businesses compete, not only for customers, but also for the capital that is required to start, operate, and expand a company’s operations. Investors seek the best return possible for their money, and they judge businesses on the basis of risk and potential reward.

Investors are concerned with a company’s ability to generate a profit. A business with proven profitability or an idea that investors think can be profitable will easily attract investment capital. When investors judge a business idea as risky, they will require a larger potential reward. And when the risk is judged to be too high, they will simply refrain from investing.

The purpose of government subsidies to renewable energy companies (or any company) is to provide businesses with the capital that they cannot otherwise obtain. The financial markets have determined that these companies cannot efficiently make products that will generate an acceptable return on investment. Private investors have judged the green energy companies too risky. And the string of bankruptcies by subsidized companies testifies to the validity of the market’s evaluation.

Consider further: In 2009, the American Recovery and Reinvestment Act established a loan-guarantee program for renewable energy projects. Of the twenty-six projects that received loans under the act, twenty-two were rated as “junk” grade investments, and the other four received the lowest “investment” grade rating. In other words, the credit rating agencies concluded that these projects carried a high risk of default.

Given the fact that financial experts—people who make their livelihood by judging the quality of investment opportunities—have determined that these companies and projects are not economically viable, what criteria do government officials use when selecting the recipients of taxpayer money? It certainly isn’t the quality of the company or project.

In a free market, investors voluntarily choose which companies they will invest in. Government subsidies remove that choice, and force taxpayers to “invest” in companies that they have determined are too risky.

If a businessman came to your house and seized your money to finance his venture, you would recognize his action as theft. The principle does not change if government acts as his proxy and delivers your money to him in the form of a subsidy.

If investors deemed green energy companies as worthy of investing, those companies would have no problem raising the necessary capital. Investors have concluded otherwise. But rather than accept the decisions of investors, government officials have decided to force taxpayers to act contrary to their own judgment. Government officials have decided that you will “invest” in those companies whether you like it or not. Government subsidies not only deprive you of your money, but also of your freedom to act on your own judgment.

As the Solyndra exapmles cited in yesterday’s post demonstrate, having “star power in D.C.” and “socializing” with political leaders is perceived to be effective. In other words, when companies are competing for government subsidies, developing the proper political connections becomes an important consideration. And political connections translate to political power, which is increasingly used to gain economic benefits.

Subsidies are a form of cronyism, of using political power to award economic benefits to supporters and allies. It is not a coincidence that the beneficiaries of subsidies are also supporters of the regime distributing the subsidies.

As one visible example, former Vice-President Al Gore has been pushing a green agenda for decades. When he left office in 2001, he had a net worth of less than $2 million. During Obama’s tenure, Gore invested in companies that received or benefited from more than $2.5 billion in loans, grants, or tax breaks. And his net worth soared to an estimated $100 million. And Gore is hardly the only politician to benefit from his political connections.

In 1997, Maine Governor Angus King signed a bill that required utilities within the state to generate at least 30 percent of their power from renewable sources, such as wind. Ten years later, King started a company to generate electricity with wind power. King’s company later received a $102 million loan guarantee from the Department of Energy. King himself received a $407,000 “success” fee from the company for his part in securing the loan.

Perhaps these examples are merely a coincidence. Or perhaps political connections really do provide economic benefits.

This post is an excerpt from my book The Innovator Versus the Collective.

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