Economics 101

Cronyism As Theft

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This past weekend we “celebrated” the one-year anniversary of the bankruptcy of Solyndra, the solar panel company.

When I say celebrate, it is bittersweet. Solyndra should have never gotten as far as it did before it went bankrupt. I am happy that we have laid to rest a government-supported company that turned out to be abysmal at their business.

However, I am sad because this disaster never should have happened. I am sad for employees of Solyndra, for workers in the green energy industry, for taxpayers, and anyone else hurt by Solyndra’s downfall.

Without government loans and support, Solyndra and its inefficiencies would have been weeded out by the market a long time ago. Taxpayers are still feeling the effects.

According to the New York Times, Solyndra received a $535 million dollar conditional federal loan guarantee. The company promised to create over 1,000 jobs in the U.S. alone.

Less than a year later, Solyndra announced it was filing for Chapter 11 bankruptcy and laying off 1,100 employees – after receiving $528 million of the initial $535 million loan. The company was raided by the FBI and placed under investigation by the Department of the Treasury for misrepresenting its finances to obtain the federal loan.

Let’s do some back-of-the-envelope calculations here:

  • The Department of Energy reported that Solyndra estimated it would create 3,000 jobs, 1,000 of them in the U.S., among other energy benefits which were never realized.
  • Those 3,000 jobs cost $528 million.
  • This means that the Federal government was willing to support job creation in the solar panel energy sector for an average of $176,000 per job, only one-third of which were U.S. jobs.

It’s a dicey game when government and business get together. It’s called cronyism. It’s unbiblical and unjust.

When companies lobby for favor or protection from the state, the resulting policy always creates winners and losers. In this case the “winner” was Solyndra. Even though the win was temporary, the government gave Solyndra an edge over their competitors through the loan.

The losers are not only taxpayers, but the employees of Solyndra, and any other firm and worker in the solar panel industry. We will never get that $528 million back. It’s forever gone. Wasted.

None of this is really that surprising. If the government panders to particular businesses, they establish an incentive for other businesses to seek the same favor. In economics,we call this rent-seeking. It’s the notion that businesses will rationally spend money to obtain favor and protection from the state, because that will earn them even more money. It’s ill-gained profit.

It’s important to point out that this problem applies to both Democrats and Republicans. As Lord Acton famously said, “All power tends to corrupt. Absolute power corrupts absolutely.” Cronyism crosses party lines.

In economics we focus a great deal on incentives, because they drive human behavior. If businesses think they can benefit from government subsidies, and if the state sets up a precedent of doing so, why wouldn’t we see rent-seeking?

If I give my two-year-old the lollipop he asks for (every night!) before dinner, he will expect this from me.  If I set up a boundary that we never have lollipops until after dinner and the boundary is firm, he will stop asking.  The same principle applies here.

The market is a strict disciplinarian that doesn’t put up with a lot of nonsense. It would have never allowed Solyndra to stay open for business if they were not providing quality products at equal to or lower prices than their competitors.

The market may not catch cheating and subterfuge the day it happens, but in the end it always weeds them out. In a market setting, legitimate profit can only be earned in the long run by serving your customers with lower prices and higher quality.

Only through government intervention were they allowed a stay of execution, and as a result jobs were lost and wealth destroyed. The market, in contrast, forces prudence and efficiency upon its participants.

To allow the greatest number of people to flourish in any society is to allow them to use the work of their hands to serve the common good.  This applies whether you supply hamburgers or health-care.

None of this is trivial in God’s eyes and the market is the best way for us to bring our gifts to serve others. Voluntary trade creates winners all around, instead of someone who wins at the expense of someone else who loses.

The only way to protect against the powerful temptation of cronyism is to have a small and limited government in both size and scope.  This allows humans to flourish in the way that God intended.

Proverbs 22:16 tells us,

He that oppresseth the poor to increase his riches, and he that giveth to the rich, shall surely come to want.

Cronyism in this country is about firms who are already wealthy and powerful trying to exploit others to maintain their profits levels. Cronyism expropriates wealth. and it obtains wealth by oppressing other parties.

The market will curry no such favor. Instead, it offers everyone the opportunity to offer to the world their creativity and purpose.

What do you think? Should the government assist businesses? Leave your comments here.

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