How Stimulus Works - Solyndra

A California solar power company touted in 2010 by President Obama during a press conference as a "testament to American ingenuity and dynamism" filed for bankruptcy this week. The company had received $535 million in loan guarantees in 2009 as part of the stimulus, $527 million of which was spent. Now the Daily Caller is reporting that executives and shareholders are politically and financially connected to the Obama administration, which fast-tracked the company's loan application. However, things are not that one-sided. The company applied for loans long before President Obama was elected, and the Energy Department said that they were simply completing a process begun years before. Finally, the L.A. Times says that despite the failure, such subsidies are a good idea because ... well, the government has been subsidizing nuclear power for decades.

The direct results of half a billion dollars in borrowed taxpayer-backed money? 1,100 jobs lost, and 4,000 promised jobs (at $125,000 per job) vanished. Over $1 million was spent by the company from 2008 to 2011 on lobbying, $500,000 of that in 2010 alone.

“The project that we supported succeeded,” insisted Damien LaVera, a spokesman for the Department of Energy.

“The facility was producing the product it said it would produce, and consumers were buying the product,” he said. “The company struggled because the market has changed dramatically.”

This is the fundamental problem with stimulus spending. In the absence of the market signals of price and profit, the government allocates money based on politics and opinion. They do so regardless of the cost, because the money they spend isn't theirs and they are not on the hook for any losses; if they need more, they can simply take more taxpayer dollars or borrow more against future dollars. It doesn't matter if a Republican or a Democrat is in charge, nor who controls Congress - the programs and the losses simply continue while cronies on both sides grow rich. The project accomplished exactly what it was designed to do, and yet the company went bankrupt and cost taxpayers hundreds of millions of dollars.

I don't think it is really that simple though. Without government spending (and often "wasteful" government spending), it is almost certainly the case that the market would not have arrived at the necessary demand to create a viable semiconductor industry, commercial passenger airline industry, or national transportation network.

I recall reading somewhere that the first 20 years of semiconductor purchases were all on the part of the Federal government. It's almost a certainty that a good deal of those (perhaps even the vast majority of them) were ill-conceived, poorly executed, and monstrously ineffective products that would never have survived "market efficiency", but without those iterations, it is highly unlikely we would be anywhere close to the technology we are at today.

Yep. One failure out of hundreds of billions of dollars worth of successes and the whole idea is shot.

And I'm sure not a single person involved in the venture learned anything that they will be able to put to future use.

This is why the government should not invest in airplane technology. We should, instead, make the Air Force buy fighter planes developed and produced solely with private funds.

From what I've read, the reason solar power is failing in the US is that the government didn't really pay much attention how its subsidies to buy solar panels were used. China noticed there were buyers in the US thanks to these subsidies, and ramped up much cheaper production of solar panels, and those eligible for said subsidies used them to purchase these instead of US-made ones. In effect, the US gov't ends up funding China's solar panel industry.

I've also read that huge Chinese subsidies drove down manufacturing costs for Chinese makers... so it's sort of a lose-lose deal. The problem with Aetius' point, though, is that the Chinese will never play the game the way he wants the US to play it, making it impossible for the US to do so until China collapses, which will just be bad for everyone.

Until China collapses? lol Don't hold your breath. Even a complete political collapse would not break them; it would cause some years of chaos, but they'd come out of it stronger in the long run.

When China's bubble blows up, it's gonna be awful. Their vast foreign reserves will cushion the blow, but it's gonna be one hell of a mess. You can expect, at the very least, massive social and political changes there.

As far as I can see from the outside, their bubble makes our property bubble look tiny -- they're building whole cities that are just sitting empty.

I do not disagree on the point. Just cutting blank checks is like tossing spaghetti at the ceiling.

But I smell:

IMAGE(http://www.twawki.com/wp-content/uploads/2010/01/cherrypicking1.jpg)

How exactly do you shift the paradigm away from throw money at the problem to, fix it?

