Last week on National Journal’s Energy Experts Blog, 16 wonks addressed the question: ”Is Washington Ready for a Carbon Tax?” Your humble servant argued that Washington is not ready — unless Republicans are willing to commit political suicide. That’s no reason for complacency, because spendaholics have on occasion gulled the Dumb Party into providing bi-partisan cover for unpopular tax hikes. President G.H.W. Bush’s disastrous repudiation of his ‘read-my-lips, no-new-taxes’ campaign pledge is the best known example.

To help avoid such debacles in the future, I will recap the main points of my National Journal blog commentary. Later this week, I’ll excerpt insightful comments by other contributors.

Nearly all Republicans in Congress have signed the Taxpayer Protection Pledge, a promise not to increase the net tax burden on their constituents. Although a “revenue neutral” carbon tax is theoretically possible, the sudden interest in carbon taxes is due to their obvious potential to feed Washington’s spending addiction. If even one dollar of the revenues from a carbon tax is used for anything except cutting other taxes, the scheme is a net tax increase and a Pledge violation. Wholesale promise-breaking by GOP leaders would outrage party’s activist base. 

Even if the Taxpayer Protection Pledge did not exist, the GOP is currently the anti-tax, pro-energy alternative to a Democratic leadership that is aggressively anti-energy and pro-tax. Endorsing a massive new energy tax would damage the product differentiation that gives people a reason to vote Republican. Recognizing these realities, House GOP leaders recently signed a ‘no climate tax’ pledge.

That’s good news. But this is a season of fiscal panic and I was there (in 1990) when the strength of Republicans failed. Perhaps the best time to kick carbon taxes is when they are down. So let’s review additional reasons to oppose a carbon tax.

Carbon taxes are regressive, imposing a larger percentage burden on low-income households. If Republicans support a carbon tax in return for cuts in corporate or capital gains taxes (a popular idea in some circles), they will be pilloried — this time fairly — for seeking to benefit the rich at the expense of the poor.

If, on the other hand, the tax provides “carbon dividends” to offset the impact of higher energy prices on poor households, it will create a new class of welfare dependents. Guess which party is better at organizing people on welfare?

Carbon taxes pose an existential threat to the development of North America’s vast coal, oil, and natural gas deposits — one of the few bright spots in the economy. The core purpose of a carbon tax is to reduce and, ultimately, eliminate carbon doxide-emitting activities. The tax ‘works’ by shrinking the economic base on which it is levied. To keep revenues up, carbon tax rates must continually increase as emissions decline. Likely result: an exodus of carbon-related capital, jobs, and emissions (“carbon leakage”). Problem: Nobody knows how to run a modern economy on cellulose, wind turbines, and solar panels. Bipartisanship on carbon taxes means co-ownership of U.S. economic decline.

In umpteen hearings on the Solyndra debacle, Republicans excoriated the Obama administration for trying to pick energy market winners and losers. A carbon tax is an even more ambitious green industrial policy than the $34.5 billion in loan guarantees  lavished by the Department of Energy (DOE) on a few dozen renewable energy projects. Carbon taxes attempt to pick and losers across the entire economy, handicapping all firms that produce or rely on carbon-based energy. Indeed, central to Solyndra’s business plan and DOE Secy. Chu’s green tech strategy was the bet that Congress would enact cap-and-trade, the regulatory surrogate for a carbon tax.

Some economists say government should tax ‘bads’ like emissions rather than ‘goods’ like labor and capital. This is sloppy thinking. In technical economic terms, only finished products and services are ‘goods.’ Labor and capital are inputs, production factors, or costs. Energy too is a key input. Without energy, most labor and capital would be idle or not even exist. About 83% of U.S. energy comes from carbon-based fuels. So a carbon tax also taxes what these economists loosely call ‘goods.’ Pretending that carbon taxes only tax emissions and nothing of value is free-lunch economics — a recipe for failure and worse.

