Many questioning the decision are victims of the sunk cost fallacy.
Warner Bros. Discovery (WBD) recently made headlines when they canceled the release of their upcoming Batgirl movie, starring Michael Keaton, J.K. Simmons, and Leslie Grace in the title role.
Movies get canceled all the time, but what shocked many was the fact that Batgirl was already finished filming. In a statement, Warner Bros. Discovery (WBD) explained that shelving the project was part of a “strategic shift.”
“The decision to not release Batgirl reflects our leadership’s strategic shift as it relates to the DC universe and HBO Max,” the statement read. “Leslie Grace is an incredibly talented actor, and this decision is not a reflection of her performance.”
The decision led to confusion and criticism from many. One of the actors in the movie went as far as to call WBD CEO David Zaslav an imbecile.
The response from fans was one of bewilderment. Why cancel a movie that you’ve already spent $90 million on? After spending so much, why not try to make back that money?
Without realizing it, many who argued the movie should be released did so by invoking one of the most common economic fallacies.
Sunk Costs are Sunk
People, whether in business or just daily activities, make their decisions based on whether they think the benefits will outweigh the costs.
When a studio greenlights the creation of a movie, the studio heads must believe the benefit they get is more than what it will cost to make the film. If a CEO expects only 100 people are willing to spend $10 for a particular movie, and hiring the actors costs them $20,000, the movie won’t get made.
It’s possible studios may even receive some intangible benefits from making a beautiful artistic movie, but those intangible benefits still wouldn’t warrant extremely high costs.
In a similar way, when people buy stocks, they’ll only do so if the benefit outweighs the cost. If a stock costs you $75, and you’re absolutely certain the stock will be worth $100 tomorrow, you’d almost certainly buy that stock.
So people will do something if the benefits exceed the costs. But it’s important to note that we’re talking about future benefits and future costs. Past costs have no place in future decision-making.
To understand why, let’s return to our stock example.
Say after buying your stock the price actually fell the next day from $75 to $50. Even worse, you now have a strong reason to believe the price will fall to $25 tomorrow. What should you do? Well, assuming your intuition is right you should certainly sell.
While there may be a temptation to hold on to the stock to “make back what you lost,” it’s important to note that if you do hold the stock when it drops from $50 to $25, the final result is that you’ve lost $25 more dollars. The fact that you already lost money does not change the fact that selling at $50 leaves you richer than “riding it out” and letting it fall to $25.
The initial loss when the stock falls in value from $75 to $50 is what economists call a “sunk cost.” It isn’t recoverable and shouldn’t change the decision to sell the stock before it falls to $25. While people may dislike the idea of “selling at a loss,” it’s superior to an even bigger loss.
When people believe they should act on sunk costs rather than future costs, economists call this the “sunk cost fallacy.”
And the sunk cost fallacy applies to movies too.
The question on whether releasing Batgirl is a good idea has nothing to do with the $90 million already spent on production. That money is a sunk cost.
What matters for the studio is whether the release of Batgirl will bring in more money than the release would cost in the future.
Cancel or Cost
So what would be the relevant costs of releasing Batgirl?
Whether company resources are used to put Batgirl in theaters or on a streaming service, those resources could be used to promote and place other projects instead. Each dollar spent making Batgirl available to viewers is a dollar not spent on a different project.
Finally, and maybe more importantly, WBD could have an enormous cost imposed on their brand if Batgirl turned out to be a bad movie.
The “DC Extended Universe” has already experienced its fair share of troubles. Critics and audiences have been disappointed by several portrayals of DC heroes.
From personal experience, I haven’t paid to watch a DC movie in theaters since the total dud portrayal of Superman that was Man of Steel.
I’m not interested in watching a DC Universe that can’t get its flagship hero right. And many fans may decide a bad Batgirl movie is the straw that breaks the camel’s back.
So even if DC already spent $90 million producing the movie, what good would it do to release the movie if it alienated more fans than it satisfied?
Although I’m not privy to any insider information, my suspicions are strongly towards this last explanation. The Marvel Cinematic Universe stands as an example of how valuable the comic book movie brand can be, and it’d be no surprise if WBD executives were trying to raise the bar on DC movies to reach that level.
So WBD’s decision to cut the already-finished Batgirl isn’t some crazy mistake where a corporation is abandoning a valuable movie.
