No more Solyndras: time for the sun to go down on public spending.

It is not the job of government to throw the public’s money at failing businesses or ‘green’ investment pipedreams. That is not capitalism, it is corporatism.

Obama receiving a guided tour of Solyndra.
John Phelan
On 20 October 2011 08:41

Whenever I watch Dragon’s Den (Shark Tank to readers in the United States) and I see some entrepreneur waking away with £50,000 in his pocket I try and come up with my own ‘Dragon’s Den idea’.

I wonder how far I’d get if I turned up and said “I want $535 million and I’ll go bust in two years”? I might not get too far with Duncan Bannatyne, but if I was pitching to Steven Chu, Barack Obama’s Energy Secretary, I might be in with a shot.

That, briefly put, is the story behind Solyndra, a California based solar energy technology company which filed for Chapter 11 bankruptcy in August.

There are rumours that something murky went on in the approval of the loan. Perhaps, perhaps not.

But there is certainly a question mark to be raised over the willingness bordering on mania of western governments to throw taxpayers money at any business prospectus with the word ‘green’ in it.

Apparently terrified of global warming, our political leaders also harbour the hope that burying Sussex under wind turbines or covering Nevada with solar panels will boost the economy, a variation on Keynes’ old bottles full of banknotes.

But this is to miss the central lesson of Solyndra; governments aren’t much good at spending money. 

In his 1980 classic, ‘Free to Choose’, Milton Friedman set out the four categories that all spending must fall into. Category I, you can spend your money on yourself; Category II, you can spend your money on someone else; Category III, you can spend someone else’s money on yourself; Category IV, you can spend someone else’s money on someone else.

Friedman gave a trip to a supermarket as an example of Category I spending, saying that “You clearly have a strong incentive both to economize and to get as much value as you can for each dollar you do spend”

Category II spending was exampled by buying presents for Christmas or birthdays. “You have the same incentive to economize as in Category I”, Friedman wrote, “but not the same incentive to get full value for money, at least as judged by the tastes of the recipient”

Friedman described Category III spending as being like lunching on an expense account. “You have no strong incentive to keep down the cost of the lunch, but you do have a strong incentive to get your money’s worth”

Category IV spending, Friedman wrote, is like paying for someone else’s lunch out of an expense account and “You have little incentive either to economize or to try to get your guest the lunch that he will value most highly”

Yet it is into this last category that all government spending falls. As D R Myddelton wrote in ‘They Meant Well’, a look at some similar examples of government profligacy in Britain, “Making a profit is the raison d’être of commercial enterprise, and company directors must account to shareholders for their success or failure in doing so. Government quasi-commercial projects may aim to make a profit, but if they fail, taxpayers have to pick up the tab”

Governments are not incentivised to get value for taxpayers’ money because they have no skin in the game. Hence debacles like Solyndra.

The obvious reply, especially given events of the last few years, is that the private sector is no better at spending its money. The multi-billion losses racked up by the likes of Merrill Lynch, JP Morgan, Citigroup, Morgan Stanley, Lloyds, Royal Bank of Scotland etc would make most governments blush.

But here’s the thing, they weren’t risking their money. When these banks saw their investments go sour they were bailed out with taxpayers cash. They were risking your money. And what’s worse, given the close relationship between Wall Street and Washington, the City and Westminster, they knew it.

None of this is capitalism despite what some might say. Capitalism is a profit and loss system with loss just as important as profit in allocating capital. Eliminate losses and you eliminate capitalism.

As has been proven from the Tanganyika ground nut fiasco to the Solyndra mess, government should leave capitalism to the capitalists.

But capitalists and government should also leave taxpayers money in taxpayers’ pockets. It is not the job of government to throw the public’s money at failing businesses or ‘green’ investment pipedreams. That is not capitalism, it is corporatism. And as the Dragons might say, I’m out.

John Phelan is a Contributing Editor for The Commentator and a Fellow at the Cobden Centre. He has also written for City AM and Conservative Home and he blogs at The Boy Phelan. 

blog comments powered by Disqus