Thursday, May 23, 2013

Stunning Fact: 98% Of DOE $34 Billion Loan Portfolio Is Being Repaid--Solyndra Is Exception Not Rule

Here are some facts that I am sure will never air on fair and balanced Fox News.

The Tesla $465 million loan that yesterday was repaid 9 years early is one of 30 loans made by the Department of Energy in a program to foster energy innovation. Another one of the 30 loans was to Solyndra that had an innovative cylindrical solar panel design.

The loans to Tesla and Solyndra create a question: does the successful Tesla or the bad Solyndra loan best represent the performance of the Department of Energy $34-billion-30 loan portfolio?

Solyndra is the exception of default to the rule of good performance among the $34-billion-30-loan portfolio. Indeed, DOE states that losses to date represent just 2% of the $34 billion portfolio, with the other 98% being repaid.

And Congress expected losses in this program to foster innovation, when it authorized and funded it during the George W. Bush Administration.  Yes, you can give credit to President Bush, if you want, for launching a successful program, though the Obama Administration has administered nearly all the loans made under it.

Congress funded a loan loss reserve for this program, as it realized its purpose was to finance innovative but risky energy ventures. At this point, 90% of the funds set aside to pay for loans that defaulted remain unused.
In short, this DOE loan program will cost the taxpayers considerably less than was expected and it is delivering large benefits.

The loan portfolio includes not just Tesla and its enormous repaid success but also 19 clean energy power plants that are producing enough power for 1 million homes, with little or no air or water pollution.

The real facts about the performance of the 30-loan portfolio that includes both Tesla and Solyndra show  big benefits to taxpayers at much less cost than was budgeted. Just don't expect to see or hear any of these real facts on Fox, the Wall Street Journal editorial page, Hannity, Limbaugh, and the rest of right wing media.

The right wing ideological bubble strengthens daily and so loses touch with America a bit more each day.


  1. Mr. Hanger, I do enjoy your commentary a great deal, but this piece is venturing into "Fox-newsish" propoganda as well. Whether none or some or all of the loans are paid back to DOE is not really the correct way to evaluate the success or value of the $34 billion program.

    There are really two major problems with such an analysis. First of course is that if we are to measure the loan program under the guise of economic stimulus, we'd have to run fancy macro-econometric models to ask just how much stimulus was had for that. Economists and pundits on both the left and right have no way to tell you whether in fact it was good, bad or otherwise - the system of equations is, what we call, Underidentified. But that doesn't stop partisans of either side from claiming they are right.

    Second is more important and directly related to your post. Assuming we all agree on the purpose of these loans, which of course is debatable, and that the purpose is to deliver new energy sources and cleaner energy sources, we must ask two important questions: at what cost? and what has been crowded out to do this?

    These are not idle questions. Do we know, for example, how much of the $34 billion in loans was piled onto other explicit and implicit guarantees? For example, how many companies had other deals for the required purchase of their product? Surely that number exceeds zero and there is a cost to this. But more important, when these companies pay back these loans, do we know how they were doing it? Is it because revenues from those companies skyrocketed? Or are we simply counting refinancings as loan repayments. After all, the nation is awash in credit availability, or so we are told, and it seems to be the case that very low interest funding can be had from a variety of sources. Would we call the DOE loans any more of a success than if a homeowner initially took out a teaser rate ARM and was able to refinance it with another mortgage? I don't know, and simply pointing to a loan "being paid back" surely doesn't help us understand this.

  2. ...
    Irrespective of the financing of these programs, repayment of the loans tells us nothing about how much we are effectively paying for each unit of energy produced, or each unit of emissions reduced. Do we know on the loan portfolio, on average, how much per ton of carbon reduced we are spending? If that number is $20 per ton it may appear to be a good deal. But is it $80 per ton? $800 per ton? It is interesting that Tesla is cited as an example of success - do we know whether the production of the batteries and the all-in cost of the Tesla cars actually mean an improvement for the environment? And surely if they are powered by wind and solar they get better effective mpg than conventional cars, but what if they are driven in West Virginia?

    There are two additional issues required to be reconciled before declaring this a success. What has the institution of these $34 billion in government loans and guarantees done to private credit flowing to R&D and energy innovations? Is there ANY crowd-out? Has anyone studied this? Or is this a free-lunch? And what does the possibility of future government picking of winners through the DOE do to private funding of innovation in the future?

