The Most Charitable Interpretation of Solyndra: Obama Is Clueless

Any rookie business student knows what it means when a company’s outside  auditor  raises “substantial doubt about its ability to continue as a going concern.”  A negative “going concern” verdict means that the auditing firm has concluded, after examining the company’s assets, liabilities, and net income that it is unlikely the company will survive.

Such a ruling warns potential investors to stay clear of the company.

Apparently, one of the few who did not understand this accounting message was President Barack Obama. Instead of staying clear, he made a televised visit to  Solyndra in Freemont, California in May of 2010. There he stated before the assembled employees, press, and TV crews that: "It is here that companies like Solyndra are leading the way toward a brighter, more prosperous future."

Solyndra declared bankruptcy and laid off  its workers on August 31.   

This was a strange upbeat message for a President to deliver about a company that received a negative “going concern” verdict from PriceWaterhouseCoopers two months earlier.  The PriceWaterhouseCoopers auditor found cumulated losses of $558 million and negative cash flows. (By the way, these cumulated losses are suspiciously close to the federal loan guarantee).

The negative audit, by the way, was no secret. It was reported by Reuters and on GreenTech websites on April 2, 2010. It would seem that some one in the Department of Energy or on Obama’s staff would have seen these accounts. If not, that is a scandal in itself.

The audit report would not have been the only sign of trouble, but it alone was enough. The numerous visits of Solyndra executives to the White House must have been about getting more bailout money. There must have been a large number of red flags we will never know about.

Obama’s visit to Solyndra was not a casual drop-by. It constituted an integral part of the selling of his top-priority green technology program. Solyndra was the first company to get a stimulus green-technology loan guarantee. Obama’s staff carefully choreographed the event and made sure it got extensive press coverage. 

How are we to explain how a U.S. President can  publicly back a company whose own auditors correctly conclude it will not survive?  None of the possible explanations inspire confidence.

One possibility is that Obama’s time horizon is so short that he was prepared to risk long-term embarrassment and scandal for short-term political gain. He could even have thought that his personal presence would cause investors to throw their money down the Solyndra pit. Who knows on this.

A second interpretation is that Obama believes his naïve view of the world –we need solar power, hence a Solyndra must be viable – trumps everything else including the fact that Solyndra was spending huge amounts of money and earning no revenues. In this case, a religious belief in green technology outweighed hard economic facts.  

A third possibility is that he is clueless when it comes to business matters. Obama could argue that no one on his staff told him – that he was kept in the dark. If we accept this argument, then we must conclude that Obama has a totally incompetent staff and administration. Obama should be reminded of  Harry Truman’s “the buck stops here.”

Of the three possibilities, the clueless argument is the most charitable.

The Solyndra affair casts doubt on the competence of the President. It also reveals the dark underbelly of state industrial policy. World experience shows that governments make poor investment bankers. The mistakes of Japan’s once-acclaimed industrial policy contributed to its three decades malaise. Mahathir’s decision to build jumbo jets in Malaysia at least was stopped before it bankrupted the country. China’s government banks throw money at political projects. Solyndra joins this  band. Let’s hope a lesson was learned.

Obama’s Jobs Speech: “And It’s All Paid For”

I had to watch President Obama’s jobs speech. I was scheduled to comment after the speech on a BBC radio program. Quite often, I skip his speeches. I already know what he plans to say. Tonight was no exception, but I had to watch.

The BBC producer warned me politely that a left-of-center commentator would join the discussion. It turned out to be Larry Kotlikoff of Boston University.

Anyway, here is my summary:

The President proposed  a half-price ($450 billion) second stimulus. He did not put a price tag on it, as I recall, but the press did. The proposed stimulus consists of spending increases for all kinds of goods things like roads and teachers and of short-term tax cuts in payroll taxes and hiring incentives. He did not mention that such short term fixes have been proven to have little or no effect – an inconvenient fact that only academic economists talk about, I guess.

The speech was delivered forcefully and with passion. It might raise his polls. But inquiring minds will want to know why a smaller second stimulus will accomplish what a larger first stimulus did not.

The President’s speech contained, pardon my French, a lie. He insisted that the second stimulus “is all paid for.” This statement will go down in history along with his: “If you like your current health insurance, you can keep it.” 

The President explained that we will spend more money now, but future spending cuts will more than compensate. Why think of  $1.5 trillion in spending cuts? Why not $2 trillion? He did not bother to say that this is the oldest “bait and switch” trick in politics.  What he is really asserting is that some future President and future Congress will be sure to make the spending cuts to “pay for” his spending right now.

I made these points during the BBC interview. I did not have any spirited exchanges with Professor Kotlikoff because he agreed that more spending now would likely create more uncertainty and depress the economy even more. So much for the right-of-center left-of-center debate BBC hoped for.

The President put himself in a bad position. He heralded his jobs speech for weeks, but he had nothing new to say. He repackaged old ideas the best he could. It is my guess that the voting public will see things as they are.

Will the New York Times Publish These Results?

"NEW YORK -- The majority of economists surveyed by the National Association for Business Economics believe that the federal deficit should be reduced only or primarily through spending cuts.
The survey out Monday found that 56 percent of the NABE members surveyed felt that way, while 37 percent said they favor equal parts spending cuts and tax increases. The remaining 7 percent believe it should be done only or mostly through tax increases."

Where is the Keynesian consensus the mainstream press writes about?

On the day this survey was released, the New York Times  published two interviews with fund managers (I guess they represent everyone) saying we need to spend more now and save later.

Obama’s Broken Record: Spend Now, Cut Later and Only Fools Disagree

The BEA’s downward revision of GDP revealed that we have yet to recover back to pre-recession levels. Rather than taking this bad news as evidence we need to cut government spending and deficits, the Obama administration sees an opportunity to spend more now and cut later. Maybe we won’t even need the cuts if business activity picks up, he says.

Obama’s liberal mouthpiece, the New York Times, reveals Obama’s new political strategy without apology:

“The President spent this week combining his pitch for deficit reduction with a renewed emphasis on the need for further temporary spending and tax cuts to encourage businesses to hire and consumers to spend.”

Note the “bait and switch:” We spend now temporarily and cut in the distant future, if at all. We have heard this “Let’s spend more now and save later” too often.  The elder Bush actually fell for it, and it cost him his reelection.

The NYT’s second drumbeat is that all “reasonable” economists agree that we should spend now and save later. After all, we all know the first Obama stimulus worked:

“Contrary to Republicans’ claims, economists generally judged his 2009-10 stimulus program to have helped, but to have been insufficient to overcome the deep downturn.”

The NYT has at least the decency to say instead of “all” economists that:

 “many economists argue that while temporary spending and tax cuts [e.g., a second stimulus] add to deficits initially, such measures can increase tax collections, reduce costs for safety-net programs and ultimately keep deficits smaller than otherwise by spurring business activity and lowering unemployment.”

What is this? Lower taxes raise revenue by promoting economic activity? Is this not “voodoo economics”? I guess as long as the tax cuts are not for the rich, the NYT can embrace voodoo economics.

President Obama reminds me of an inept  magician who attempts to misdirect his audience from the rabbit up his sleeve (more spending and deficits) to a beautiful bikini –clad female assistant (spending cuts and deficit reduction). No matter, how often he is caught, he tries it again.

I am becoming like a broken record too. This is at least the third post I have written on the lack of consensus on Keynesian economics and stimulus spending. Read
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