Some speculate about a grand bargain in which carbon taxes replace carbon regulations — everything from the EPA’s greenhouse gas emission standards to California’s cap-and-trade program to State-level renewable electricity mandates. The EPA, the California Air Resources Board, the major environmental organizations, and the renewable energy lobbies have spent decades building the regulatory programs they administer or influence. They want to add carbon taxes to carbon regulation, not substitute one for the other. Talk a grand bargain is a ploy designed to lure gullible Republicans to the negotiating table. Few if any of the Left’s regulatory sacred cows would be traded away. In the meantime, carbon tax negotiations would divide GOP leaders from their rank and file and demoralize the party’s activist base.

The backlash against GOP leaders’ complicity would be swift and severe. Yet for all the economic pain inflicted and political damage incurred, they would accomplish no discernible environmental gain. As hurricane expert Roger Pielke Jr. points out, even under IPCC assumptions, changes in energy policy “wouldn’t have a discernible impact on future disasters for the better part of a century or more.” Similarly, also using IPCC assumptions, Chip Knappenberger of the Cato Institute Center for the Study of Science calculates that even if the U.S. eliminated all CO2 emissions tomorrow, the impact on global temperatures would be a reduction ”of approximately 0.08°C by the year 2050 and 0.17°C by the year 2100 — amounts that are, for all intents and purposes, negligible.”

Under a carbon tax, the U.S. would keep emitting billions of tons of carbon dioxide annually for a long time – otherwise the tax wouldn’t raise much revenue. So the notion that carbon taxes can measurably reduce extreme weather risk or climate change impacts within any policy-relevant timeframe is ludicrous.

Earlier this week, the Treasury Department’s Office of Inspector General (OIG) released an audit report on Treasury’s role in reviewing, in March 2009, the Department of Energy’s (DOE’s) $535 million loan guarantee to Solyndra, the solar panel manufacturer that filed for bankruptcy in September 2011. Before going belly up, Solyndra burned through $528 million of the $535 million it received from Treasury’s Federal Financing Bank (FFB). Nearly all of the defaulted loan will be paid off by American taxpayers.

An agency’s OIG is supposed to be a watchdog guarding the public fisc from waste, fraud, and abuse. Watchdogs bark and even bite. This watchdog pussyfoots.

The title of the audit report is “Consultation on Solyndra Loan Guarantee Was Rushed.” Well, it was that. Treasury signed off on the Solyndra loan guarantee only two days after being asked on March 17, 2009 to vet it so that DOE could issue a press release touting the loan on the morning of March 20.

A more accurate title would be ”Consultation on Solyndra Loan Guarantee Was Half-Assed.” Granted, government reports must eschew the use of idiomatic pejoratives. Nonetheless, the OIG did not have to make excuses for Treasury and DOE. The report ascribes to regulatory vagueness derelictions more reasonably attributed to negligence, incompetence, and pliancy in the face of political pressure.    

DOE issued the Solyndra loan guarantee under Title XVII of the 2005 Energy Policy Act, as amended by the 2009 American Recovery and Reinvestment Act (a.k.a. the Stimulus Program). Under the Act, DOE is authorized to make loan guarantees to companies investing in ”innovative” “clean” and “renewable” technologies after consultation with Treasury. The Act itself does not specify the nature of the consultation, but, as the OIG points out, the regulations implementing the Act (10 CFR § 609) require that consultation with Treasury be concurrent with DOE’s review process:

Concurrent with its review process, DOE will consult with the Secretary of the Treasury regarding the terms and conditions of the potential loan guarantees.

However, reports the OIG, “In the case of Solyndra, Treasury was not consulted on the terms and conditions of the loan transaction prior to or concurrent with DOE’s review process. Furthermore, the consultation that did occur was rushed.”

How rushed? Treasury was not consulted about the Solyndra loan guarantee until March 17, 2009, after DOE and the Office of Management and Budget (OMB) had already approved it. OMB asked Treasury to sign off on the loan guarantee that day. Treasury asked for more time. “DOE originally agreed to extend Treasury’s review time to noon on March 20, 2009. However, Treasury then agreed with a DOE request to expedite the review to March 19, 2009, so that the press release could be issued on the morning of March 20, 2009″ (p. 6).

