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The Fierce Incompetence of Central Planning

Monday, October 3, 2011
By Dan

What if I told you you could get in on the ground floor (or low level) of a technology company. The company is a few years old, and has had increasing losses over it’s history: $27.2M three years ago, $114.1M two years ago, $232.2M last year and on pace to hit $160M this year. Those are losses. Their revenue for this year is on pace to be about $80M. In other words, the company is losing twice as much in costs as it generates in sales. They are, in fact, making a product for $3 and selling it for $1.

Two other facts you might find interest: (1) the company is in an industry that struggles to break even and (2) the company’s auditors cannot honestly say the company will be in business next year.  Investors have put in $1 billion, and the company is now desperate for cash.  Would you be willing to loan the company $535 million–more than half of its equity investment?

To put that in perspective, assume someone you know put up $100,000 for a Subway franchise.  He has lost money for four years straight, sells sandwiches for $5 when they cost him $15 to make, his bank and his accountant say he has no chance of staying in business.  Would you loan him $53,500 to open another store across town?

If you think this is a “good bet,” please contact me for a great deal on a slightly used, but historic bridge in lower Manhattan. This company (in case you’re wondering, it is the infamous Solyndra, circa 2010) is a stinker. But even with the benefit of hindsight, President Obama has no regrets over Solyndra. Obama, even now, defends the $535 million loan guaranty as a “good bet.”

This is why central planning will always fail.  Not only are politicians not equipped to pick winners and losers, their hindsight is 20/2000–qualifying for legal blindness.

If you think this is an isolated incident, think again.  Dick Durbin was warned repeatedly that his amendment to the Dodd-Frank bill would lead to increased costs for consumers.  When those predictions become reality, he impotently tells consumers to bank elsewhere.  As if the country’s smaller banks are less susceptible to his cost shifting than Bank of America.

Ignorance may be bliss, but it’s also the Democratic Party’s economic platform.

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2 Responses to “The Fierce Incompetence of Central Planning”

  1. Pip

    Take renewable energy though. I would if I knew every OPEC member lied about their potential oil reserves, in some cases, reported at doubling the real amount. I would if I searched all over Libya for 6 years, and couldn’t find a new well. I would if Saudi Arabia hasn’t discovered a new significant source for 30 years, and are sinking short term off-shore wells as fast as possible. I would if oil shale, that thing that any oil executive would refer to as “shit” is last great big hope. I would if I realized that billions of people depend on this resource for the production of their food. Also, you’re mistaken in the nature of government investment. The government ideally invests in those areas that even long-term institutional groups would consider “too long term,” or “too risky,” or “simply too big.” And on the flipside, the government invests in those things that they cannot do without in the future. I could make a better list than this one which is off the top of my head, but even the Google self-driven car is the result of DARPA funding. The robot arms that amputated service men receive now have the ability to move with the operator “thinking” about it, and that’s the lineage of the MKULTRA programs over fifty years ago. All the satellites orbiting your head giving you cell phone service and much more are the consequence of a Space Program. When you look at our energy problems, in my opinion, America isn’t doing enough, and hasn’t done enough for decades. I would love it if the free market was taking care of our future. It struggles to take care of us in the present, and the incentive structure of individual wealth makes certain projects and certain investments beyond the capability of our present captalist system. You can cherry-pick government plans that are winners and losers, but I think it makes more sense to ask what projects should the government do because the market is not, and the project can reasonably be argued to provide for the future. Alternative energy is a “good bet” in the same way that invading Afghanistan and Iraq, and toppling (yes, we did!) the Libyan regime was a “good bet.” Yes, these things cost millions, to trillions of dollars to do, but the alternative is a future fueled by…? I guess, when a Quant figures out how to create imaginary investment vehicles that actually drive us someplace, we’ll truly be in bliss.

  2. Dan

    Do you not recognize the difference between government sponsored research and central planning? In your examples, the government had a broader purpose and invested taxpayer monies in endeavors that, at the time, the American public supported and served a legitimate purpose. You can argue, in hindsight about the purpose and its legitimacy, but I for one do not think that defense research is a bad use of taxpayer money.

    “Investing” in a company that your own advisers and the company’s auditors warned was going bankrupt is stupid and a waste of money. The fact that the government does not have a profit motive or a limited amount of resources is the reason crony capitalism and central planning fail. When a politician can award money, not on the basis of merit or the efficient application of capital, but on political expediency, the wrong companies will get the funding more often than not. When private investors are free to decide, capital will, more often than not, flow to the best, and most efficient use.


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