Jan 27 2012

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Obama’s Hat Tip to Mitt Romney

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The Risks of Government Investments

The South Carolina primary placed the building critique against Mitt Romney and Bain Capital in stark relief.

Romney the “vulture capitalist,” destroying companies and livelihoods for “Mr. Potter-like” fat cat investors, who cashed in handsomely.

The attacks by primary opponents serve as a preface to what a nominee Romney will face, with the full force of the Democratic Party behind it, come this fall. Indeed, presidential advisor, David Axelrod, among others, appear to relish the opportunity to go after Romney’s private sector experience in contrast to President Obama’s compassionate alternative.

Which makes President Obama’s State of the Union address last Tuesday so interesting.

Perhaps not even realizing it, President Obama all but endorsed Mitt Romney’s private sector experience, embracing the private equity model that Democratic surrogates are excoriating, and, as a result, highlighting a much different and much more interesting debate on how best to secure growth and prosperity for Americans.

Speaking at SOTU of his continued commitment  to the $80 billion sunk into Department of Energy’s Loan Guarantee program, used to support clean energy as part of the 2009 Stimulus, the President said,

“In three years, our partnership with the private sector has already positioned America to be the world’s leading manufacturer of high-tech batteries.  Because of federal investments, renewable energy use has nearly doubled, and thousands of Americans have jobs because of it….Our experience…shows us that the payoffs on these public investments don’t always come right away.  Some technologies don’t pan out; some companies fail.  But I will not walk away from the promise of clean energy.”

So, in other words, catalyzing private capital for investment is essential to economic growth and jobs, but even the most enlightened investments can fail.  Such individual failure should not serve as an indictment of the overall investment goals.

It would appear that Obama and Romney agree.  But it is at this nexus that the real debate can begin.  Who is the better investor, government or the private sector?

In the 154 weeks since the Stimulus was approved, federal investments in clean energy have failed spectacularly.

Solyndra, LLC, the California solar panel manufacturer went under last year at a cost of $550 million to the American taxpayer. 1,100 Americans lost their jobs.

Also last year, Beacon Power Corporation went bankrupt after receiving $43 million in Energy department dollars, costing another 130 jobs.

And, embarrassingly for the President, Ener1, Inc., one of the high-tech battery manufacturers that the President lauded in his SOTU address, declared Chapter 11 yesterday, after a $118.5 million grant from the Department of Energy.

And this is only what we know now.  The whole Clean Energy program is under multiple investigations from the Energy Department IG to the FBI to congressional committees.

In sum, government directed investment has lost more than $700 million in taxpayer dollars and cost over 1,200 jobs in less than three years.

So what about Mitt Romney and Bain Capital?

According to the Wall Street Journal, Bain Capital invested roughly $1.1 billion in 77 projects during Mitt Romney’s tenure (1984-1999). This investment produced $2.5 billion in gains for the period, among the best track records for firms of that era.

More specifically, with Romney in charge, Bain invested $250 million in its top ten projects. These projects returned a whopping $1.85 billion for investors, while expanding growth and jobs.

But of course, not all the investments panned out.

Four of the top ten investments eventually declared Chapter 11.

However, unlike Obama’s clean tech investments, each of those companies had become more profitable after Bain’s investment ($589 million in cumulative gains). In addition, company failures occurred in a window between 7-12 years after the initial Bain investment (not the 1-2 for Team Obama) and in some cases, after Bain had exited the investment entirely.

Critically, it is also noteworthy that all four companies emerged from Chapter 11 and today remain either publicly traded, or were acquired by other firms.

What has happened to Solyndra and Beacon Power, and how much will the taxpayers receive back for their investment?

So, whose model of investment is more successful?

The results speak for themselves.

Indeed the Obama “command economy” approach is rooted in special interests, compromised by politics and stymied by its own intellectual confusion.

Consider that in declaring bankruptcy yesterday, Ener1 attributed its failure to strong competition from private sector companies such as Johnson Controls and Hitachi, as well as cheaper products from China and Korea.

What is the US government doing investing in a technology company whose product already has a sound basis in the private sector? Why is the US government using taxpayer dollars to create and subsidize competition to other American firms?

 Further, why are these projects being approved in the first place when the product can only be manufactured at a loss against foreign competition?

It defies any sense of reason or basic understanding of the free market.

Indeed, this is akin to the Soviet Union that lauded its steel production as a sign of industrial prowess, but without any use for its product.

Yet, President Obama is committed to continuing with this losing proposition.

The Democrats are right.  If Romney is the nominee, his business experience will be exhibit #1 for the general election.

But with the President having already ceded the argument on the general risks of any capital investment, the superior model that Romney and Republicans championed will win the day.




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