Yes, the Obama administration's green loans are unprofitable. They should be.
Last week, we were treated to another instance of completely confused debate over a government financing program, this time the Department of Energy's green loans initiative. The department released a financial report on the program, which has been quite successful. A report at BusinessWeek claimed the program was on track to make a $5 billion profit.
The problem is that the $5 billion figure doesn't take into account the costs of financing or the rate of default. Correcting for that, the program is narrowly unprofitable. Thus, the bean counters over at the Tax Policy Center attacked, wagging their fingers at reporters for not reading the report closely, and accusing the Department of Energy of selling its program in a misleading way.
But this whole discussion is beside the point. As with the TARP bailout — when the government invested tens of millions of dollars in big banks — discussions of "profitability" are completely pointless. The federal government has the world's reserve currency and the legal ability to make arbitrary quantities of dollars. Profitability is an important question for businesses, and state governments to a lesser extent, because they don't have the dollar creation machine. But for the feds, it's simply not an important benchmark. The question is whether the policy is good or not.
Indeed, in this case fretting about profitability is not just misleading, but backwards. Think about why the government makes loans to businesses in the first place. We already have banks and venture capitalists that will fund technologies that are likely to make a profit. The main reason to get the government involved is to fund moon-shot developments, to fund research into those technologies that aren't profitable — or at least not yet.
Historically, the government has been pretty good at that. From nuclear energy to the internet to literally thousands of other discoveries, government science funding has been enormously productive and beneficial to both business and society. The Energy Department's loan program fits right in with that tradition. With climate change a major threat to civilization, clean energy technology needs to be developed as fast as possible. Thus, a loan program directed at long-shot green tech is an excellent idea. It's not going to solve climate change by itself, obviously, but it's still a solid plan.
Thus we see the real problem with Energy Department's program: it's not unprofitable enough. With the government totally unconcerned with making money, it ought to be pushing the envelope and funding very risky plans — ones that may have a good likelihood of failure, but a chance of enormous, breakthrough success. That doesn't mean no due diligence, or that the government should completely ignore the return ratio. It's to say that the government should be far, far more aggressive than any normal business would be.
This was all hashed out long ago, when former Secretary of Energy Stephen Chu made this exact argument and lost out to the knock-kneed political hacks. They feared that any loan failure would result in the usual Republican tornado of neck-bulging, purple-faced outrage. Administration officials would have been better off doing the policy right, making the case on the merits, and simply eating the inevitable firestorm, since it's what they got anyway.
But when you hear about green energy loans, remember this simple fact: the government isn't a business and doesn't have to operate like one.