Should Government Fund Risky Start-Ups?

At the heart of the Solyndra debacle, there’s a fundamental question over the role of government: should taxpayer money be used to fund risky start-ups that might not necessarily have a chance otherwise? CNN reports:

Now the company’s bankruptcy has become a case study on an issue likely to gain increasing attention: Should the government be investing taxpayer dollars in promising — but risky — startup companies?

The White House thinks it should. And despite emails released today showing White House officials were closely involved in the process of securing loans for Solyndra, the administration argues there was no political element to the decision. Democrats reason that in cases like Solyndra, government funding is necessary because venture capitalists won’t gamble on these unpredictable investments:

The White House has argued that any effort to finance start-up businesses in a relatively new field like solar energy is bound to include risky ventures that could fail. They reject the notion being pushed by Republicans that Solyndra was chosen for political reasons. One of the largest private investors in the deal, Oklahoma billionaire George Kaiser, was also a prominent fundraiser for Obama’s 2008 presidential campaign.

The White House’s argument – “if we don’t do it, nobody else will” – isn’t necessarily accurate. There are plenty of venture capital firms that specialize in clean energy, and the industry has actually seen a lot of growth in recent years, despite the economic downturn. If a clean energy company can’t secure private venture capital, than that’s a pretty serious red flag.

But even if a company is able to get private venture capital backing, like Solyndra did at one point, the government could actually end up harming the industry as a whole by investing in it. A recent Berkeley study also found that Obama administration’s current strategy could potentially hinder the clean energy market:

The current Obama administration strategy for providing enormous loan guarantees to a few chosen venture capital financed firms is misguided because it is likely to truncate the chaotic business model search that characterizes the formation of new industries. …

Massive government capital investments dwarfing anything that any private sector investor would invest in single firms or technologies will alter the competitive ecosystem –and not for the better. Such policies necessarily create non-market incentives to increase investment in lobbying for large government loans or grants diverting firms from private sector customers and market-based learning to focus upon the government as the customer.

So conservative philosophical arguments aside, the White House’s line of reasoning is faulty if the strategy is actually doing more to damage the industry than help it.