My new column is up at Forbes, and discusses why politicians, particularly this administration, think they can allocate capital better than the market
The problem is that this top-down override of market capital allocations is almost certain to destroy wealth, because there are at least two problems with it (beyond the obvious liberty and property rights issues).
First, the decisions are being made by, at most, a few hundred government workers. There is no possible way these workers can ever gather the knowledge and information posessed by millions of private actors making similar investment decisions. Like monkeys throwing darts, some of the investments will work out, but on average their success rate has to be far lower than the network of individuals in the broader economy.
Second, and probably more important, government decisions-makers have terrible incentives when making these investments. Seldom, if ever, are government re-allocations of capital made with an expectation of earning a return. In fact, many of these programs promote themselves explicitly as shifting capital to investments no rational private investor would touch. These investments are undertaken because they promote some sexy technology, or create jobs among a favored constituency, or even just because they make for a nice bullet point on a politician’s reelection web site.
Obama’s investment of taxpayer money into Solyndra is a great example. It is clear little due diligence was completed before the loan guarantees to Solyndra were rushed out the door in 2009 in time to meet Energy Secretary Steven Chu’s artificial target date for the first loan of Obama’s green jobs program. A good, well-timed sound bite on the evening news was more important that the actual details of the investment.
But, in fact, little due dilligence should have been necessary. ....