The company likely believes the cost is greater than the benefit. And given the recent track record of DC movies, I don’t doubt they’re right.
Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education George Mason University. His research interest is at the intersection of political economy, development economics, and population economics.
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Sound economic thinking is vital for a prosperous future.
Economics is the study of human action—the choices people make in a world of scarcity. Scarcity means that people have unlimited wants but we live in a world of limited resources. Because of this fact people have to make choices, and choices imply trade-offs. The choices people make are influenced by the incentives they face and those incentives are shaped by the institutions—rules of the game—under which people live and interact with others.
In this essay, I will explain eight ideas and give examples of the economic way of thinking.
1. TANSTAAFL: Know the Difference Between Price and Cost
We often hear how wonderful certain countries are because they provide “free healthcare” or “free education.” Many will also say “I got it for free” because they didn’t pay with money.
The error lies in not understanding the difference between price and cost. For example, people usually say, “The Starbucks latte cost me five dollars” or, “The movie ticket cost me fifteen dollars.” Cost in economics means what you give up or sacrifice. In these examples, the prices were $5 and $15. But the cost of the latte was perhaps the sandwich one could have purchased instead with that same $5, and the cost of the movie was perhaps the three lattes one could have purchased instead with that same $15.
Labeling healthcare and education “free” is not just wrong—”there’s no such thing as a free lunch”—it’s also misleading. As my former professor Walter E. Williams would say, “Unless you believe in Santa Claus or the Tooth Fairy, the money has to come from somewhere.” You might not get a medical bill in those countries but you have more taken out of your paycheck (i.e., taxes) and you might have to wait much longer to get that test or have that “minor” (from the bureaucrats’ perspective) surgery. You pay with either money or time, but either way, you pay! Taxes are also used to pay for public schools, which is yet another example of how people call something “free” when it is not.
There’s a difference between zero price and zero cost. There could be a zero price ($0), but there’s never a zero cost. Therefore, don’t swear anymore by using the “F” word!
2. Actions Matter More Than Statements
“Actions speak louder than words,” is a well-known idiom. Humans act, and the act of choice tells us something. Consider this example: A person walks into an Apple store and sees the price of the latest iPhone and angrily mumbles, “What a rip off” but still proceeds to purchase that phone.
When one does something voluntarily, it demonstrates their true preference at the time. Assuming that individuals are self-interested and will ex ante (looking forward in time) subjectively weigh the cost and benefit of an action, and, also assuming it’s not a right to have the private property of another (i.e., Apple’s iPhone), then when a person walks into an Apple store and buys the new iPhone, the individual obviously expects to be better off in some way at that moment. To say that Apple “took advantage” of the willing customer would be nonsense since Apple, or any private business, cannot force people to buy their product. It’s one thing to say something, but the proof is in the act of choice.
3. Sunk Cost Fallacy: Don’t Cry Over Spilt Milk
“Don’t cry over spilt milk” means what’s done is done. The only costs that should come into our decision-making are future opportunity costs. Past costs are “sunk.” The typical example to explain the sunk cost fallacy is the movie example. You spend $15 to see a movie and an hour into this three-hour movie you realize that it’s horrible and will only get worse. However, your feeling is that you should stay and get your money’s worth. That is bad economic thinking. The $15 is gone so don’t lose the next two hours of your valuable time—get up and leave.
Most of us know people who were (are) in a horrible relationship or dating the wrong type of person (perhaps this applies to you). But the feeling of “I’ve already spent two years of my life with this person” can lead to a bad decision. Many end up marrying the person in order to justify the investment of time.
No offense to Beyoncé, but if you like yourself, then perhaps don’t let that person “put a ring on it”! Don’t lose the next two years of precious time. It’s better to be single than in a bad relationship (but that’s for another essay).
4. Tradeoffs: Learn to Think at the Margin
The optimal or efficient level of pollution is not zero. The optimal number of traffic deaths or sports injuries also is probably not zero. The optimal number of people getting a virus is not zero. The optimal level of safety is not perfect safety. Does this sound strange or harsh? Well, if you want to do a cross country road trip and not walk or ride a bike, or if you want to enjoy playing or watching sports, and if you want to physically interact with others, then it is clear that the optimal level of pollution, deaths, injuries, and people getting a virus is actually greater than zero. The optimal level of safety is less than perfect safety. Nothing is free including more safety—trade-offs are always involved because there is always an opportunity cost when we do something, even things like travel, play sports, or interact with others.