KingGorilla wrote:

I do not disagree on the point. Just cutting blank checks is like tossing spaghetti at the ceiling.

But I smell:

IMAGE(http://www.twawki.com/wp-content/uploads/2010/01/cherrypicking1.jpg)

How exactly do you shift the paradigm away from throw money at the problem to, fix it?

In general, truly blank checks are fairly rare. Most requests for government funding are pretty difficult to come by and require fairly extensive knowledge in the grant proposal process as well as compelling cases that the result of your effort will address a particular government business need. If you don't believe me, try navigating your way through the GSA process to try to provide something to the government.

The notable exceptions to those policies have a tendency to make the papers. These include when "contractors" get pallet loads of $100 bills that literally disappear once they touch down in Iraq or $60 Halliburton burritos. It's just that those really egregious cases tend to stick in our minds and we come away thinking that this is precisely how the government does business.

Robear wrote:

Until China collapses? lol Don't hold your breath. Even a complete political collapse would not break them; it would cause some years of chaos, but they'd come out of it stronger in the long run.

it depends how the collapse happens. If it's a gradual collapse over several years, then I think you're right. But if one morning people wake up and find the RMB 4 million apartment they just bought is now worth 50 kuai, I'm pretty sure there will be chaos.

True. But I have trouble picturing the scenario that leads to that.

Robear wrote:

Yep. One failure out of hundreds of billions of dollars worth of successes and the whole idea is shot.

This is what is considered a success by the government. It's easy to be successful when you pull an Orwell and define failure as success.

Chairman_Mao wrote:

I've also read that huge Chinese subsidies drove down manufacturing costs for Chinese makers... so it's sort of a lose-lose deal. The problem with Aetius' point, though, is that the Chinese will never play the game the way he wants the US to play it, making it impossible for the US to do so until China collapses, which will just be bad for everyone.

Actually, that pretty much is part of my point - I'm pretty sure that we can't win the subsidy game against a totalitarian government, so we shouldn't be trying. Let the Chinese drive themselves off the bridge trying to direct their economy, while we get our economy back to something that resembles reality.

The notable exceptions to those policies have a tendency to make the papers. These include when "contractors" get pallet loads of $100 bills that literally disappear once they touch down in Iraq or $60 Halliburton burritos. It's just that those really egregious cases tend to stick in our minds and we come away thinking that this is precisely how the government does business.

Politics is how the government does business. Do you believe that campaign donors and supporters don't receive benefits from their elected officials? How many black programs follow those rules? Like in this case, those requirements exist largely to provide a barrier for politicians to utilize as leverage in negotiations.

KingGorilla wrote:

How exactly do you shift the paradigm away from throw money at the problem to, fix it?

The obvious argument would be the simplest - don't do that. Stop throwing money at people.

This is what is considered a success by the government.

Really? The government has declared this a success after the failure of the company? Do tell...

I would however like to know what percentage of the stimulus funds were spent on companies that proceeded to then go into bankruptcy. If the point is that the stimulus sucks, one example is a really poor argument.

The best example I can think of is GM, which is among the worst-managed companies going. They are freaking incompetent. And people see that they've recovered to some degree of profitability, and say 'yay, we saved all those jobs!' -- but what they don't see is that Ford, which has been exceptionally well-managed, and is now competing toe-to-toe with Japanese automakers on quality, performance, and features with many of its models, has been very badly hurt by the preservation of its incompetent competition.

They didn't take a dime of bailout money, and they should have been able to snap up GM's assets for a song, hire a bunch of their employees, and then put them to work under GOOD management.

Instead, the quality automaker was f*cked over to save the morons at GM. Instead of allowing that sector to contract to one strong, exceptionally well-managed company, we kept the idiots in business, and badly weakened the smart guys.

(and I'm not pointing that at the line workers; my ire is pointed strictly and solely at GM's horrible, horrible management.)

