The Constancy of Crony Capitalism

Cronyism is the practice by which government officials—Democrats and Republicans, liberals and conservatives—give preferential treatment to particular firms or industries in exchange for votes, campaign contributions, or the pleasure of promoting pet projects. Favored companies reap financial rewards, reduce their exposure to risk, and gain an advantage over rivals who don’t get the same government help.

In his 1986 memoir The Triumph of Politics, former Reagan administration budget director David Stockman wrote: “I had long insisted, to any liberals who would listen, that the supply-side revolution would be different from the corrupted opportunism of the organized business groups; that it would go after weak [corporate welfare] claims like Boeing’s, not just weak clients such as food stamp recipients. Giving the heave-ho to the well-heeled lobbyists of the big corporations who keep the whole scam alive would be dramatic proof that we meant business, not business-as-usual.” 

After four years as the Reagan administration’s fiscal whiz kid, Stockman left, objecting to the president’s inability or unwillingness to make good on his promises to cut government spending. Crony capitalism, having avoided a showdown with a principled adversary, has thrived ever since. 

Cronyism is the practice by which government officials—Democrats and Republicans, liberals and conservatives—give preferential treatment to particular firms or industries in exchange for votes, campaign contributions, or the pleasure of promoting pet projects. Favored companies reap financial rewards, reduce their exposure to risk, and gain an advantage over rivals who don’t get the same government help.

Consider the alternative energy industry. Politicians and businessmen claim that innovative solar, wind, and nuclear companies have a hard time getting private funding for 21st-century energy schemes because they are too risky or require too much initial investment in the commercialization phase. That’s where the Energy Department’s Section 1705 loan program comes in. 

Section 1705 guarantees loans to alternative energy companies so banks don’t have to worry about defaults. The loan guarantee authority originated with Title XVII of the Energy Policy Act of 2005; the American Recovery and Reinvestment Act of 2009 added Section 1705, which among other things subsidizes the fees that would otherwise be paid by borrowers.

Since the program’s creation, the Energy Department has guaranteed $16 billion in loans for a total of 26 projects. Although Section 1705 is mainly known for funding such high-profile bankruptcies as Solyndra and Abound Solar, the companies it helps generally do well. That’s because most of the loan guarantees have gone to projects backed by large and financially secure companies. For instance, the energy producer Cogentrix, recipient of a $90 million guarantee, is a subsidiary of the investment bank Goldman Sachs. There’s every reason to believe Congentrix could have obtained a loan on its own.

But why bother? The terms offered by the feds are unbelievably good. 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 $205 million 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 guarantees 80 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. During a July 18 statement before the House Committee on Oversight and Government Reform, Craig Witsoe, former CEO of Abound Solar, one of the Section 1705 companies that recently went under, explained that his company managed to collect an additional $350 million from private investors after it had secured its government guarantee. Much of that funding could be the product of the security that the federal support implied.

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. 

NRG is hardly an exception. On top of the $500 million it got under the Section 1705 loan program, Solyndra benefited from a $10.3 million loan guarantee that the Export-Import Bank extended to a Belgian company to finance a sale of Solyndra products. (That’s what the Ex-Im Bank does: give taxpayer money or taxpayer-backed loan guarantees to foreign firms that buy American goods and services). Now that Solyndra has collapsed, taxpayers will pick up that tab too.

The list goes on. First Solar received a $646 million Section 1705 loan in 2011 through its partner Exelon, then another $547.7 million in loan guarantees to subsidize the sale of solar panels to solar farms abroad. To add insult to injury, as The Washington Examiner’s Tim Carney recently discovered, $192.9 million in Ex-Im Bank money went to a Canadian company named St. Clair Solar, a wholly owned subsidiary of First Solar. In other words, the company received a loan to buy solar panels from itself. 

In 2010 the Obama administration gave First Solar a $16.3 million loan to expand its factory in Ohio. Shortly thereafter, then-Gov. Ted Strickland gave the company $1 million in job training grants, and the Ohio Department of Energy extended another $5 million in loans. The state’s Air Quality Development Authority gave First Solar an additional $10 million. Yet all of that taxpayer money couldn’t keep the company afloat: In April 2012, First Solar laid off 2,000 workers. It is currently teetering on the edge of failure. 

Corporate double dipping isn’t new. Bipartisan federal, state, and local support for the “weak claims” of corporations has been going on for far more than 30 years, and not just in new and exotic industries such as alternative energy. The target of David Stockman’s ire, aerospace giant Boeing, continues to receive almost unfathomably huge direct and indirect subsidies from the federal government. Ninety percent of the value of the loan guarantees issued by the Export–Import Bank in 2011 went to subsidize Boeing. As a result, Carney reports, Boeing “accounted for 45.6 percent, or $40.7 billion, of Ex-Im’s total exposure in fiscal 2011.” With the help of federal guarantees, the company gained contracts from the likes of Air China and Air India.

Boeing shows its gratitude to taxpayers by overcharging them at every turn. The nonprofit Project on Government Oversight recently reported that “Boeing charged the U.S. Army $1,678.61 for a plastic roller assembly that could have been purchased for $7.71 internally from the Department of Defense’s own supplies. In another transaction, a thin metal pin worth 4 cents that the Pentagon had on hand, unused by the tens of thousands, ended up costing the Army $71.01—a markup of more than 177,000 percent.” The watchdog group’s investigation found that Boeing overcharged the Army nearly $13 million in dozens of transactions, jacking up the price on small, mundane parts and in some cases charging thousands of times more than they were worth. What Stockman called the “corrupted opportunism of the organized business groups” has become business as usual.