Incremental decision-making is what economists call thinking at the margin. Marginal means the one additional or extra unit. Every time we make a decision it’s as if we are calculating the marginal benefit (the benefit of one more unit) and the marginal cost (what would be given up to acquire one more unit) of the action. The economic way of thinking says something should be done until the marginal benefit (MB) equals the marginal cost (MC). There’s also a concept known as the law of diminishing marginal utility—each additional unit gives less and less utility or benefit.
We want clean air so that our eyes aren’t irritated when we go outside and our lungs don’t burn when we take a breath. However, if the desire is perfectly clean air this would mean no more cars, no planes, no boats or ships, and no trains (some would actually desire this situation, at least theoretically). This would impose tremendous costs on society.
Let’s look at it another way. If I snapped my fingers and made the Pacific Ocean perfectly clean but then put one drop of oil somewhere in the ocean unbeknownst to everyone else, would it be worth it to spend money, time and other resources to hunt down that one drop of oil? The marginal benefit of finding and removing one drop of oil in the quintillions of gallons of water would be less than the marginal cost. In plain English, it’s not worth it. Again, the optimal level of pollution is some, not zero.
When it comes to studying, practicing a sport or musical instrument, or dating someone before marrying them, you might think, “The more time, the better.” I am a literal person so if I told my students, “The more you study the better,” this would mean they would never eat, drink, sleep, or spend time with family and friends. But common sense says that after studying for a certain amount of time most students will say, “I get it” or simply “time to move on.” Why waste more time studying?
Also, if you are in a place in your life where you are considering marriage, then the point of dating is to acquire information about the other person so that you can make a good decision. Ultimately, you come to a point where you have enough information to propose, accept a proposal, or break up with this person. When I proposed to my wife, I did not have perfect information about her, but my information was good enough. Sure, one more month of dating would have given me some marginal benefit in terms of additional information about her, but I came to a point where I had enough information—where MB=MC.
“Good enough is good enough” is what economists mean by doing something until the marginal benefit equals the marginal cost. The MB=MC rule implies that the “more is better” thinking is not optimal. One aspirin from the bottle can help your headache but it’s dangerous to think, “Well, if one is good, the whole bottle is better.” Yes, your headache will be gone but so will you.
5. Comparative Advantage: Ability to Do Something Does Not Mean One Should
In a standard economics class, students are taught absolute advantage and comparative advantage. The former means being able to produce more than another with the same amount of resources or using fewer resources to produce an output. The latter means being able to do something at a lower opportunity cost than another.
Because there’s always an opportunity cost when doing something, sometimes it is advantageous to pay someone else to do something even if we have the knowledge and skills to do it ourselves. This also has applications to trade policy. Just because the United States (actually individuals in the United States) can produce certain products does not mean we should. It’s ok if not everything we buy says “Made in USA” because if the government tries to “protect American jobs” and begins imposing tariffs and quotas, we are not actually saving American jobs. It’s more correct to say we are saving particular jobs at the expense of other American jobs. Of course, good politics and good economics often go in different directions.
6. Supply and Demand: Understand How Prices Work
The complaint that businesses can charge “whatever they want” is nonsense. For example, why is it that movie theaters only charge $8 for popcorn and not $8,000 or $8,000,000 if they can supposedly charge whatever they want? There are two sides to a market transaction, and it’s this interaction of sellers and buyers that determines the price. What’s interesting is that many times the same people complaining are the ones making noise eating that popcorn during the movie.
7. Fixed Pie Fallacy: Voluntary Exchange Is Win-Win That Creates a Bigger Pie
Entrepreneurs become wealthy if they create a product or service that provides value for a large number of people. Unless the entrepreneurs received special privileges from the government, they didn’t forcibly take money from their customers.
The anger directed at “the rich” is based on the fallacy of thinking the economy is a fixed-size pie. In other words, those who criticize the “filthy rich” believe that they took a piece that was too big, leaving less pie for the rest of us regular folks. The reality is that these entrepreneurs baked a bigger pie. They benefited, but so did we!
