Friday, May 25, 2012

Public Funds for Private Firms: Obama’s Record

The Washington Post has a great opinion piece about the problem with federal tax money going to private businesses: Forget Bain — Obama’s public-equity record is the real scandal - The Washington Post.  Excellent editorial, very worthwhile.

My point here is not to attack Obama overall - this is not a partisan website - but rather to address this species of privatization and intermingling of government with firms in the market.  For those who consider themselves capitalists or believers in free markets, it's good to remember that Adam Smith originally wrote The Wealth of Nations partly to attack the system of state-endorsed monopolies and government-supported private businesses of his day.  The current practice of channeling millions of dollars from the public coffers to private firms runs contrary to the original intent of free-market capitalism.  Here are some excerpts from the Post editorial:
Since taking office, Obama has invested billions of taxpayer dollars in private businesses, including as part of his stimulus spending bill. Many of those investments have turned out to be unmitigated disasters — leaving in their wake bankruptcies, layoffs, criminal investigations and taxpayers on the hook for billions. 
And he concludes:

Now the man who made Solyndra a household name says Mitt Romney’s record at Bain Capital “is what this campaign is going to be about.” Good luck with that, Mr. President. If Obama wants to attack Romney’s alleged private equity failures as chief executive of Bain, he’d better be ready to defend his own massive public equity failures as chief executive of the United States.

He then offers several examples.  Raser Technologies received a $33 million federal grant, but is now in bankruptcy, has a handful of employees, and owed over a million in back taxes.  ECOtality received $126.2 million in taxpayer money and recently announced that it will not be profitable anytime in the foreseeable future, and they're under investigation for insider trading.  Nevada Geothermal Power (NGP) received a $98.5 million taxpayer loan guarantee but is no longer expected to be able to stay in business. First Solar got more than $3 billion in loan guarantees from two states (CA and AZ) and recently announced $402 million in losses.   And it goes on.  

As I have said before, government subsidies for businesses distort markets, reduce efficiency, foster monopolies, and undermine competition.  These government programs lead to a vicious cycle of dependence (they need repeated infusions of capital and subsidies to stay afloat); there is little incentive to innovate, take risks, or work hard when the money was not earned, but bestowed by politicians.  

And it's not just that the recipients waste or lose the money: infusing one firm in the marketplace with millions or billions in cash or loan guarantees ultimately puts the other firms in that arena at a disadvantage, so they are not as profitable, they're less attractive to investors or talented employees, and so on - in other words, the subsidies for one firm generate below-market returns and results for the other firms that are legitimately competing in the marketplace.  Obama's subsidies can also cause specialized inflation, affected the prices or costs associated with the suppliers or distributors of the firms that receive millions in free money.

 - Dru Stevenson

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