I agree; GM did not do as well as Ford. But overall, TARP prevented another depression at the time. It prevented the loss of about 8 million jobs. While there are failures, the overall effects were better than doing nothing.

GM sells more cars in China than in the US now and still is struggling to profit. That's what I call incompetence

Yes; absolutely. I'm not defending GM here.

Aetius wrote:
The notable exceptions to those policies have a tendency to make the papers. These include when "contractors" get pallet loads of $100 bills that literally disappear once they touch down in Iraq or $60 Halliburton burritos. It's just that those really egregious cases tend to stick in our minds and we come away thinking that this is precisely how the government does business.

Politics is how the government does business. Do you believe that campaign donors and supporters don't receive benefits from their elected officials? How many black programs follow those rules? Like in this case, those requirements exist largely to provide a barrier for politicians to utilize as leverage in negotiations.

Having spent a good deal of time working on government contracts, knowing folks on contracts, and seeing the process of winning bids, I can pretty emphatically say that the above statement is largely pretty freaking uneducated. This is NOT how the majority of business is done and the rules do not "exist largely to provide a barrier for politicians to utilize as leverage in negotiations".

Seriously. That's some ignorant stuff.

That's just because your company isn't one of the 'connected' ones, Paleo.

Malor wrote:

That's just because your company isn't one of the 'connected' ones, Paleo.

This.

Malor wrote:

That's just because your company isn't one of the 'connected' ones, Paleo.

Seriously. Spend any time at all as a purchasing manager in the GSA system and you'll instantly realize how ridiculous that statement is. I don't care how "connected" you are, if you aren't providing the goods or services specified in the purchase request AND not providing it at the lowest price AND not providing any other of your customers a lower price for the same good or service, you're not getting the business. And if you do, it the sort of exceptional case that ends up in the papers.

Talk to anyone in the federal government that has been responsible for buying anything from paper clips to supercomputers. The rules make it pretty damned difficult to simply shunt business off to your friends. Talk to anyone who does federal government sales and you realize exactly how much they fear even a minor infraction (like buying a congressman a dinner at Appleby's) landing them in front of a congressional committee.

It may not be the most efficient system for buying stuff, but it does a pretty good job of limiting cronyism. I would argue it does a MUCH better job of that than commercial business (the "free market") where bribery is far more endemic.

I'm sure Halliburton would be fascinated to hear about your experiences, Paleo.

The armed services in particular are corrupt as f*ck, and award many many contracts, not just without competitive bidding, but without bidding on a cost-plus basis. That is, whatever amount of money the contractor spends, the Pentagon guarantees that money back, plus something like ten percent.

There are parts of the government that still work correctly, but there are broad swaths where mostly the Republicans have completely hijacked the process, and tens of billions of dollars are leaking away.

Oh and yes, the system would work, if only it applied to everyone. It doesn't.

The exceptions are exceptional.

You do bring up one decent point though that one party in particular seems to be intentionally running things deliberately poorly out of the desire to destroy overall faith in government. And idiots that the American people seem to be it is working.

The cure to bad government is good government. Not less government.

Malor wrote:

I'm sure Halliburton would be fascinated to hear about your experiences, Paleo.

The armed services in particular are corrupt as f*ck, and award many many contracts, not just without competitive bidding, but without bidding on a cost-plus basis. That is, whatever amount of money the contractor spends, the Pentagon guarantees that money back, plus something like ten percent.

There are parts of the government that still work correctly, but there are broad swaths where mostly the Republicans have completely hijacked the process, and tens of billions of dollars are leaking away.

I don't know if this has changed recently, but at the very least it isn't consistent across military contracts. The tanker contract that was awarded to Boeing earlier this year was a fixed-bid contract. If Boeing goes over (likely), that's their problem.

Paleocon wrote:

Talk to anyone in the federal government that has been responsible for buying anything from paper clips to supercomputers. The rules make it pretty damned difficult to simply shunt business off to your friends. Talk to anyone who does federal government sales and you realize exactly how much they fear even a minor infraction (like buying a congressman a dinner at Appleby's) landing them in front of a congressional committee.