In a business transaction, exchanges are voluntary, and voluntary trade is a win-win situation. The entrepreneur wins (as well as the employees he or she hires) and the customers win.
8. Good Intentions Fallacy: Don’t Forget about Unseen Costs
Intentions and results are not always the same thing. The economic way of thinking teaches us to consider possible unintended consequences of our own actions or the actions of politicians. Just because something sounds good or feels right does not mean a certain goal will be achieved. In fact, the very problem that is being addressed can become worse.
Sound economic thinking also removes one’s blinders. The effects of a policy on all groups are considered, not just one group. This helps individuals to see through politicians’ claims that a policy will save American jobs when in reality only some special-interest group will benefit at the expense of other Americans. When politicians confiscate money (i.e., taxes) to build sports stadiums using the “it will create jobs” argument, the mistake is to focus on the jobs seen and neglecting the unseen—the opportunity cost of those tax dollars.
Conclusion
There is so much more to say about this subject called economics and there are many more examples of the economic way of thinking that I could have included. Some characterize economics as applied common sense; yet, economics also gives us counterintuitive insights.
Ninos P. Malek is an Economics professor at De Anza College in Cupertino, California and a Lecturer at San Jose State University in San Jose, California. He teaches principles of macroeconomics, principles of microeconomics, economics of social issues, and intermediate microeconomics. His previous experience also includes teaching introductory economics at George Mason University.
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It probably depends on who is doing the lying. A stranger’s fabrications may not phase you, but dishonesty from a friend or lover can end the relationship. The more you feel the liar is supposed to be “on your side,” the more his or her deceptions feel like betrayal — unless, it turns out, the lies come from a politician you support.
When I shared a link on Facebook to Rick Shenkman’s article “Why Are Trump Voters Not Bothered by His Lies?” someone immediately replied by asking, “Why are Hillary voters not bothered by her lies?” Why, in other words, focus on only one mendacious candidate when lying to voters seems like a prerequisite for running for office?
Shenkman, who is the editor of HistoryNewsNetwork.org and the author ofPolitical Animals: How Our Stone-Age Brain Gets in the Way of Smart Politics, might respond with his claim that Trump “has told more lies than any other leading political figure probably ever has.” But his article is in fact about neither Trump’s astonishing number of fibs nor his supporters’ astonishing tolerance for them; it is about how widespread both such lying and such tolerance are across party lines and throughout the era of mass-media mass democracy.
Shenkman is writing for a left-leaning readership, thus his headline’s righteous indignation toward a right-wing candidate, but most of the examples he gives are of deliberately deceitful Democrats. He starts with candidate Kennedy’s campaign claim that the Soviets had more nuclear missiles than the United States:
He continued to insist that there was a missile gap to the Soviet’s advantage even after he was briefed by General Earl Wheeler that there wasn’t. After the election his secretary of defense, Robert McNamara, told the press on background that a study had found there was no missile gap, leading to blaring headlines the next morning.
JFK’s reaction? He ordered his press secretary, Pierre Salinger, to tell the media that there had been no study and that there was a gap. The truth was that JFK himself didn’t take his own rhetoric about the missile gap seriously. At cabinet meetings he cracked on numerous occasions, “Who ever believed in the missile gap” anyway?
Four years later, President Johnson “told the American people that the North Vietnamese were guilty of making repeated unprovoked attacks on [US] naval vessels in the Tonkin Gulf.” As with Kennedy, we know that Johnson was being dishonest, not mistaken. “Hell,” LBJ told an aide, “those dumb stupid sailors were just shooting at flying fish.”
Shenkman barely touches on Nixon’s perfidy in Watergate and never mentions Nixon aide John Ehrlichman’s 1994 interview, admitting that the war on drugs was not about crime or health but was rather a politically motivated attack on war protestors and American blacks. “Did we know we were lying about the drugs?” said the president’s former domestic affairs advisor. “Of course we did.”
And while he may have given Ms. Clinton a pass, Shenkman does mention the millions of supporters who refused to believe the allegations against her husband “until prosecutors revealed they possessed [Monica Lewinsky’s] infamous blue dress.”
No one should be shocked by the frequency of politicians’ duplicity, but it is frustrating when a candidate is caught in an undeniable falsehood and his or her supporters never waiver. Our political culture expects politicians to perjure and prevaricate left and right, but that doesn’t make their deceptions defensible. So where is the outrage?
