China Grove is Not a Doobie Brothers Song: My friend Joe Nocera has, er, refined his defense of Solyndra. He no longer seems to think giving it a half-billion-dollar guaranteed government loan was a really neat idea. (Megan McArdle demolished that notion.) He concedes that “Solyndra wasn’t ready for prime time and that the Department of Energy, which gave it a $535 million federally guaranteed loan, should have known as much.” He now argues that sure, Solyndra was a loser, but that doesn’t undermine the general rationale for the government’s loan program:
The third criticism is the one that really matters: government “is a crappy vc,” as Obama’s former economic adviser, Larry Summers, put it in another embarrassing e-mail that was recently released as part of a Congressional investigation into Solyndra.
“VC,” of course, stands for venture capitalist; the notion is that government is not equipped to play that role. A corollary point, voiced by Holman Jenkins Jr. in The Wall Street Journal, is that solar projects that make financial sense get financed by the private sector and those that don’t are the ones that need federal backing.
But if you spend any time actually looking into how the Department of Energy doles out the loan guarantees, you quickly realize that it’s not acting like a venture capitalist. Rather, it is funding projects that have already attracted private capital — lots of it. The private sector, in other words, is still the one picking winners and losers.
What the program is essentially doing is moving alternative energy innovations to full-scale development. Why is the government doing this? Because this is precisely where the private sector fails. As Rothwell puts it, “The program is supposed to overcome the commercialization valley of death.”
In this country, it is relatively easy to get venture capital for a good idea — and alternative energy has attracted billions in the past few years. What is hard to come by is money to fund the far more expensive process of commercializing the innovation. Andy Grove, the former chief executive of Intel (and still one of the great business minds in America), has been sounding the alarm about this, pointing out that one reason so many American innovations wind up being manufactured in China is that the Chinese are more than happy to finance the commercialization process. [E.A.]
Hmm. Is capitalism really incapable of providing the capital to commercialize promising innovations? Isn’t that kinda the whole point of capitalism? If it can’t do that, who needs it? But if you read the Andy Grove piece to which Nocera links, Grove is not arguing that banks do not fund the commercialization of promising innovations (because they are somehow “paralyzed by the financial crisis and don’t understand the economics of solar power”–Nocera’s implausible excuses). Grove argues that we do fund the commercialization of promising innovations but that the commercialization plans indeed involve doing the manufacturing work–and creating all the factory jobs–in China. (“Apple, meanwhile, has about 25,000 employees in the U.S. That means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods, and iPhones.”) Grove’s advancing an argument about the offshoring of the jobs created by promising innovations, not about promising innovations going unfunded.
Five years ago a friend joined a large VC firm as a partner. His responsibility was to make sure that all the startups they funded had a “China strategy,” meaning a plan to move what jobs they could to China.
Why are the jobs moving to China? It’s not hard to figure out. Here’s Grove:
As time passed, wages and health-care costs rose in the U.S. China opened up. American companies discovered that they could have their manufacturing and even their engineering done more cheaply overseas. When they did so, margins improved. Management was happy, and so were stockholders …
In other words, China does it more cheaply. It would seem to have little or nothing to do with the Chinese being “more than happy to finance the commercialization process.” These projects are financed, remember, in the U.S.. It has everything to do with China having a huge untapped supply of inexpensive, willing, competent workers.
But how are you going to stop firms from manufacturing where it’s most economical? Not through government loans. Suppose Solyndra’s DOE-financed solar cells had been a successful product. Why wouldn’t it still be much cheaper to make them in China? Either Solyndra itself would eventually shift production, or one of its competitors would and then eat Solyndra’s market share. Grove is quite explicit that to prevent this sort of thing you’d need some form of tariff on foreign manufactured goods:
We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars—fight to win.)
Is Nocera willing to embrace this type of tariff? If not, he’s fooling his readers into thinking the DOE loan program embodied a solution to the problem Grove identifies.
One way to look at it is to note that there’s an obvious tension between the “green” part of a “green jobs” agenda and the “jobs” part. If all you care about is 1) promoting solar power, then solar cells manufactured in China are as good as cells manufactured here–even better, if they’re cheaper and therefore more likely to be installed. But if that’s the case then Nocera hasn’t shown that you need government financing to achieve your goals because private financing is unavailable. Grove doesn’t speak to this problem.
But if 2) what you care about is promoting jobs, then it will take a whole lot more than government loans and loan guarantees to keep green manufacturing and engineering jobs in the U.S.
I’d always figured “green jobs” backers were focused on goal (1) and resigned to creating lots of Chinese manufacturing jobs. After all, there’d still be jobs that could only be performed here in the U.S., like installing the damn things. Nocera seems to suggest that’s not enough–or that when the time comes to try to rationalize a disastrous Obama boondoggle, it’s OK to quietly switch to goal (2).
P.S.: The alternative long-run strategy for goal (2), giving the market play while keeping the manufacturing jobs here, was I believe suggested by Walter Russell Mead: make it as easy as possible to start manufacturing enterprises in the United States, using our own recently acquired supply of productive workers willing to work cheap–for $10-$14 an hour, say. That means protecting firms from Davis-Bacon-style high-wage mandates and Wagner Act unionism, and from new “protected classes” of potential plaintiffs–a conservative goal. It may also mean relieving them of health care and pension costs by having government shoulder that entire burden–a liberal goal. Plus, of course, lower taxes (achieved in part by cutting government to the essentials) and simple, predictable regulations.
P.P.S.: Nocera suggests private backers of big “green” energy projects seek government funding because they can’t raise the extra cash. Isn’t it more likely that they seek government funding because one of the big risks they take is the possibility of a change in energy regulation or policy–and a big DOE investment offers some assurance that this won’t happen? It’s an indicator of future government support and protection, a “mandate of heaven,” if you will. These energy deals, in this view, are inherently corporatist–they assume the state will act to favor select business partners.
P.P.P.S.: If liberal environmentalists think we should have a carbon tax (because they fear global warming caused by fossil fuels) and conservative critics of Solyndra think we should have a carbon tax (because it would be more efficient to let the market figure out how to avoid burning carbon than having winner-picking government loan programs) then why not have a carbon tax? Gotta tax something.