Tuesday, September 20, 2011
BS Alert by Brett Narloch
Issue: Economic Development
In May 2010, President Barack Obama visited a solar power panel manufacturing company (Solyndra, LLC) in California touting his “green” agenda. The federal government guaranteed Solyndra $535 million in loans to construct a new plant so they would be able to compete against the other major solar power panel manufacturing companies around the world.
Unfortunately, it did not work. In August, Solyndra fired 1,100 employees and planned to file for Chapter 11 bankruptcy. Since that announcement, the media has uncovered warnings from auditors from before the loan guarantees were approved suggesting that Solyndra might not be a good investment. Charges of cronyism have now become prevalent from Republicans in Congress who are now investigating the matter.
Republican US Congressman Paul Ryan said, “This is industrial policy and crony capitalism at its worst. It’s exhibit A for how this kind of economic policy doesn’t work.”
The problems with this approach to economic development are obvious.
- No matter how smart bureaucrats are, they cannot make good decisions about what future consumers are going to want; therefore, they cannot efficiently allocate resources.
- Politics becomes the prime motivator in the decision-making process, not economics or science.
- Every dollar backed by the federal government is a dollar that was first taken out of the private sector or printed out of thin air hurting the economy in the name of helping it.
These are the main reasons why central economic planning does not work.
So what does this have to do with North Dakota? Well, this type of central economic planning has become the hallmark of the state legislature and executive branch for the past decade and has been universally praised by both major political parties and each party’s leadership.
The state backs loans through the Bank of North Dakota, the Agriculture Products and Utilization Commission (APUC) gives money to private firms in North Dakota, there are numerous bio-fuel programs designed to subsidize production, and the list goes on and on.
The North Dakota Commerce Department’s budget and staff have grown dramatically over the past decade as the state government gets more involved with subsidizing certain industries. Their budget now tops $130 million. Of course, anyone who understands economics knows that every dollar given to the Commerce Department was taken from profitable businesses and people. (Why on Earth are we taking money from businesses that clearly serve the public well and giving it to companies who have nothing more than good connections or are operating in politically favorable industries?)
Let me put Solyndra’s loan into perspective. Solydra’s loan guarantees amounted to $535 million, which would be the equivalent of North Dakota backing loans for a company totaling about $475,000 if you compare the size of the loan to each government’s budget. The ND Development Fund is described as follows:
The fund provides "gap financing" through loans and equity investments not available from most conventional lenders and is available to any primary-sector business with the exception of production agriculture. The Development Fund also administers the Regional Rural Revolving Loan Fund, which provides funding for primary-sector projects located in a community of less than 8,000 in population or located more than five miles outside the city limits.
The fund is a secondary source of financing, subordinate to private sources. If a business can't handle added debt, the Development Fund can take an equity financing position.
A quick look at their records reveals that two companies in North Dakota received loan guarantees of $500,000 from the fund in 2010 – there were dozens of smaller guarantees. That is the rough equivalent of the federal government giving loan guarantees of $535 million.
Most North Dakotans in the political class (Republicans and Democrats) would argue that North Dakota does business differently than the federal government. We have a lot better handle on which companies will succeed and which ones will fail. Of course, they’ll write-off examples such as Web-Smart, Alien Technology, and dozens of others as small, rare examples.
But the point I’m trying to make is that the same philosophy that guides President Obama’s economic policies is the same philosophy that guides Gov. Dalrymple’s and the legislature’s policies: government can and should take money from some and give it to their buddies in the private sector.
An argument can certainly be made that the federal government’s actions are unconstitutional, but what makes North Dakota’s “economic development” policies worse – in this case – is the fact that North Dakota’s constitution specifically prohibits these activities (Article X, Section 18). So not only are we given policies based on politics rather than economics, we have to break the law to enact such policies. This type of Obamanomics is fully embraced by our state government. That’s BS.