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Brooks Wilson's Economics Blog: Loans by the DOE: Good Investment or Political Payoff?

Friday, September 25, 2009

Loans by the DOE: Good Investment or Political Payoff?

One danger of a government highly involved in decisions of private companies is that economic success becomes dependent on political connections. A second danger is that the average citizen will not have the time to gather the information to distinguish between economic interventions that will benefit the economy and those that benefit the politically connected. Corruption can be disguised as a public investment, necessary for some larger good. Both dangers are good reasons for the government to avoid unnecessary interactions. Josh Mitchell and Stephen Power, writing for the Wall Street Journal, describe how two politically connected small startup firms making luxury hybrid sports cars received nearly one billion in loans from the Department of Energy in "Gore-Backed Car Firm Gets Large U.S. Loan."

WASHINGTON -- A tiny car company backed by former Vice President Al Gore has just gotten a $529 million U.S. government loan to help build a hybrid sports car in Finland that will sell for about $89,000.

The award this week to California startup Fisker Automotive Inc. follows a $465 million government loan to Tesla Motors Inc., purveyors of a $109,000 British-built electric Roadster. Tesla, like Fisker, is a California startup focusing on high-end hybrids, with a number of celebrity endorsements that is backed by investors that have contributed to Democratic campaigns.

The awards to Fisker and Tesla have prompted concern from companies that have had their bids for loans rejected, and criticism from groups that question why vehicles aimed at the wealthiest customers are getting loans subsidized by taxpayers.

"This is not for average Americans," said Leslie Paige, a spokeswoman for Citizens Against Government Waste, an anti-tax group in Washington. "This is for people to put something in their driveway that is a conversation piece. It's status symbol thing."

DOE officials spent months working with Fisker on its application, touring its Irvine, Calif., and Pontiac, Mich., facilities and test-driving prototypes.

Matt Rogers, who oversees the department's loan programs as a senior adviser to Energy Secretary Steven Chu, said Fisker was awarded the loan after a "detailed technical review" that concluded the company could eventually deliver a highly fuel-efficient hybrid car to a mass audience. Fisker said most of its DOE loan will be used to finance U.S. production of a $40,000 family sedan that has yet to be designed.

We know that the market is generally better at allocating resources than the government, but that the government can sometimes improve market outcomes. Was this a good investment, a payoff to the politically connected, or something else?

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1 comment:

  1. Dena Husak, Econ Student27/9/09 6:20 PM

    Because I was not on Capitol Hill the day this loan was reviewed or released, I cannot say for sure what the definative reason behind Fisker and Tesla receiving the DOE loan.

    I can, however, say that to invest this much money into a company who will eventually (although not any time soon) produce a vehicle for $40,000 to pay back this loan is unrealistic. Not just any vehicle, but a family sedan. I don't know too many families that are going to dish out that amount of money for a family sedan when they can get an equally safe vehicle for a little more than half that price. Generally, family values tend to focus more towards their childrens' needs, futures, and even desires before worrying about an extravagent vehicle when an allocation of resources are crunched. In other words, it's not a wise investment because there may not be a sufficient demand to satisfy the supply they need to sell to pay back these loans any time in the near future. This is especially unwise during the current recession.

    From the evidence at hand, one would tend to conclude that the reason for the loans were probably the result of a payoff to those invested in the politically powered. However, if my memory is correct, even General Motors received a loan from the government when the recession first began last year. So, there's no way of truthfully determining one way or another, from my position anyway.

    Another point in defense of those who criticize the loan is that there are a number of other companies who could, perhaps, better profit the economy as a whole, especially if the reason behind DOE loans is to stimulate America's markets.