Treasury did express “concerns” about the loan guarantee in an email dated March 19, 2009, in particular the amount of skin Solyndra’s private investors had in the game:

. . . this should have been 65% debt and 35% equity instead of 73% debt and 27% equity . . . . DOE says their hands are tied on this issue . . . They are under pressure to complete a deal [p. 7].

Along the same lines, following a conference call with DOE, another Treasury email states:

. . .we pressed on certain issues as why we aren’t providing only a partial guarantee and covering a smaller percentage of eligible project costs, but the train really has left the station on this deal [p. 7].

So Treasury’s review was exceedingly rushed to meet the political exigency of getting out a press release. Treasury was brought into the process too late in the game to change the loan’s terms and conditions. Too late to minimize taxpayers’ risk if Solyndra went bust, which it did.

“Treasury told us that all comments raised were addressed by DOE” (p. 7), and “Treasury officials told us that this time period [one day] was sufficient in the case of its review of the Solyndra loan guarantee” (p. 10), the OIG reports without objection. Huh? If treasury’s review had been “sufficient,” taxpayers today might not be on the hook for a half billion-dollar loan default.

To the OIG, the problem is not negligence, incompetence, or undue political influence but statutory and regulatory vagueness regarding Treasury’s consultative role. ”After numerous interviews with Treasury officials and evaluation of available documentation, it still remains unclear as to how Treasury delineates a consultation with regard to DOE’s LPG [loan guarantee program],” the OIG reports.

Amazing. Let’s grant that “Neither the Act nor 10 CFR § 609 defines or explains ‘consultation’ or ‘consult’ on the part of Treasury” (p. 8). Nonetheless, Treasury officials who review loan guarantees are supposed to know how to do their job, and they are supposed to be vigilant in the taxpayer’s interest. Treasury’s lack of a well-defined process for reviewing federal loan guarantee applications is itself scandalous!

Treasury’s attitude toward its consultative responsibility could fairly be described as lackadaisical. Only five of 11 officials asked to review the documents did so, and one or more were clueless:

Treasury’s Office of Policy and Legislative Review (OPLR) was assigned to coordinate Treasury’s consultation on DOE’s LGP for Solyndra. Subsequent to the assignment, the Director of the OPLR contacted 11 individuals, asking them to review Solyndra documents. In the end, only 5 individuals reviewed the documents and provided comments. Strangely, not everyone we spoke with was aware of being officially part of the consultative team. [p. 9]

Treasury was also slipshod about record keeping, thanks to which we may never know how DOE addressed the concerns Treasury raised during its “sufficient” one-day review of the Solyndra loan:

The Government Accountability Office (GAO) established standards for internal control in the federal government. In its guidance, GAO provideds that internal control and all transactions and other significant events need to be clearly documented, and the documentation be readily available for examination. . . .All documentation and records should be properly managed and maintained. . . .Ultimately, Treasury did perform a consultation on the Solyndra loan but was unable to provide sufficient documentation to support its review. . . .To support its review, Treasury officials provided e-mails and a brief memorandum summarizing a conference call with DOE dated March 2010. However, that memorandum was finalized 1 year after the conference call took place. . . .So, while Treasury officials told us that they had sufficient time to review the Solyndra documents, and all pertinent questions and concerns were adequately addressed, they maintained no documentation of DOE’s responses to the questions and concerns raised. [pp. 10-11]

But surely, after it was clear Solyndra was in financial trouble and DOE had to give the company an additional $75 million to keep it afloat and subordinate the government’s (i.e. taxpayers’) interest to that of private investors, Treasury scrutinized these changes in the loan’s terms and conditions? Actually, no. In this case, Treasury performed no review at all. Again, the OIG suggests, the fault lies neither with Treasury nor DOE but with lack of definitional clarity. You see, it all depends on whether “changes” in a loan rise to the level of ”deviations” — or whether “deviations” add up to “substantial change”:

Treasury was not consulted on the restructure and it was uncertain if Treasury should have been consulted in accordance with CFR § 609.18 dealing with deviations from the financial terms of a loan guarantee. According to CFR § 609.18, “DOE will consult with OMB and the Secretary of the Treasury before DOE grants any deviations that would constitute a substantial change in the financial terms of the Loan Guarantee Agreement and related documents.” However, we were told by Treasury officials that it was unclear if Solyndra’s restructure was considered a deviation. [pp. 8-9]

If you want a good laugh, try to imagine the head loan officer of a private bank resorting to such definitional hair splitting to avoid reviewing a $75 million loan restructuring agreement.

