The most important part of the study of Economics is the effect of incentives.
Case 1:
Solyndra - a solar company that recently went bankrupt. Obama reiterated in Tuesday's State of the Union that "green energy" would continue to receive support from the Federal Government (also known as the American people). In 2009 Obama allowed more than $500,000,000 to be sent to Solyndra as a "loan". What incentive does this create?
The truth is, massive loans create an incentive to fail. How? Well after Solyndra received the loan, they had 2 options.
1. Work efficiently and pay lower than average wages in order to pay down their debt and hopefully pay the loan back within 30-40 years (if solar panels miraculously became ridiculously popular).
or
2. Supply 1,100 people with a couple years of wages (off the backs of the tax-payer), be inefficient by paying high wages to administrators, build luxurious facilities, and calmly go bankrupt 2 years later - and never have to pay back the loan!
Why would they want to work to pay back the massive loan when they could instead just use it as a handout?
If you doubt that Solyndra wasn't completely reckless with the money they received from us, see here how they treated the hundreds of brand new parts that they had stocked in their facility when they found out that they were going bankrupt.
Case 1:
Solyndra - a solar company that recently went bankrupt. Obama reiterated in Tuesday's State of the Union that "green energy" would continue to receive support from the Federal Government (also known as the American people). In 2009 Obama allowed more than $500,000,000 to be sent to Solyndra as a "loan". What incentive does this create?
The truth is, massive loans create an incentive to fail. How? Well after Solyndra received the loan, they had 2 options.
1. Work efficiently and pay lower than average wages in order to pay down their debt and hopefully pay the loan back within 30-40 years (if solar panels miraculously became ridiculously popular).
or
2. Supply 1,100 people with a couple years of wages (off the backs of the tax-payer), be inefficient by paying high wages to administrators, build luxurious facilities, and calmly go bankrupt 2 years later - and never have to pay back the loan!
Why would they want to work to pay back the massive loan when they could instead just use it as a handout?
If you doubt that Solyndra wasn't completely reckless with the money they received from us, see here how they treated the hundreds of brand new parts that they had stocked in their facility when they found out that they were going bankrupt.
So, if it's known that incentive programs do not work and actually make things worse why do they exist?
ReplyDeleteGood question. The reality is that they shouldn't exist. They always lead to inefficiency. The market has a certain demand for things, like solar power, and the supply will grow to match the demand. When an industry is subsidized, more supply is generated than there is demand so there is inefficiency in the market. My next post will be supply and demand and how subsidies disrupt that balance.
DeleteSometimes, as a society we feel that certain industries should be subsidized (in this case, the politicians thought "green energy" was a worthy societal goal). The idea is that if the government gives the industry a boost in order to get started, the demand will follow afterwards. This rarely happens, but if we as a society decide that the risk is worth what the outcome would be, then we subsidize. The problem in our system is lobbying. Obama pushes for green energy projects partially because he thinks they are vital for the perpetuation of our society, and partly because that sector provides money to the Democratic party (likewise if you want to turn the tables, the Republicans might push for pro-gun legislation that would greatly help the NRA and in turn the NRA will continue to donate to the Republicans running for office).
I think that we should just get rid of subsidies all together, at least at the federal level. Corn subsidies still exist and you know better than most how these subsidies are hurting in unforeseen industries. Because corn is subsidized, the farmers that produce it are paid just to produce it. So they can sell if for really cheap. For this reason, corn is used to feed cows, corn is processed into sugar. And you know more ways than I do how corn is used in bad ways. All of these "negative externalities" or unforeseen negative effects are because of the federal subsidies to the corn industry.