Businesses built on ‘juice’
The Solyndra business model always destroys wealth
- Thursday, October 6, 2011
Some companies are in business to serve consumers.
Others are in business to serve themselves. Such was the case of Solyndra — a newly bankrupt California-based firm in the ostensible business of manufacturing solar panels.
Solyndra's business model — like that of many "renewable"-energy-component manufacturers — doesn't achieve success by producing goods that consumers value and would purchase freely. Instead, this business model achieves success by petitioning politicians to legally compel consumers to purchase the company's product. Contrary to voluntary market transactions — wherein producers and consumers benefit alike — gains made by predatory rent-seekers like Solyndra come at the direct expense of an unwilling population.
Solyndra was founded in 2005 as renewable-energy lobbyists were inducing state lawmakers around the country to enact renewable-portfolio standards — legal requirements for electric ratepayers to purchase electricity produced through "renewable," but less efficient, means. These edicts of compulsion offered a guaranteed market to manufacturers of solar panels like Solyndra, even though their product was not competitive.
In addition to these guaranteed markets in the states, solar panel manufacturers were also benefitting from the artificial demand spurred by large federal and state subsidies already granted to utility companies that operate solar panels. According to information from the U.S. Department of Energy, federal subsidies alone amount to $775 per megawatt-hour of production, as compared to 64 cents for an equivalent unit of coal-fired or natural-gas-fired electricity.
Around the same time that Solyndra was formed, Congress and the Bush White House were putting the final touches on the Energy Policy Act of 2005. This legislation offered federal backing for loans made to solar panel manufacturers.
Solyndra executives eyed this legislation with envy, and soon began their marketing campaign. However, marketing campaigns in the "juice" industries are unlike marketing campaigns for bath soap, hair conditioner and the like. Companies that wring profit from political pull needn't sell consumers on the value of their product. These companies don't compete in the marketplace. They compete in the halls of Congress, where "marketing" means "lobbying."
And lobby Solyndra did. Between 2008 and 2011, Solyndra, a moderately sized startup, spent $1.35 million on lobbying, at the federal level alone. Also, according to FEC records, Solyndra executives, investors and lobbyists spent heavily on campaign donations, benefitting primarily Democrats.
When President Obama and a Democratic Congress took office in early 2009 and passed the $787 billion American Reinvestment and Recovery Act, they targeted renewable-energy companies for nearly $90 billion in subsidies. Solyndra was among the largest benefactors, receiving loan guarantees worth $535 million.
The Democratic leadership wanted to sell renewable energy as the job-creator of the future — despite research demonstrating that far more jobs are destroyed than created by the higher taxes and electricity prices that follow renewable energy's mandates and subsidies. Solyndra, cast as the poster child for this campaign, received a half-billion-dollar loan guarantee. The company used the money to build a manufacturing plant that soon became a focal point of Democrats' "green jobs "public relations campaign.
However, even as President Obama, in May 2010, made a highly publicized visit to Solyndra's factory to tout the success of his spending policies, the firm's independent auditors were questioning whether Solyndra's business plan was even viable. After all, as Holman Jenkins recently pointed out in the Wall Street Journal, Solyndra had been "lured by federal loans to expand its output of $6 solar panels that it could sell for $3."
By December 2010, Solyndra was facing imminent bankruptcy. However, the Obama administration — now politically invested in the company's success — arranged a taxpayer-funded bailout. The administration agreed to subordinate $385 million in outstanding government loans to new investment — meaning that Solyndra's politically connected investors would become senior creditors and the first to cash out if Solyndra filed for bankruptcy, while taxpayers would be stuck with the bad debt.
With Solyndra's September 2011 bankruptcy filing, this threat has now come to fruition.
Solyndra was little more than a corporate vehicle for cronies to loot taxpayers. Its business model, however, is, unfortunately, not unique. Here in the Silver State, Nevada Geothermal — a Canadian company — received $145 million in public financing through the same programs as Solyndra.
Even as these rent-seeking enterprises continue to fail, the U.S. Department of Energy has plans currently on the table to commit an additional $6.5 billion in loan guarantees to nine new projects. According to DOE figures, these projects would create a total of 283 permanent jobs — at the bargain price of $23 million each!
American taxpayers cannot long sustain the rent-seeking cronyism occurring in Washington. A nation built on political juice is a nation rife with cronyism, corruption and despair.
True wealth is built by catering to the needs of consumers. It is built through free enterprise.
It's time for America to remind its political class of this reality.
Geoffrey Lawrence is deputy policy director at the Nevada Policy Research Institute. For more visit http://npri.org.