The real lesson of the OIG’s investigation is not that we need clearer regulatory definitions of “consult” and “deviation.” Rather, it is that government lending and loan guarantee programs are inherently susceptible to waste, negligence, and political manipulation, because government loan officers are playing with other people’s money.

Henry Hazlitt, author of Economics In One Lesson, arguably the best introduction to economics ever written, nailed it decades ago:

The proposal is frequently made that the government ought to assume the risks that are “too great for private industry.” [1]  This means that bureaucrats should be permitted to take risks with the taxpayers’ money that no one is willing to take with his own.

Such a policy would lead to evils of many different kinds. It would lead to favoritism: to the making of loans to friends, or in return for bribes. It would inevitably lead to scandals. It would lead to recriminations whenever the taxpayers’ money was thrown away on enterprises that failed. . . .

But we shall pass over all these evils for the moment, and concentrate on just one consequence of loans of this type. This is that they will waste capital and reduce production. They will throw the available capital into bad or at least dubious projects. They will throw it into the hands of persons who are less competent or less trustworthy than those who otherwise would have got it. For the amount of real capital at any moment (as distinguished from monetary tokens run off on a printing press) is limited. What is put into the hands of B cannot be put into the hands of A. . . .

[Private investors] may sometimes make mistakes. But for several reasons they are likely to make fewer mistakes than government lenders. In the first place, the money is either their own or has been voluntarily entrusted to them. In the case of government-lending the money is that of other people, and it has been taken from them, regardless of their personal wish, in taxes. The private money will be invested only where repayment with interest or profit is definitely expected. This is a sign that the persons to whom the money has been lent will be expected to produce things for the market that people actually want. The government money, on the other hand, is likely to be lent for some vague general purpose like “creating employment” [2]; and the more inefficient the work — that is, the greater the volume of employment it requires in relation to the value of the product — the more highly thought of the investment is likely to be.

[1] Such as investments in the ”clean tech industries of the future” are often said to be.

[2] Creating “green jobs,” in today’s parlance.

Even the liberal Washington Post, which hasn’t endorsed a Republican for President since 1952, seems to be souring on the Obama Administration’s failed energy programs, saying they were “infused with politics at every level.” As it noted in discussing the Solyndra scandal: “Obama’s green-technology program was infused with politics at every level, The Washington Post found in an analysis of thousands of memos, company records and internal ­e-mails. Political considerations were raised repeatedly by company investors, Energy Department bureaucrats and White House officials. The records, some previously unreported, show that when warned that financial disaster might lie ahead, the administration remained steadfast in its support for Solyndra,” which was owned by major Obama backers, like George Kaiser.

As law professor Glenn Harlan Reynolds notes, “all the ‘stimulus’ and ‘green energy’ stuff was never anything but a program to put taxpayer money into the hands of cronies and supporters.”

The Obama Administration hastily approved the  taxpayer subsidies for Solyndra despite obvious danger signs and warnings from accountants about the company’s likely collapse, the misgivings of agency officials, and the company’s mismanagement and lousy-quality products. (Solyndra executives are now pleading the 5th Amendment to avoid disclosing incriminating information.) The Obama administration was determined to shovel taxpayer money to its cronies as fast as it could. As an Obama fundraiser and Solyndra stakeholder exulted,  “there’s never been more money shoved out of the government’s door in world history and probably never will be again than in the last few months and the next 18 months. And our selfish parochial goal is to get as much of it . . . as we possibly can.”  “At the time Solyndra received its grant, Vice President Joe Biden declared that the Solyndra investment is ‘exactly what the [the stimulus package] is all about.’”

