When Government Gambles Taxpayers Lose

Government support for green business is great, but government should avoid making really large bets on companies that are far out of proportion to what the original investors themselves are putting into the ventures. And the U.S, government, these days, is making a lot of those risky bets.

Take the $110 million in regional, state and federal incentives granted to SAGE Electrochromics, a manufacturer of so-called “smart windows.” The technology turns windows dark at the flick of a switch, allowing buildings to block out heat and save on electricity for air conditioning. While the incentives, which includes $72 million in loan guarantees fro the U.S. Department of Energy, will help the company build a manufacturing facility in Minnesota, the government is choosing a particular approach to darkening windows that may or may not prove commercially viable on a large scale. Currently the windows are primarily used in luxury residences.

The government subsidies become problematic when they compete with alternative approaches to the same technology. Such alternatives are popping up across the country including here in Seattle. Vitriosic, for example, has developed a technology that it plans to license to glass manufacturers that will allow large glass companies to build smart windows at a fraction of SAGE’s costs. Yet companies like Vitriosic will have a tougher time succeeding because of the subsidies that SAGE is receiving.

Another example is the $465 million in U.S. government loans and loan guarantees that have been granted to Tesla, the tiny electric car start-up. There changes of failure are incredibly high. It’s hard to imagine Tesla outcompeting over the longterm against the likes of GM, Geely in China and Nissan in Japan. And while the downside risk is high, the upside opportunity is limited. The company would have to be an overwhelming success to bring a strong return in terms of environmental impacts.

I don’t agree with a recent economist article that trashes all industrial policy. There have been successful cases of industrial policy in Japan, Korea and China. Examples would be machine tools in Japan and semiconductors in Korea and many sectors in China. But to be effective, these policies have to be carefully crafted. Experience suggests governments should support a range of technologies and companies rather than focusing too heavily on a single company in a particular sector. And typically the investments should be relatively small relatively to the total investments being made by the company’s founders. That’s how Washington Technology Center is approaching the issue. In the case of Tesla, the U.S. government stand to lose half a billion if the company collapses. As one writer points out, Tesla could well be the next DeLorean: a well-hyped, overpriced car that does more to fuel the imagination than change the industry. And just as with the DeLorean, the U.S. taxpayer will end up paying the bill.