Arnold Kling  

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I've written about it before, but Wired reminds me,


Startup companies that enjoy DOE support, most notably Tesla Motors and Fisker Automotive, have an extraordinary advantage over potential competitors since they have secured access to capital on very cheap terms. The magnitude of this advantage puts the DOE in the role of kingmaker with the power to vault a small startup with no product on the market -- as is the case with Fisker -- into a potential global player on the back of government financial support.

As I have said before, as far as I am concerned, this is the worst Obamination. The American people are being forced to participate in a venture capital fling in which they take most of the down side and none of the up side. And it is not being debated. Nobody has to come before the public and explain themselves. If you call yourself a progressive, are you proud of this?


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COMMENTS (26 to date)
thruth writes:

"If you call yourself a progressive, are you proud of this?"

I'm not one, but why wouldn't they be? It's even self-validating: "we gave them money and they succeeded" [at the expense of the rest of the economy]

Bradley Slinkard writes:

Where is the accountability? Raising your own capital forces investor pressure on productivity, ingenuity, efficiency, and profitability. Not only will DOE support fail to provide the best results, it will provide another program where the American people will be forced to shell out money now and in the future for a program that "feels" good.

spencer writes:

The DOE, Dept of Defense and other government agencies have played a major role in the development of new technology in the post WW II era causing many products to be developed well before the private sector was ready to take on the very long run and risky investment in developing new products.

I doubt if you can name a single product of Silicon Valley that did not have significant government financing at some point in its development-- including semiconductors where NASA finance the major step of moving semis from an interesting laboratory experiment to commercial development.


Such investment is a significant reason why real per capita growth in the US has been about 50% higher since WW II than it was in earlier eras when government support of research and development was much more limited.

As a liberal I am extremely proud of the way government financing has advanced the cause of research and development to the point where private capital was able to take on the very risky development of basic research and development.

Maybe if you looked at how the partnerships between government and private capital in the various Asian countries played a major role in changing the Asian countries comparative advantage rather than your simple model that assumes that all government intervention has a negative impact you might have a better understanding of how economic growth is actually achieved.

David C writes:

I'm not a progressive, closer to libertarian, but I am very far to the left on global warming issues, and honestly, if an $8 billion dollar program in a multi-trillion dollar government is "the worst Obamination", that'd be an incredible achievement. I don't think that's the case, but moving on.

The article complains about distortions in the market, but isn't that a necessary goal of global warming prevention? If global warming is a negative externality of the market place, then "distortions" in the market need to take place. One way to do this would be to reduce capital allocated to companies that are emitting lots of carbon and increasing capital allocated to companies that are emitting very little carbon. One problem with the method the government is employing is that political constraints force them to increase investment in American companies, and otherwise successful green foreign companies are being reduced in size. The other problem I can see is a generic complaint of the failures of top-down government management although Wired doesn't, I think, successfully demonstrate whether that is a problem here. Sometimes, top-down regulation is the best option; for instance, laws against stealing. Other political constraints may prevent better solutions although the question still remains whether this is an improvement over the status quo. I don't think the answer is quite so obvious.

Doc Merlin writes:

Um, dude... you are confusing the liberals and the progressives. They caucus together, but the progressives would have zero problem with this. The progressives are all in favor of state control and funding of business. Its the liberals that are against it.

SydB writes:

"Hedge funds historically used massive leverage to generate outsized returns, but if the trade turns against them, that same leverage multiplies their downside and can lead to financial ruin. In the case of the DOE loans or grants, the upside is multiplied and the downside remains the same since the most the equity investor can lose is the original investment."

Perhaps I'm the one confused, but the above sentence from that article seems confused. Why is he talking about hedge funds in an article on venture capital? Venture capitalist don't use leverage. They use risk. Large risk. Investing a lot of money in firms that will go bankrupt, assuming that they'll hit pay-dirt with at least one firm that will make up for those losses and then some (a lot of some).

Is the author of the article mixed up as I think?

Robert writes:

I am a liberal/progressive/whatever (Doc Merlin, I think you are wrong to suggest there are specific definitions associated with those terms, my understanding is that progressive is just a more red-state friendly term) and I was set to agree with Arnold, but spencer makes a pretty decent case actually.

I would say the biggest problem with that policy is that the DOE is choosing the companies instead of letting the market choose the company, but I suppose that's unavoidable when funding science? Maybe? I am not sure a prize-style grant would work as well given the investment needed.

I disagree that Americans get none of the upside. If this funding leads to a new Toyota based here instead of in China, for example, then I think a lot of Americans would benefit.

spencer writes:

P.S. -- do not forget that the internet was built by the pentagon.

I'm still waiting for you to explain away why per capita growth has been 50% higher since 1950 than it was from 1850 to 1950.

I've made this challenge to you before and you ignored it.

Are you just going to ignore this again. Or do you have some actual facts or data to support your thesis that big government has made us worse off?

SydB writes:

Spencer's right. Pentagon R&D largely created both the internet, digital communications technology, and integrated circuits. The commercial products we are familiar with are spin-offs of those efforts and were often created by individuals who were trained on military projects (or went to grad school on funding from the military).

