Why The Government Should Have Stayed Away From Fisker And Tesla

Edward Niedermeyer
by Edward Niedermeyer

The Detroit News reports that the White House has ordered a review of the Department of Energy’s various loan programs in the wake of the Solyndra scandal, noting

White House Chief of Staff William Daley ordered an independent analysis on the state of the Department of Energy’s loan portfolio — including loans to solar, nuclear and auto companies.

“The president is committed to investing in clean energy because he understands that the jobs developing and manufacturing these technologies will either be created here or in other countries,” Daley said.

One of those programs is the so-called “Advanced Technology Vehicle Manufacturing” loan program, which was nearly used to fund the Detroit bailout and has since come under fire from various quarters. Twice already the Government Accountability Office has questioned the ATVM loan program for its lax oversight, weak goals, lack of technical support, inconsistency in awarding loans and the undetermined impact of funded vehicles. And those internal issues could help explain why the Center For Public Integrity has accused the ATVM program of operating a patronage scheme, alleging that major Obama donor and Tesla board member Steve Westly personally benefitted from loans made to the company. And on the Fisker side of things, backer John Doerr of the VC firm KleinerPerkins is another major Obama donor, suggesting a pattern of politically-motivated loan awards to well-connected EV firms that carry high risks. With government intervention in the auto industry still a hot-button issue in the wake of the bailout, this scandal has huge implications for the legitimacy of America’s emerging “industrial policy.”

Meanwhile the real victim here could be Chrysler, which desperately needs to develop vehicles with higher fuel efficiency and yet has not received any loans that it applied for in the pre-bailout period. Not only could this put Chrysler’s finances under pressure, but it also shows a distinct lack of focus or strategy in the White House’s industrial policy. The bailout era was rife with justifications of the rescue of GM and Chrysler on the basis that the firms would build a new generation of green vehicles. And yet GM has withdrawn from the loan program, and Chrysler is being strung along… while both (but Chrysler in particular) struggle to bring up their average fuel economy which are two of the lowest in the industry. Having rescued these two firms, why would the government choose to send available loans to firms like Tesla and Fisker, which are aiming for the luxury segments and thus have less chance of creating significant impacts on both jobs and the US’s status as a green economy leader? The answer may prove to be found in the relationships between Fisker and Tesla’s well-connected backers.

The fact that Fisker is building its first car in Finland has dominated the political outrage over the ATVM loan program, but the real issue is the opportunity cost. If there is proof that Fisker and Tesla received loans because of political donations made by their backers, it will have diverted money from more effective opportunities, proving that government intervention in the economy is fundamentally fraught with inefficiency. Though Republicans and others have purely political motivations for trying to give the Obama Administration grief ahead of an election, there is a real principle at stake here. If the government is going to play a role in guiding industry towards more sustainable strategies, it needs to take the utmost care to optimize that aid in terms of both market and jobs impacts. The nature of the auto industry is such that start-ups face incredible challenges, and as luxury manufacturers, Tesla and Fisker will neither sell many cars nor employ many Americans. The resources, experience and infrastructure already in place at major manufacturers make them the logical place to invest “green” loans… especially because the bailout did not, in fact, prepare them especially well to compete in the green car space.

Ultimately, governments need to face a fundamental choice: either allow the market to drive innovation at the risk of losing jobs to other countries, or intervene with programs like this one on a purely utilitarian basis. There is some evidence that government incentives for future technology development can help lumbering auto firms prepare for unexpected energy shocks in ways that the market might not always be able to do, with its relatively short-term incentives. But if there’s not a utilitarian strategy underpinning these government interventions, the effort will inevitably fall victim to political patronage, and all of the inefficiency (not to mention blowback against all forms of government intervention in the economy) that comes with it. By giving hefty loans to two unproven but well-connected startups, the Obama Administration has run the risk of fostering a backlash against all forms of green incentives… and the result could be merciless market pressure on lagging firms like Chrysler should another oil price spike come. In that scenario, Chrysler could find itself in serious trouble again, and be forced back to Washington for its third bailout… further driving the inefficiencies of the apparently politically-motivated loans to Fisker and Tesla.

Edward Niedermeyer
Edward Niedermeyer

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  • GS650G GS650G on Oct 31, 2011

    Let the Italians bail out Chrysler, after all it's theirs now. And the UAW can help, it's theirs too.

  • Ayebaybay Ayebaybay on Oct 31, 2011

    No bank, auto company, or any other business entity has the right to collect money from the government when lacking funds. There may be a certain element of nobility in government intervention of green enterprises, but as recent events have showed, it is best that the private sector handles these issues- assuming they aren't bailed out if things go awry. What incentive does the government have, especially if they're not held accountable? None. They can always claim they need more time, they're making progress, etc. But with whose money? The private sector- if in a purely capitalist society- is much more well equipped because its lively hood depends on it. And you know what, as long as there are winners there will be losers. But that doesn't necessarily mean that those losers can't become successful without bailout money, they'll just have to think of a new idea.

    • See 1 previous
    • Ayebaybay Ayebaybay on Nov 02, 2011

      @dolorean Greed is a constant across all political platforms. Companies who take government money to do their biding (GE) are as greedy as some claim Wall St. bankers to be. It would be convenient to separate greed for "good causes" vs. greed for one's bank account, but greed is really just greed...There are laws against monopolies, price fixing etc, but I don't see any repercussions for those involved in the Solyndra debacle. If it were left to the market, Solyndra would go out of business and someone else with "greed" would step up to the plate and engineer a green company. Government does not win or lose with the success or failure of a company, people do.

  • Stephen Never had such a problem with my Toyota products.
  • Vulpine My first pickup truck was a Mitsubishi Sport... able to out-accelerate the French Fuego turbo by Renault at the time. I really liked the brand back then because they built a model for every type of driver, including the rather famous 300/3000GT AWD sports car (a car I really wanted, but couldn't afford.)
  • Vulpine A sedan version of either car makes it no longer that car. We've already seen this with the Mustang Mach-E and almost nobody acknowledges it as a Mustang.
  • Vulpine Not just Chevy, but GM has been shooting itself in the foot for the last three decades. They've already had to be rescued once in that period, and if they keep going as they are, they will need another rescue... assuming the US govt. will willing to lose more money on them.
  • W Conrad Sedans have been fine for me, but I were getting a new car, it would be an SUV. Not only because less sedans available, but I can't see around them in my sedan!