The Corner

Stimulus Cronyism

In preparation for tonight, Mr. Romney should read the Washington Examiner’s Tim Carney’s Sunday column correcting Vice President Biden’s statement during last week’s debate that there was no waste, no inefficiency, and no cronyism in the 2009 stimulus bill. He gives the example of a leading Obama donor and subsidy recipient Elon Musk, whose company and the millions it received from the administration’s stimulus bill are under investigation by both the IRS and the federal inspector general. As Carney explains, it’s one thing for the government to mismanage a grant; it’s another when the mismanagement happens to benefit heavily some large administration’s donors:

Musk is the paradigmatic political entrepreneur, launching businesses that seek to capitalize on government favors and lobbying clout rather than provide goods or services that consumers demand.

Musk is CEO of and the biggest investor in Tesla Motors, an electric car company that depends on stimulus money and other subsidies. He also founded Space Exploration Technologies, or SpaceX, whose primary customer is the federal government.

Musk has personally given more than $100,000 to Obama’s re-election campaign, including two gifts of more than $30,000 each to the Obama Victory Fund, which divides the money between the maximum allowable donations to the Democratic National Committee and the maximum to the Obama campaign. (Musk has also given generously to Republicans.)

Keep those max gifts in mind when Obama says he rejects donations from lobbyists.

There is much more in the piece, which you can read here. Unfortunately, this is not the only example of cronyism in the stimulus bill, or even among the green-energy beneficiaries of the stimulus money. #more#We all know about Solyndra and Abound Solar, for instance. Both companies received funding through the DoE’s 1705 loan-guarantee program, which was expanded as part of the stimulus bill. Both companies failed and it seems that both companies were well connected to the administration. One of Abound Solar’s biggest investors, for instance, is large Democratic donor Pat Stryker.

Understandably, these two companies have received a lot of attention because of their very public failures. However, in my mind the worst cronies are the companies that received preferential treatment under the 1705 loan program but didn’t fail. That’s because, in most of these cases, the projects that got the federally backed loans were either relatively low-risk, and/or the companies backing them could have borrowed capital elsewhere. In my latest Reason magazine, I documented the financial edge these companies are getting compared to the competition and the level of double-dipping that goes on at the same time.

Eric Lipton of The New York Times reported in November 2011 that green giant NRG Energy obtained a $1.2 billion guarantee to build its California Valley Solar Ranch “at the exceptionally low rate of about 3.5 percent compared with the 7 percent that executives said they would otherwise have had to pay.” The lower rate saves the company $205million over the life of the loan, Lipton explained. The company has also received two other packages of federally backed loans totaling $2.6 billion. And the deal gets even sweeter: Section 1705 guarantees80 percent of a project’s total cost, a much higher portion than private banks usually agree to finance.

State backing confers subtler advantages as well. In 2010 the Government Accountability Office concluded that federal subsidies signal to investors that a company is relatively safe, a perception that helps attract additional private capital. […].

Section 1705 loan guarantees are not the only subsidies available to alternative energy firms. NRG received more than three dozen grants under the 2009 stimulus. NRG is also eligible for money from the Treasury Department’s Section 1603 grant program, which provides up to 30 percent of a project’s cost in cash. Eric Lipton calculated that the company would be eligible for a $430 million cash payment on its $1.2 billion Section 1705 project once the construction of the California Valley Solar Ranch is completed. NRG also could receive additional cash under the Section 1603 for its other two 1705 projects.

These federal goodies are often duplicated at the state and local levels. Lipton noted that “under a state law passed to encourage the construction of more solar projects, NRG will not have to pay property taxes to San Luis Obispo County on its solar panels, saving it an estimated $14 million a year.” California offers depreciation tax breaks for renewable energy plants, reducing NRG’s corporate income taxes by $110 million.

If you add the captive ratepayers from whom NRG will benefit thanks to state green-energy purchase mandates, you understand why it would be hard to go back to doing business without the government’s largesse. (Here’s a video of a hearing that expplains the political connection between BrightSource — one of the NRG projects that received a 1705 loan — and the administration.)

The solution to this problem is certainly not for the government to its lending to high-risk companies with poor credit ratings like Abound and Solyndra, but to get the government out of the lending business altogether, starting with the many loan-guarantee programs it runs today. Better yet, Congress should put an end to all government subsidies of private businesses (including small businesses, automobile companies, oil-and-gas firms, banks, and farms).

Finally, I wanted to direct you to the work of Todd Shepherd, an investigative reporter from the Independence Institute. Over the last few months, he has done some spectacular work exposing the fact that, contrary to what Abound Solar’s CEO claimed, the solar company didn’t go under because of the Chinese competition. It actually went bankrupt because its solar panels were catching on fire once exposed to the sun. Paul Chesser has another good summary of the Abound debacle.


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