Les writes:

I have a question for everyone that thinks government subsidies are necessary or desirable.

My question is: how did the U.S. become a prosperous industrial giant and the world's largest economy before World War I, when our federal government levied little or no income taxes, had hardly any national debt, and could not afford to pay subsidies?

And for extra credit, how did Hong Kong become so prosperous in the absence of government subsidies?

SydB writes:

"My question is: how did the U.S. become a prosperous industrial giant and the world's largest economy before World War I, when our federal government levied little or no income taxes, had hardly any national debt, and could not afford to pay subsidies?"

Largest supply of war natural resources bar none.

"And for extra credit, how did Hong Kong become so prosperous in the absence of government subsidies?"

The same way apple computer did. Perfecting what had already been developed.

SydB writes:

Correction: Strike war. Typo. "Largest supply of natural resources bar none." Of course, there's more than just that. But it's a great start.

Dain writes:

Isn't this issue explored in William Baumol's book on good and bad capitalism? Can somebody sum that up for me?

Isn't this also what is meant by "crony capitalism"? Perhaps it isn't crony if there is transparency and the ability to withdraw subsidies from failing firms at some point?

david writes:

@Les

Nobody, nobody remembers how the British brutally suppressed Communist dissidents in Hong Kong, or built masses of public housing for industrial neighborhoods, or provided British-style public healthcare (GASP!), or provided free public education (GASP AGAIN!).

All of the Asian Tigers had massive government action - government action that tended to include shooting their opposition, in fact, never mind the massive interventions in controlling housing and labor.

liberty writes:

"All of the Asian Tigers had massive government action - government action that tended to include shooting their opposition, in fact, never mind the massive interventions in controlling housing and labor."

You mean the centrally directed investment in Korea and Japan that led to their major crashes in the 1990s?

Being honest for a moment: do you really believe that the massive growth they experienced before that is more likely due to taxing the population and centrally directing it - or do you think it might have more to do with the fact that these countries for the first time in their existence actually began to engage in free trade, and let down some of the domestic trade and social barriers, centralized investment and crony capitalism of the old Empires?

- You know, the government centrally directs ALL investment in North Korea still today.

Sonic Charmer writes:

Of course 'progressives' are proud. This money is going to benefit 'green' people who work on 'green' things (i.e. 'progressives', or at least their friends or people 'progressives' can strongly identify with and would enjoy having dinner with), who are therefore The Good People. The aim of 'progressivism' (like that of most isms) is to ensconce The Good People in sinecures and ensure that society honors them, at the expense of The Bad People, as much as possible.

If some actual product comes out of the process at the end of the day, so much the better - an extra bonus. But it's not the goal. The goal is setting up the social arrangement which maximally values The Good People, i.e., 'progressives'.

david writes:

I think that the rapid growth of Japan and South Korea relied directly on industrial and tariff policy favoring designated export sectors, yes. This is orthodoxy in economic industrial theory.

You might have heard of something called export-led industrialization? You don't get there by opening borders and competing with the first world's massive amounts of capital, you get there by subsidizing exports heavily so that you can build up a competitive advantage in some industry. After all, many countries had freer trade in the postwar period and only some industrialized quickly.

South Korea, Taiwan, and Singapore also relied on violent suppression of labor unions to prolong their international export competitiveness, so this is hardly a 'liberal' approach to take. Just an FYI. Also, it is generally accepted that such policy began to recede in the 80s with S Korea and Taiwan dismantling their dictatorships and therefore allowing labor wages to rise rapidly. Singapore also removed wage and price controls in this period (it remains authoritarian, though).

I emphasize that this is the orthodox account and your ignorance of it is, well, startling. It is also exactly Kling's hated 'picking winners'; the usual libertarian counterargument is to note that many countries tried to pick winners and picked badly, so it can be argued that there is no a priori way to do so reliably. But arguing that four 'Asian Tigers' didn't achieve their growth by picking winners would make yours a fringe opinion.

Ryan Vann writes:

Spencer,

Why wouldn't GDP growth be higher in the future than the past, assuming increasing returns to technology?

I don't think the lack or inclusion of government would really make much of a difference on the overal growth trend. Also, why pick a 100 year period that saw two massive wars, and one giant depression to a 50 year period with none of those things?

Daublin writes:

Spencer, naming innovations not promoted by the governmentis like shooting fish in a barrel. Since we are on a blog, I'll mention: the Internet wasn't big until dial up came on the scene, the World Wide Web was put together by Tim Berners-Lee in his spare time, and the best search engine was put together by students working on their own time. Sure, in all of these things there was some sort of government money, if nothing else the post office. The innovation, however, was not chosen nor foreseen by the government, and in fact was at odds with what the government would have imagined.

It's chilling to imagine if we were forced to use the government version of any of these. Think about the land-line phone system versus Skype. Think about Xanadu, or Altavista. These are the kind of systems we'd be stuck with if the government was able to pick winners in these areas. With these electric car deals, we are subsidizing people at random. Probabilistically, we are subsidizing mediocrity.

SyB writes:

"The innovation, however, was not chosen nor foreseen by the government, and in fact was at odds with what the government would have imagined."