While diverting taxpayer money away from productive and efficient businesses to corporate-welfare recipients controlled by political cronies, the Obama Administration is busy wiping out jobs through thousands of pages of counterproductive regulations.  Some of these new regulations are designed to spawn lawsuits that will enrich trial lawyers at businesses’  and consumers’ expense.

Obama appointees at the EEOC are busy harassing businesses that hire and fire based on merit, thus discouraging employers from hiring or expanding operations, and the EEOC is bringing costly, unjustified lawsuits against businesses.  The 2010 healthcare law imposes financial burdens — some of them large, and others difficult to calculate — on the nation’s employers, resulting in some business owners deciding not to expand or hire new employees.

Many businesses are also suffering from the effects of the Dodd-Frank financial “reform” law, a 2,315 page monstrosity that makes it harder for small businesses to obtain credit, and also outsources and wipes out jobs in the financial sector. Even one-time Obama supporters in the business community have grown disenchanted: Democratic businessman Steve Wynn called Obama“the greatest wet blanket to business and progress and job creation in my lifetime,” saying that “the business community in this country is frightened to death of the weird political philosophy of the President of the United States. And until he’s gone, everybody’s going to be sitting on their thumbs.”

The Obama administration has sought to temporarily pump up the economy with stimulus spending paid for with massive deficits, but as the Congressional Budget Office has noted, the stimulus package will actually shrink the economy in the long run, so it will not be able to offset the economic drag resulting from all of the Obama administration’s new regulations and red tape.

At today’s House Energy and Commerce Oversight and Investigations Subcommittee hearing, “From DOE Loan Guarantee to FBI Raid: What Solyndra’s Executives Knew,” the witnesses, Solyndra President and CEO Brian Harrison and Solyndra VP and CFO W.G. Stover, invoked their Fifth Amendment right against self-incrimination in response to every question asked by Committee members. Harrison and Stover told the committee nothing about what Solyndra’s executives knew.

Nonetheless, the hearing spotlighted information that can only build public support for the Committee’s ongoing investigation.

As part of the hearing record, the Committee released a June 23, 2011 document, “Exceeding Expectations: Solyndra Today,” that makes enthusiastic claims about the company’s progress and prospects that are difficult to reconcile with its decision to file for bankruptcy just nine weeks later:

Solyndra, one of the only volume solar manufacturers in the United States, continues to make excellent progress to the company’s overall annual strategic plan, while meeting the company’s technical, cost and performance milestones. The factory is ramping and Solyndra is hiring employees today, creating jobs at the company, within our primarily domestic supply chain, and through integrators and installers implementing our systems on rooftops in the U.S. and around the world.

Solyndra does not publicly release quarterly results but is on track for this year. The ability to command a slight price premium as a result of substantial differentiation and product benefits continues and our cash production cost per watt is dropping rapidly at pace with the industry.

The Committee also released a July 13, 2011 letter from Solyndra CEO Brian Harrison to Subcommittee Chair Cliff Stearns (R-Fla.) and Ranking Member Diana DeGette (D-Colo.) extolling the company’s successes such as the growth in revenues from $6 million in 2008 to $140 million in 2010 with revenues expected to double in 2011. It is hard to square this information with the company’s imminent collapse. At a minimum, other more pertinent information was not disclosed.

In addition, the Committee released an email dated september 10, 2011 from Solyndra’s counsel pledging that Harrison would “appear voluntarily and answer the Committee’s questions.” The email references a request, honored by the Committee, to postpone the hearing so that Harrison could concentrate on managing asset sales to minimize taxpayer losses. But then three days ago, Chairman Stearns said in his opening statement, Solyndra’s counsel informed the Committee that Harrison and Stover would decline to answer questions.

In their opening statements, Republican members reiterated the many unanswered questions sparked by Solyndra’s bankruptcy: Why did the Department of Energy (DOE) approve a $535 million loan guarantee to a company whose liquidity was a major concern since 2009? Did political pressure from the White House for a photo-op and green jobs PR tip the scales at DOE and the Office of Management and Budget (OMB) in favor of approving the loan guarantee? Why did DOE restructure Solyndra’s loan even though allowing the company to fail sooner would have been less costly to taxpayers? Why were taxpayers subordinated to private investors in the restructuring, in apparent violation of the law? To what extent were any of these decisions influenced by President Obama’s political ties to Solyndra investor George Kaiser?

