The Wrong Numerator at the WaPo

September 15th, 2011 at 1:40 pm

The WaPo features a critical piece today on the job creation associated with the “$38.6 billion loan guarantee program” that was part of the Recovery Act.

On the front page of their website, thepiece was summarized thusly:

“U.S. government says a loan guarantee program that has created 3,545 new permanent jobs is on track to save or create 60,000 jobs. If goal is reached, it would work out to about $640,000 in loan guarantees for each job.”

OK, that’s bad math.  The piece is justly critical in other ways, but that part’s way off.  They’ve divided the full loan volume—the sum of all loan amounts–by the number of jobs.  The correct numerator is the “credit subsidy”—the amount for which tax payers will be on the hook if the loans fail.

That’s likely to be well under $5 billion, which gets you into a much more reasonable neighborhood re bang-for-buck.

The article does point this out: “If the companies do well, they won’t need to draw on the guarantees and won’t cost the government anything.”  But their emphasis on this $640K/job number assumes every loan defaults, which is implausible (the piece is partly motivated by the bankruptcy of Solyndra, a solar panel producer that received a $535 million loan from the program).

That said, if the general point of the piece is that it’s very hard to be at all precise in estimating the number of jobs created through guaranteed loans to companies investing in clean energy projects, they’re right. 

On the other hand, if the conclusion is that since a) we can’t accurately estimate job creation from such lending programs, and b) some of these investments will go bad, therefore we shouldn’t make the investments, that’s wrong.

History is clear that private markets will under-invest in some of these types of new ideas and technologies—the returns are too uncertain (see railroads through internet).  And we should absolutely expect bankruptcies, like Solyndra, along the way.  But in the interest of fostering innovation in the production of clean energy and building market share in a globally expanding sector, there are good reasons for the government to have provided seed capital in the form of these subsidized loans, especially given the recession and the jammed financial markets back in 2009.

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3 comments in reply to "The Wrong Numerator at the WaPo"

  1. Linkmeister says:

    Granted it was 150 years ago, but “When Congress authorized building the transcontinental railroad in 1862, it agreed to loan hundreds of millions of dollars to the two corporations to construct it. Congress also gave the railroad companies millions of acres of Western land, which the railroads sold to repay their loans.”

    Source: http://history-world.org/history_of_the_united_states5.htm

    Santayana is right again.


  2. bakho says:

    A large and diversified portfolio balances the losses with large gains. The US government is in a position to capture returns on all successful new technology by their ability to tax. How much of the initial investment in the internet has been captured by income taxes and other taxes that result from the success of the internet?

    BigOil and DirtyCoal don’t want CleanCompetition. They want collect subsidies, not see them go to their competitors.

    Does BigEnergy have a potential gain from using this “example” to discourage BigG investment and subsidy to solar? DUH.


  3. Bill Gatliff says:

    Slightly off-topic, but would someone PLEASE tell me which specifically are the “regulations” that the Republicans claim are hindering job growth and hiring?


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