This is a truism. It applies to all innovators. They don't know how their products will be used. So you are not making an argument against government sponsored innovation.

Komori writes:

"Why is he talking about hedge funds in an article on venture capital? Venture capitalist don't use leverage. They use risk. Large risk."

Normally, yes. He's saying that since the DoE is picking up 80% of the tab, the venture capital firms are being granted significant leverage with no downside (the government eats the loss if it fails) and significant upside. Which naturally provides incentive to take much larger risks.

fundamentalist writes:

For those of you in love with the DOE, check out this article on the enormous waste of funds by the DOE over the past 40 years: http://www.thefreemanonline.org/featured/energy-policy-wisdom-or-waste/

Spencer: “semiconductors where NASA finance the major step of moving semis from an interesting laboratory experiment to commercial development.”

I don’t think that is historically accurate. Bell labs invented the transistor and commercialized it. But even if it is true that state agencies had some successes, it doesn’t mean that private enterprise couldn’t have done the same thing faster, better and cheaper, which is almost always the case.

Spencer: “Such investment is a significant reason why real per capita growth in the US has been about 50% higher since WW II than it was in earlier eras when government support of research and development was much more limited.”

That’s neither good history nor good economics. Government research wastes most of its money. What few successes it achieves are no reason to keep wasting the other 90%. Real per capita gdp growth is achieved by greater productivity, which has not been higher than it was pre-WWII. Greater productivity comes from capital accumulation and more capital intensive production.

The US had no state funding of research prior to WWII, yet we managed to raise the per capita gdp to a much greater degree than we have since WWII. How do you explain that?

In addition, the state gets its money primarily from taxes. Taxes hurt private business, so you’re praising the state for punching private business in the eye with one hand and then giving them some money with the other?

You want to look at Asian economies as models? They used our technology, most of which private enterprise developed. We gave them an enormous advantage. Besides, the fact that they succeeded with state aid and direction doesn’t mean that they would not have succeeded to an even greater degree had they chosen the free market route. China has had the greatest success of all Asian nations. How did they accomplish it? By increasing state investment? At the time they launched their miracle, the state was already doing all of the investment. No, China’s miracle came from the state getting out of the way and letting private enterprise work.

The fact that the state wastes far more wealth than it creates is not ideology; it’s historical fact supported by enormous amounts of data. Why point to a few successes and ignore the hundreds of failures?

David C writes:

"the World Wide Web was put together by Tim Berners-Lee in his spare time"

It should be noted that although that innovation wasn't created by the government, neither was it created by the free market. The inventor of the World Wide Web believed in the commons. Most of the innovation on the web has come from either small start-ups or open-source advocates. Since these are relatively simple innovations requiring very little capital to engineer, big business does not hold its own very well. In this regard, spencer may be correct that free markets fail to adequately invest in R&D. However, that doesn't lead to the conclusion that the government should throw a bunch of money away figuring out how to kill people. And certainly when a government is spending hundreds of billions every year researching something, occasional positive outcomes should surface. That doesn't make the military any less wasteful.

David writes:

I have posted this before, but here we go again: from the Nov. 10 2008 issue of Chemical & Engineering News. Robert Fri was EPA's first deputy administrator. Recall that NASA and DoD technology investments are generally made in support of their particular mission. The size or necessity of those missions are a separate issue. DoE's investments are made to rescue society from itself, or at least rescue polar bears from society.

Begin excerpt...
In times of energy stress, new technologies become “the holy grail of energy policy,” Fri noted. However, he added, government- particularly the Department of Energy- has had a “checkered past” of bringing government-backed technologies to the market.
“The government is very good at starting energy projects that it believes will solve energy problems, but it is not very good at generating the intended results”, Fri said. He illustrated his point by noting the failure of several government-supported large-scale projects during the 1970s: the synthetic fuels program, breeder reactor development, and Nixon’s push for pollution-free cars.
Nearly a decade ago, Fri oversaw a National Research Council study that examined 25 years of DOE-funded R&D. It found that 75% of the research returns on investments from energy R&D projects could be traced to three projects that took up a mere 0.03% of the overall R&D spending. In addition, the study found that half the overall investments generated no returns. The three most successful R&D projects- electronic ballast for fluorescent lighting, energy-efficient windows, and better refrigeration- appeared mundane when they were selected for funding, according to Fri.


David C writes:

Re: David

Here's what Robert Fri's current assessment of the Department of Energy is:

"The major reason is that the private sector does not now have a strong incentive to develop this technology, and will not until a carbon price is established. ... The history of energy research developed in our retrospective study shows that government programs with clearly focused goals can yield substantial benefits. The converse is true, as well; a lack of focus is often associated with lackluster results. While in its early days, DOE programs often lacked this focus, in my opinion it has improved greatly. I commend the Climate Change Technology Program strategic plan as an excellent roadmap for actions that DOE and other departments can constructively take."

Source: http://www7.nationalacademies.org/ocga/testimony/Energy_Research_and_Development.asp

Les writes:

David responded to my message, but did not answer my question.

No problem: no answer speaks for itself. Silence is conspicuous.

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