This. You wouldn't believe the amount of time I waste every year in 'training' learning all about the various federal laws governing this sort of thing as well as what I could or could not accept from a potential customer. And I'm just a software developer - I have no actual contact with outside customers.

Just read the FAR for selling into the Federal space. Don't give me TLDR - every single person connected with Federal sales and contracting has to read these, on pain of going to jail if they screw it up. Section 3 is particularly apt for this discussion (use the HTML version, it's easiest.) If you want to talk about it intelligently, this is the starting point.

If you want to get into the nitty-gritty, READ THIS FIRST, then figure out how and why Pentagon purchasing is different in some cases. But don't pretend to understand the system without this kind of information stuck into your head, because any first year out of college intern at a contracting firm or a vendor knows more about this than Joe on the street. Sloganeering and blithe assertions of corruption, or the expectation that egregious violations are the norm, don't cut it. The vast majority of sales into Federal spaces is done to higher ethical and legal standards than sales to commercial companies, and it's done on the whole by people on both sides who are *very* concerned about not wasting taxpayer's money.

And if there was any doubt regarding whether or not that one party really IS trying to fcuk things up intentionally, here is an article you absolutely MUST read.

A couple of years ago, a Republican committee staff director told me candidly (and proudly) what the method was to all this obstruction and disruption. Should Republicans succeed in obstructing the Senate from doing its job, it would further lower Congress's generic favorability rating among the American people. By sabotaging the reputation of an institution of government, the party that is programmatically against government would come out the relative winner.

A deeply cynical tactic, to be sure, but a psychologically insightful one that plays on the weaknesses both of the voting public and the news media. There are tens of millions of low-information voters who hardly know which party controls which branch of government, let alone which party is pursuing a particular legislative tactic. These voters' confusion over who did what allows them to form the conclusion that "they are all crooks," and that "government is no good," further leading them to think, "a plague on both your houses" and "the parties are like two kids in a school yard." This ill-informed public cynicism, in its turn, further intensifies the long-term decline in public trust in government that has been taking place since the early 1960s - a distrust that has been stoked by Republican rhetoric at every turn ("Government is the problem," declared Ronald Reagan in 1980).

In other words, it is the stated intention of the GOP to fcuk up so badly that people will lose faith in the government as a whole and demand less government. And morons that we are, we fall for it. And the demonstrated ignorance of the procurement process above is concrete evidence of this precise phenomenon.

Seriously. Why in the hell would anyone reward this behavior with exactly what they want?

At least they tried something new. Now we know.

PS - Solar is still in its infancy. Bankruptcies are normal for emerging technologies.

Veteren open-source/tech/renewable energy journalist Dana Blankenhorn's take.

French reporter called me last week after I wrote about the failure of Solyndra here.

She was asking about whether the President was in trouble, due to the failure of loan guarantees to jump-start the industry. I agreed those programs had not worked, adding government has two roles in renewable energy, expanding research and guaranteeing a market.

http://www.danablankenhorn.com/2011/...

http://brucekrasting.blogspot.com/20...

I also made note of some scuttlebutt that George Kaiser (Oklahoma oil billionaire) was involved with Solyndra. I have been looking for a confirmation of this. Kaiser is an important link in this story. He is also a very big fund-raiser for Obama. He is often referred to as a “Bundler”. In this case that means he encouraged/pushed others to put up money for the big O’s campaign.

...

This story will hound Obama. His campaign got big bucks from a guy who ended up costing the Feds a very big penny. This is a story that could drag Obama down. He either has to step up and explain how this could have happened or he can say nothing. He has to provide some clarity on the George Kaiser connection. If he chooses to keep mum on this mess he will have to face Congressional hearings for the next 18 months. There will be a story in the paper every week or so. The Republicans will see to it. This is a story that could turn an election.