“Our brains are partisan,” Shenkman writes:
While we are quick to seize on the misstatements of other candidates, we give them a pass when it’s our own. When the social scientist Drew Westen put voters in an MRI machine he discovered that their brains quickly shut off the flow of information contrary to their beliefs about their favorite candidates. The neurons actively involved in the transmission of this information literally went inactive.
It’s not just the political candidates who are lying. So are the voters. “We lie,” Shenkman points out, “about our unwillingness to put up with lies.”
If politicians keep lying and voters keep shrugging it off, isn’t that an indictment of democracy? Aren’t voters supposed to act as a check on the people in power?
In theory, an election is supposed to be more than a popularity contest. Candidates are supposed to represent an approach to policy making, which is in turn supposed to reflect both facts and a theory of cause and effect. What we have instead is a formalized tribalism, us versus them, facts be damned.
Shenkman assures the reader that the liars don’t get away with it forever, but his evidence for that conclusion is questionable. Johnson and Nixon are remembered as liars by both Democrats and Republicans, but the reckoning for Gulf of Tonkin and Watergate are outliers in the steady stream of deception flowing out of DC and the state capitals. Meanwhile, Mssrs Kennedy and Clinton will be remembered more for deceiving their wives than the voters.
Westen’s research on cognitive dissonance and party politics is troubling, but well before there was any hard data on how voters process unwanted facts, the theory of rational ignorance told us why so many facts are so unwanted: to the individual voter, the cost of acquiring the relevant knowledge far outweighs the practical benefits of knowing the truth when casting a ballot.
In contrast, the benefits of supporting a candidate accrue, not from any actual effect on the electoral outcome, but largely from the signaling that it provides the voter: this is the sort of person I am, and these are the sorts of causes I support. Symbolic affiliation isn’t dependent on the truth of any particular facts, so why should we expect inconvenient falsehoods to change anyone’s political alignment?
As I wrote in “Too Dumb for Democracy?” (Freeman, spring 2015), “getting an issue like the minimum wage terribly wrong takes no work and has the immediate payoff of feeling like you’re on the side of the angels. It also solidifies your standing within your own ideological tribe. Bothering to understand supply and demand … offers no practical reward after you pull the lever in the election booth.”
The lies we care the least to uncover are precisely those for which the cost of caring outweighs the benefits of our vigilance. That describes almost anything we may ever be asked to vote on. But when knowing the truth directly matters to the decisions we make every day — the truth about our jobs, our homes, our families and loved ones — the relative benefits of knowing the truth are far greater, and we therefore penalize the liars in our lives. Cognitive dissonance may be a barrier to accepting hard truths, but even cognitive dissonance is price sensitive.
The more decisions we cede to the political process, the less we should expect anyone to protect our interests. Even we don’t bother to do it, because the rules of the game — majority rules — render our efforts ineffectual. Worse than that: we’re not even rewarded for knowing what policies really are or aren’t in our best interest.
The truth can win out, but it’s a lot less likely in an election.
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How many jobs would the Keystone Pipeline project create? Political reporter Tom Murse points out that the answer is a matter of dispute. “Supporters argue that the Keystone XL pipeline would create tens of thousands, if not hundreds of thousands, of new jobs.” But critics “claim those numbers are wildly inflated,” Murse writes.
Both sides assume a higher number would make the project better for the economy. Both sides have it backwards.
Home Economics
The value of work is easy to grasp at the most domestic level: your own home.
Being a homeowner isn’t easy. Among other things, you always seem to have more chores to do than time to do them. The chores are not ends in themselves. Rather, they are means to an end — in this case, making a home and yard more livable or aesthetically pleasing.
Opting to do a chore yourself — “insourcing” in current parlance — isn’t costless. You lose the opportunity to enjoy the fruits of your other labors. For example, you could tackle different chores, spend more time with your family, or work extra hours in the marketplace, increasing your income. Hiring someone else to do the chore — that is, “outsourcing” — isn’t costless, either. It means you can’t buy other things. Costs represent sacrificed alternatives.