Questioning Solyndra’s CEO and CFO under oath might have helped the Committee get to the bottom of those issues. But with the Justice Department (DOJ) investigating Solyndra, Harrison and Stover would run the risk of self-incrimination if they testified as promised. This, however, sets the stage for a new line of speculation about possible wrongdoing by the White House. Committee member Morgan Griffith (R-Va.) wondered whether DOJ launched its investigation just to keep the Solyndra execs from testifying:

In light of the fact that the Justice Department got a search warrant for your records shortly after the unflattering emails from within the Obama administration were given to this committee, do you feel you have been unfairly targeted by the Obama administration Justice Department in order to keep you from testifying here today? Or do you believe the Justice Department’s investigation in this matter is a smokescreen, by the administration, to shield the administration’s gross negligence in giving you and possibly others questionable loan guarantees in the first place? Or do you believe it is a smokescreen for the administration’s decision to subordinate $75 million of taxpayer money against the clear meaning of the law?

Tomorrow, the House Energy and Commerce Committee will hold its second hearing on Solyndra, the manufacturer of innovative non-silicon-based solar panels that borrowed $527 million only to file for bankruptcy, shutter its brand new Freemont, Calif. factory, and lay off 1,100 employees on September 6. Expect Committee Democrats to blame China and the allegedly unforeseen fall in the price of conventional silicon-based solar panels for the debacle.

That’s the line the Department of Energy’s (DOE) witness, Jonathan Silver, took at the Committee’s first (September 14) Solyndra hearing, noting China’s provision of more than $30 billion in subsidized financing to its solar manufacturers, which rapidly dropped silicon prices, “taking Solyndra, and many industry analysts, by surprise.” DOE’s blog, Energy.Gov, had already adopted this explanation on August 31, the day Solyndra announced it would file for bankruptcy.

Similarly, Solyndra’s August 31 announcement coyly cited the “resources of larger foreign [i.e. Chinese] manufacturers” and a “global oversupply of [mainly Chinese] solar panels” as factors foiling the company’s business plan. Solyndra’s ex-employees have applied to the Department of Labor (DOL) for aid under the Trade Adjustment Assistance (TAA) program, claiming that China put them out of work. If DOL approves the application, Solyndra’s former workers will receive allowances for job retraining, job searching, and health care for up to 130 weeks, or about $13,000 per employee. Blogger Scott Linicom decries such double dipping:

So to recap: massive government subsidies created 1,100 “green jobs” that never would’ve existed but for those massive government subsidies.  And when those fake jobs disappeared because the subsidized employer-company inevitably couldn’t compete in the market, the dislocated workers blamed China (instead of what’s easily one of the worst business plans ever drafted) in order to receive . . . wait for it . . . more government subsidies. Behold, the Circle of Government Life.

Whether it’s Solyndra execs and DOE officials trying to save face, ”progressives” defending the honor of green industrial policy, or former employees looking for more taxpayer freebies, they all would have us believe that Solyndra’s $535 million loan guarantee was a good bet at the time it was made. They need a scapegoat for Solyndra’s crash, so they blame China. Indeed, some (e.g. Grist) claim Solyndra’s collapse shows that the U.S. government isn’t doing enough to help our “clean tech” companies “compete.” Balderdash.    

Solyndra’s business plan was dubious from the getgo. Committee Ranking Member Henry Waxman (D-Calif.) claims that “under both the Bush Administration and the Obama Administration, DOE officials strongly backed Solyndra.” In fact, on January 9, 2009, Bush’s DOE declined to approve Solyndra’s loan guarantee application, citing several “unresolved” issues including lack of an independent study of the company’s long-term prospects, questions about the company’s financial strength, and concern about the scale-up of production assumed in the business plan (Documents Entered into Record, p. 1).