    Then there is the issue of the central planning of energy research. Surely there is a role for government funding of basic R&D, but it does not appear to me that funding particular technologies would qualify under this standard, or at least not the way we did it. Two questions arise. First, wouldn't some version of $34 billion in prizes, or better yet, patent buyouts, be a more effective way to encourage these investments? Can a loan program honestly be said to be successful without appealing to this counterfactual? And of course, there comes the issue of central planning itself, how do we know that the allocation of the $34 billion through this politically directed process is superior to the way investment would have been selected had it been done on the virtues of prices, profits and losses.

    And finally, there is an issue that we teach our economics students about regularly - that we are not to confuse good outcomes with good decisions, and similarly that we are not to confuse bad outcomes with bad decisions. Let's take a particularly common illustration of this error. Folks who remain healthy for years and years and years have been known to tell me that, "buying health insurance was a stupid idea since I never used it." Of course, this is not really correct. The purpose of health insurance is to protect you from unmanageable and unpredictable outcomes. These are risks with somewhat known probabilities. Just because you don't actually get sick does not mean it was dumb to pay for protection. Similarly, if you are offered the chance to take a gamble that in 9 out of 10 cases you owe a bookie $100, and in 1 out of 10 cases you win $50, if you end up winning the $50 this is not an illustration of a good decision. The expected value of the gamble is MINUS $85. Just because the sun shone on your butt for a day doesn't me you were smart.

    Much of this is of course not easy to measure, but before we slam the Fox News crowd and before we declare the loan program a success, surely a "fair and balanced" approach that is not "ideological junk" would suggest that these are important issues to resolve?

    1. You raise many good questions that go beyond the limited point of the post. The basic purpose of the post was to correct a tsunami of misinformation about the repayment performance of the DOE 30 loan portfolio. Again, the loans have a high rate of repayment.

      One can disagree with the judgment of the Congress and President Bush who created the program and say that the government should not spur energy innovation. That is a rational position to take. I don't agree with that position, as I do believe government has a vital role in spurring energy innovation, as well as stimulating private demand during times of economic collapse.

    2. Actually, it seems like the main purpose of the post was to tout the success of the loan program: "show a highly successful program that is delivering big benefits to taxpayers at much less cost than was budgeted." Your response to Wintercow ignores this statement. It seems you are suggesting that paying back the loans is proof of success, but as Wintercow points out, that seems like an odd way to measure success.

    3. Repayment rates are certainly an important metric at a bank or a government loan program. Would you agree with that?

      Repayment rates are not the only metric, though the critics of the DOE energy portfolio's performance are ready to write off the whole program on the basis of 2% of the loan's not being repaid--Solyndra mainly.

      The program has financed perhaps one of the most important energy innovations and companies of the 21st century--electric vehicles and Tesla.

      It has also financed 19 power plant projects, at a time of economic collapse, while recovering capital and earning interest. Not too bad. I wish Lehman Brothers was this well run.

  3. Certainly it's better to pay them back then not, or so it seems. The WSJ has a very interesting piece this morning on Tesla, which includes the "fact" that it loses $10,000 per car and made a profit only because of the emissions credits it benefits from selling in California.

  4. I did read the editorial today at 7:00 am at the Harrisburg airport. The WSJ editorial page is among the first things I read each day and then the NYT editorial page.

    This editorial does have some interesting claims but continues to mislead (being polite) its readers about the performance of the 30 loans in the DOE portfolio. It of course never gives the actual facts on that portfolio--98% of loans being repaid and just 10% of the loan loss reserve for the portfolio having been paid for bad loans. Those facts destroy the claim made again in this editorial that most of the loans have gone bad or that Tesla's repayment is the exception. The stock market is pricing Tesla as a producer of a creatively destructive or transformative piece of technology. That is the current market judgment. The car of course uses electricity only but goes more than 200 miles on a single charge. It has range. It also has the highest rating ever of a car by Consumer Reports. It has been called with reason the most important car since the Model T. And yes government played a role in accelerating its development and commercialization. Good and money well spent. Few things are more important to our economy, national security, and the environment than accelerating the decline in our reliance on oil. And that is why I also favor government accelerating the deployment of natural gas fueling stations.