The rule when it comes to home ownership isn’t rocket science. Tackle those chores whose ends you value more than their cost. If your water softener breaks, and you value having softened water more than what it would cost either you or the plumber to repair it, then hire the plumber if his cost is less than what it costs you to fix it yourself. (Don’t forget to count the work time you’ll be giving up to act as your own plumber.)
By outsourcing the repair work, you will have “lost a job,” but your standard of living will be higher. By how much? The difference between your cost and the plumber’s cost.
Added household chores — that is, “gaining jobs” — are anything but a blessing. Chores represent hurdles between you and that more livable, aesthetically pleasing home and yard. Each job represents something you’re going to have to give up before your house is the way you want it. “Gaining jobs” to achieve a given objective is synonymous with worsening your situation, not improving it.
The Rule Writ Large — The Case of the Keystone Pipeline
What is rocket science for many is the ability to recognize that the rule for individual households extends to the national household, as we can see in the case of the Keystone Pipeline controversy. The project, which has been a political football for several years, would transfer oil from Canada to the Texas Gulf Coast. The project’s desirability is associated with the number of jobs required for the pipeline’s construction and maintenance. The more jobs created, the more desirable the pipeline, it would seem.
All involved in the discussion fail to apply lessons for individual households to the national household. Pipeline jobs are part of the cost of getting oil from Canada to the Texas Gulf Coast. They are not part of the benefits. The fewer jobs created, the better. Indeed, in the best of all worlds, there would bezero jobs required to transfer oil from Canada to the Texas Gulf Coast. That way, we could get the oil transferred without having to give up anything!
Pipeline proponents who note a large number of required jobs are unwittingly arguing against the project, just as opponents who cite a small number of jobs are unwittingly arguing in its favor.
Beyond the Pipeline
This failure to apply the simple rules for individual households is not restricted to the Keystone Pipeline issue. It pervades economic, business, and political discussions. Government programs come packaged with estimates of the number of new jobs the programs will supposedly create. The more jobs, the merrier. That’s the political refrain. Likewise, state and local economic development bureaucrats tout the number of jobs associated with business relocations or expansions.
One has to wonder whether those who peddle this more-jobs nonsense apply it to their own households. I bet not. Fewer chores, not more, make their homes more enjoyable. National households are no different. Or as Adam Smith put it in his classic, The Wealth of Nations, that which “is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”
T. Norman Van Cott, professor of economics, received his Ph.D. from the University of Washington in 1969. Before joining Ball State in 1977, he taught at University of New Mexico (1968-1972) and West Georgia College (1972-1977). He was the department chairperson from 1985 to 1999. His fields of interest include microeconomic theory, public finance, and international economics. Van Cott’s current research is the economics of constitutions.
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Why does federal spending matter? There are many reasons, but perhaps the most fundamental is that free markets allocate resources better than governments because markets rely on price instead of politics. Many industries show this observation to be true, but the emerging field of “green banks” offers perhaps one of the clearest recent examples.
A green bank is a “public or quasi-public financing institution that provides low-cost, long-term financing support to clean, low-carbon projects by leveraging public funds…to attract private investment.” Right now, only a handful of green banks are scattered across Connecticut, California, New York, Rhode Island, and Hawaii.
Free marketers rightly doubt whether public funds should be used to finance private startups. But regardless of where one stands in that debate, the states’ struggles serve as a valuable testing ground for future investments.
The State of Connecticut operates under a fairly significant budget deficit. California has been calculating its budgets without taking unfunded pension liabilities into account, and it’s gambling with its ability to service its debt. New York continues to live beyond its means. Rhode Island’s newest budget does little to rehabilitate its deficit spending addiction, and, despite having a balanced budget clause in its state constitution, Hawaii has a pattern of operating at a deficit.
In fact, a state solvency report released by the Mercatus Center has each of these five states ranked in the bottom third of the country, with their solvency described as either “low” or “poor.”
This all raises the question of whether these governments are able to find sound investment opportunities in the first place. Rhode Island couldn’t even identify a bad investment when baseball legend Curt Schilling wanted $75 million to make video games about something other than baseball!
Recently, though, there have been calls to extend the struggling green banking system to the federal level. Mark Muro and Reed Hundt at the Brookings Institute argued in favor of federal action in support of green banks. Somewhat paradoxically, they assert that demand for green banking institutions and the types of companies they finance is so strong that the existing state-based green banks cannot muster enough capital to meet demand.