As for the allegedly unanticipated glut in rooftop solar panels, which made Solyndra’s thin-film panels uncompetitive, it was the topic of a January 12, 2009 USA Today article. In an email dated January 13, 2009, Bush DOE staff cited the glut, reported in USA Today, as the reason for the DOE Credit Committee’s “unanimous decision not to engage in further discussions with Solyndra at this time” (Documents Entered into Record, p. 2).

Emails obtained by the Committee suggest that White House pressure for quick approval may have compromised the depth and quality of DOE and Office of Management and Budget (OMB) review of Solyndra’s loan application (Documents Entered into Record, pp. 4, 11, 12):

• “There’s a recurrent problem with the [White House] scheduling office looking for events [loan guarantee approvals] before they are ready to go.” (March 10, 2009)
• “As long as we make it crystal clear to DOE that this is only in the interest of time, and that there’s no precedent set, then I’m okay with it. But we also need to make sure they don’t jam us on later deals so there isn’t time to negotiate those, too.” (August 27, 2009)
• “We have ended up in the situation of having to do rushed approvals on a couple of occasions (and we are worried about Solyndra at the end of the week). We would prefer to have sufficient time to do our due diligence reviews and have the approval set the date for the announcement rather than the other way around.” (August 31, 2009)

DOE approved the Solyndra loan guarantee on September 4, 2009 — an event timed to coincide with the ground breaking ceremony for the company’s Freemont, California factory. Speakers included DOE Secretary Steven Chu, California Gov. Arnold Schwarzenegger, and Vice President Biden (via satellite feed). But a scant two weeks before, on August 19 and 20, emails between DOE staff note that when Fitch modeled Solyndra’s cash flow over time, the company ”runs out of cash in Sept. 2011 even in the base case without any stress. This is a liquidity issue” (Documents Entered into Record, pp. 8-9). Rarely has a government business forecast been so accurate!

In addition to the liquidity problem, it is unclear whether Solyndra had a viable plan to reconcile its production costs and sale prices. According to an ABC News analysis:

While Energy Department officials steadfastly vouched for Solyndra — even after an earlier round of layoffs raised eyebrows — other federal agencies and industry analysts for months questioned the viability of the company. Peter Lynch, a longtime solar industry analyst, told ABC News the company’s fate should have been obvious from the start.

“Here’s the bottom line,” Lynch said. “It costs them $6 to make a unit. They’re selling it for $3. In order to be competitive today, they have to sell it for between $1.5 and $2. That is not a viable business plan.”

Along the same lines, ELECTRO IQ (November 8, 2010) posed the question: “Can Solyndra reconcile cost-per-watt and sale price?” From the article:

In the last year, there have been numerous stories about CIGS [copper idium gallium selenide] thin-film manufacturer Solyndra’s troubles — a pulled IPO, a restructuring of the executive team, and, most troubling, the high cost of module production. (In an S-1 filing a year ago, the company said its average sales price was over $3.20 a watt, about 65% more than leading crystalline-silicon PV manufacturers. Its cost of manufacturing was over $6 a watt). Solyndra aims at $3.5 per watt by the end of 2011.

Tim Worstall, writing in Forbes (September 17, 2011), argues that, “Yes, it was possible to see this failure coming.” Defenders of the loan argue that the fall in silicon solar prices was unforeseen, hence “Solyndra’s non-silicon technology got bushwhacked by something no one could have anticipated.”

In reality, it was “blatantly obvious” that competitors’ prices would fall. In the mid-2000s demand exceeded supply and the price soared. But as Econ 101 tells us, soaring prices create incentives to increase supply, which then push prices down.

What’s more, says Worstall, by 2008, First Solar, a leading supplier of non-silicon modules, had already achieved lower cost-per-watt than Solyndra hoped to achieve by 2011.

Concludes Worstall: “It wasn’t an unexpected fall in silicon prices that did in Solyndra: they were never even close to being competitive on pricing against non-silicon technologies. They weren’t even in the right ballpark at all.”

