Government Favoritism

Government Favoritism

That there is dismay, criticism, if not scandal, about the federal government’s loss of over $500 million in trying to subsidize the solar power company Solyndra should be no surprise. It’s an inevitable result of government directly financing a risky private venture. Not only is there the loss of money, but the aspect of political favoritism, and the consequent failure to properly examine the project in the first place.

  Let me say at the outset that this is not a first for government at any level. And, let me concede that some  projects succeed and some fail just as in the private financing world. Also, let me point out that there are many other projects in the alternative energy field that are going to fail because it is an inherently risky business. The underlying issue is more than the risk. The underlying issue is what is government’s proper role.

  My contention is that it is not the proper role of government to be a direct investor in private enterprises however desirable and alluring they might be. Government, which forcibly takes money from private citizens and businesses, should not pick individual winners and losers. And, as supposed trustees for our money, what investments that are made have to be exceptionally broad.

  Scientific research and development with results shared with all participants is a proper place to spend money. So is infrastructure. Roads, water and sewer lines, utilities, land, water and rail access and even land are acceptable. Tax breaks to entire industry group is also acceptable and, in any event, too late to curtail. However, that is one reason our tax code runs to 50,000 pages or more. Social engineering by tax incentive. That will be one of the hurdles as we seek to simplify the tax code.

  These observations are colored by my own experiences as a founder and leader of a non-profit industrial development group in Western Pennsylvania. All monies came from private people or businesses. Money was scarce and donors watchful and wary. Board members were business men and women, bankers, insurance brokers, Realtors, and lawyers.

  Our first project took all our treasury, a whopping $10,000, and that was to install a gas line to a thinly capitalized start-up plastic company. We were angry that the gas company wouldn’t install the line at its expense and in return we brought public and political pressure to change their policy and also forced them to rebate to us a percentage of the gas bill until we got our money back. We did and the company went on to become a multi-million dollar enterprise with several branches through the country.

  Our second proposed project, after we replenished the treasury, was a non-starter. We refused to provide working capital to a smooth talking Hungarian refuge/tailor who wanted to start up a clothing enterprise. Neither his finances, outside backing, nor managerial skills and reputation matched our criteria. I and fellow co-president of the development group took personal heat in the community including threats of a lawsuit. We held out and were vindicated later when the tailor got in trouble with the law.

  Our group eventually raised enough money to purchase land and develop an industrial park. We never provided working capital to an entity, but did offer a park with infrastructure. State government did participate  with loans to us for the development. These were first position loans with payoffs, in addition to regular payments, with the sale of land. However, from dealings with businesses we contacted, it was clear that providing working capital, direct grants and loan guarantees to businesses was far too risky and fraught with potential and often obvious conflicts.

  My, or our story, doesn’t have a good ending. When we started our group the domestic steel industry was booming. Steel company execs and workers alike thought the jobs would never go away and that our effort to diversify the base was both unnecessary and disruptive to the local workforce (fears of non-union labor). In the early to mid 1980s the domestic steel industry crashed and with it our projects. The county later took over the park for taxes. Some of the companies we helped continued, but the area with a loss of 250,000 jobs in a five year period, lost its vitality. As one writer titled his definitive book, “And The Wolf Finally Came.”

  Ours was worth the try. Time, money, and individual efforts were lost, but not wasted. Very little, if any, government money was at risk or lost. Economic disasters do occur. Government should not provide the venture capital. Government’s ultimate reward is success because government takes a portion of every economic transaction. That means patience and policies to encourage private businesss development, not to be the business.