Wherever there is potential for profit and a sound business plan, lending institutions are likely to be found, willing to relinquish a little capital for a consistent and reasonable rate of return. So where are the private lenders and other investment firms who have taken notice and are competing for the opportunity to provide loans to such highly sought-after companies and products?
Even assuming that there is demand for green banking services, recent experience shows that a federally-subsidized system would likely lead to inefficiency, favor trading, and failure. For instance, the Department of Energy Loan Program is designed to facilitate and aid clean energy startup companies. Its portfolio exceeds $30 billion, but following a series of bad investments like Solyndra, Inc., new loan guarantees have been few and far between. The program has already lost over $700 million.
Even the rosiest measurements do not show particularly exciting returns from this system. The Department of Energy itself estimates that over the lifetime of the loans it’s guaranteed, there exists the potential to see $5 billion in profit. However, those estimates also depend on the peculiar accounting methods the DoE itself employs.
This problem is apparent in other government sectors. For instance, determining how much profit the federal government makes off of student loans depends on who is asked. Some say none, while others say it’s in the billions. Gauging the economic impact or solvency of government programs is notoriously difficult, and different methods can yield what look like very different results. Add to that the consistently uncertain nature of the energy market, and profits are hardly guaranteed.
Examples abound of wasteful federal spending, and the growing green technology and renewable energy industry is no exception. The DoE Loan Program has already faced issues that go well beyond Solyndra: Abound Solar, a Colorado-based solar panel manufacturer, was given a $400 million DoE loan guarantee, only to later file for bankruptcy, potentially costing taxpayers $60 million. The Ivanpah Solar Electric Generating System, a 175,000 unit heliostat array in California, received a $1.6 billion federal loan and, because it failed to produce the amount of power estimated, was forced to later request more than$500 million in federal grants from the Treasury Department. A recent Taxpayers Protection Alliance study showed that risky investments in heavily subsidized solar energy could even lead to a bubble similar to the disastrous 2008 housing bubble.
Those who want to expand the government’s role in green banking likely want to see more clean and renewable energy reach the consumer market, and a lot of people probably applaud that goal — but the real question is whether the proposed means can reliably achieve that end. A wise manager with a solid business plan can find investors who will willingly take a chance. Considering the struggles of several states, trusting the federal government to build an even bigger system would exponentially increase that risk.
In contrast, the market offers opportunity to entrepreneurs in the green technology and renewable energy industries. For instance, GreatPoint Energy, a company specializing in clean coal, successfully went the route that other companies do: Design a product or service, find investors, and compete in the marketplace.
SolarCity, a California-based and publicly traded corporation of over 2,500 employees, entered the industry before many government loan programs were established. Thanks to a sound business model and subsequent horizontal and vertical expansion, it has become a leader in the industry. SolarCity’s success, however, cannot be touted by the Department of Energy’s Loan Program, which declined to invest in the company, leading SolarCity to try — and succeed — in finding private investment.
If GreatPoint or SolarCity had failed, only those who willingly participated in the startup would suffer the consequences. The issue with green banking — and indeed government “investments” more generally — is that taxpayers are not party to the negotiations but are the ones ultimately on the hook for failures.
In absolute terms, these billions of dollars are a lot of money. But in the grand scheme of government spending, the amount of money invested in green banks and renewable energy production is relatively small. If Social Security is the Atlantic Ocean, and wasteful defense appropriations are the Mediterranean, then green energy investments fall somewhere in the range of the Y-40 pool: easily measurable but certainly not insignificant.
Your odds of drowning may be smaller in the pool than the ocean, but that doesn’t make the drowning itself any more pleasant. The federal government is already under water; adding new liabilities on the hope that politicians can guess the future of energy is merely a step towards the deep end, not the ladder out.
Jonathan Bydlak is the founder and president of the Institute to Reduce Spending and the Coalition to Reduce Spending.
https://drrichswier.com/wp-content/uploads/wind-solar-power.jpg283460Foundation for Economic Education (FEE)http://drrich.wpengine.com/wp-content/uploads/logo_264x69.pngFoundation for Economic Education (FEE)2015-07-22 17:20:112015-07-22 17:21:36“Green Banks” Will Drown in the Red by Jonathan Bydlak