Let’s take a closer look at DOE loan program director Silver’s ’don’t-blame-DOE-or-Solyndra’ explanation of why the company went bust:

In 2009, Solyndra appeared to be well-positioned to compete and succeed in the global marketplace. Solyndra manufactured cylindrical, thin-film, solar cells, which avoided both the high cost of polysilicon — a crucial component used in conventional solar panels — and certain costs associated with installing flat panels. But polysilicon prices subsequently dropped significantly, taking Solyndra, and many industry analysts, by surprise. Among the principal beneficiaries of this pricing environment were four of Solyndra’s Chinese competitors, which sell polysilicon panels and received $20 billion in credit from the China Development Bank in 2010.

* * *

Unfortunately, changes in the solar market have only accelerated in 2011, since the restructuring [of Solyndra's loan guarantee in February 2011] — making it more difficult for the company to compete. Chinese companies have flooded the market with inexpensive panels, and Europe — currently the largest customer base for solar panels — have suffered from an economic crisis that has significantly reduced demand and forced cuts in subsidies for solar deployment that were important to Solyndra’s business model. The result has been a further and unprecedented 42% drop in solar cell prices in the first eight months of 2011.

All of that may be correct, but the pertinent issue is whether anyone could have foreseen these changes in the marketplace in 2009 and 2010 when the U.S. government decided to bet taxpayers’ money on Solyndra. Far from being unforeseeable that China would subsidize its ”clean tech” companies to beat out U.S. firms and capture market share, this was a major premise of DOE’s loan guarantee program. We had to fight fire with fire or else lose the “clean energy race,” Obama officials warned. As DOE Secretary Chu said in testimony on October 27, 2009:

China has already made its choice. China is spending about $9 billion a month on clean energy. . . .The United States, meanwhile, has fallen behind. . . .We manufactured more than 40 percent of the world’s solar cells as recently as the mid 1990s; today, we produce just 7 percent. When the starting gun sounded on the clean energy race, the United States stumbled. But I remain confident that we can make up the ground. . . .The Recovery Act includes $80 billion to put tens of thousands of Americans to work developing new battery technologies for hybrid vehicles, making our homes and businesses more energy efficient, doubling our capacity to generate renewable electricity, and modernizing the electric grid.

Moreover, one did not need to be a rocket scientist to predict that if the U.S. government leverages billions of dollars in private investment to compete with Chinese firms, China would up the ante. After all, Beijing is flush with cash, whereas Washington is deep in debt.

Nor was any great acumen required to anticipate that the economic crisis would cut subsidies and thereby reduce demand for solar panels in Europe. In October 2009, the Rheinisch-Westfälisches Institut (RWI) reported that Germany’s feeder tariff system was on course to subsidize solar voltaic modules to the tune of $73 billion from 2000 through 2010, yet solar power was providing less than 1% of the nation’s electricity. Such lavish subsidies are unsustainable, especially during a financial crisis.

One also wonders why Solyndra had to hire 3,000 people to build a brand new factory (“Fab 2″). Wouldn’t it have been cheaper to rent space in an existing building? Ah, but then there would have been no groundbreaking and no photo-op for Secy. Chu, Gov. Schwarzenegger, and Vice President Biden. Mixing politics with business politicized Solyndra’s business plan.

Even if one makes the dubious assumption that Solyndra’s business plan was sound at the time DOE approved the loan guarantee, why did S0lyndra stick to the plan when it became clear the company was going broke?  ”The Fed money was explicitly tied to being *solely* used to build Fab 2. Solyndra could not use the loan proceeds for *anything* else,” according to an anonymous member of Solyndra’s management team. The DOE loan guarantee, it seems, reduced Solyndra’s ability to adapt to changing market conditions.

Sadly, the one lesson Team Obama will never draw from Solyndra’s failure is the most important one: the folly of government trying to play venture capitalist. Heritage Foundation economist David Kreutzer offers some choice words in two recent blog posts:

“We have such a great product that nobody will lend us the money,” was the nonsensical argument from Solyndra and its backers. Those who did not see the logical flaw in 2009 cannot help but see the flawed result in 2011. Unfortunately, some still do not see the logical problem that led to the mess.

Indeed, two of the criteria for the loan program show how silly it is to have government run a bank. One is that the loan must be for a commercially viable project. Another is that the applicants have to demonstrate that they could not get private financing. By definition, the second criterion rules out the first.