Two years ago, the solar company Solyndra was a darling of the Obama Administration. The company had received more than five hundred million dollars in loan guarantees from the Department of Energy, and was building a factory to manufacture a revolutionary new successor to the solar panel—one that didn’t require expensive silicon and came in a convenient tube format. It seemed like an ideal show horse for the Administration’s green-jobs strategy. Vice-President Joe Biden spoke by video at the plant’s groundbreaking ceremony, saying that the company was creating “the jobs of the future.” The following May, Obama gave a speech at the factory, and declared, “The true engine of economic growth will always be companies like Solyndra.”
Not quite. In fact, Solyndra had a huge problem: the price of silicon panels was plummeting, making its products uncompetitive. The company burned through its pile of cash in a futile attempt to stay afloat; in late August, it declared bankruptcy and fired eleven hundred workers. Solyndra went from show horse to cautionary tale. Its offices were raided by the F.B.I., and congressional Republicans have held hearings, including one at which two of the company’s top executives took the Fifth Amendment. Allegations of corruption are flying; critics of the Administration are arguing that the whole idea of government support for green companies should be abandoned as a pure boondoggle.
Washington being what it is, the backlash against green subsidies is no surprise. But it’s an overreaction every bit as hysterical as the pro-Solyndra hype was. Industrial policy does have a checkered history, and in much of the developing world government intervention in the marketplace has translated mainly into crony capitalism. But in other places the story is more encouraging; many economists argue that government intervention in the market was instrumental in the postwar rise of countries like Japan, South Korea, and Taiwan; more recently, Germany has built a sizable solar industry using subsidies. It’s certainly true that we don’t want government to be in the business of helping decide which big-box retailer or maker of MP3 players has the best chance of succeeding. But it’s also true that there are a few industries where it makes a lot of sense for the government to complement the market by subsidizing research and development. Renewable energy is one of them.
That’s because the energy market is not like most other markets. Indeed, the economics of alternative energy are such that private investors, left to their own devices, are bound to underinvest in it, since the considerable social benefits—cleaner air, fewer greenhouse emissions—accrue to everyone, not just to direct customers. That means that the economic rate of return is significantly less than the social rate of return. Energy markets are also dominated by entrenched, regulated companies, and that reduces the incentive for investment; despite the immense size of the energy market, as of 2005 spending on energy R. & D. accounted for just two per cent of total spending on R. & D. in the U.S. This creates an opportunity for the government to add value by investing smartly, just as it can add value by spending money on education or infrastructure, other areas where the social returns are greater than the economic ones.
Of course, some think the Solyndra failure shows that the government isn’t investing smartly. But, while government subsidies have built-in problems—most obviously, some money will go to projects that would have happened anyway—there’s little sign that the Department of Energy has handed out money recklessly: the vetting process, which relied on three thousand outside experts, was unusually rigorous. Solyndra was a wager that went wrong, but failure is integral to the business of investing in new companies; many venture capitalists will tell you that, of the companies they fund, they expect a third, if not more, to fail. By those standards, the government is actually doing pretty well so far: under the stimulus program, the D.O.E. has handed out nearly twenty billion dollars in loan guarantees to renewable-energy companies, and only Solyndra has defaulted, accounting for a small fraction of the money guaranteed. Solyndra’s failure isn’t a reason for the government to give up on alternative energy, any more than the failure of Pets.com during the Internet bubble means that venture capital should steer clear of tech projects.
Besides, the government is already hopelessly entangled in the energy market. As a new study by Nancy Pfund and Ben Healey shows, government subsidies have played a key role in the energy industry since the nineteenth century. The nuclear-power industry was effectively created by the government in the nineteen-fifties, and probably could not exist today without government guarantees. The coal industry was heavily subsidized during the nineteenth century. And the oil-and-gas industry has received tax breaks and allowances worth billions of dollars a year for more than half a century—to say nothing of the implicit, but incredibly costly, subsidy that oil producers have received in the form of the Fifth and Sixth Fleets. On top of this, fossil-fuel producers are subsidized because the prices of their products don’t include the social costs they inflict on the environment—pollution and greenhouse emissions. We already have an industrial policy on energy—it’s just that it’s an industrial policy designed to subsidize and encourage the use of fossil fuels. An economist’s ideal solution to all this might be to repeal the oil industry’s tax breaks, tax carbon to reflect its social costs, and let the market work its magic. But that seems to be, at least for now, a political impossibility. Putting money into alternative energy is as close as we can get to levelling the playing field. Solyndra was a big bet that happened to go bad. But we probably need to be making more bets like it.