A newcomer to the byzantine world of congressional appropriations and federal budgeting, Elon Musk has attracted no shortage of skepticism as to whether he can credibly pursue his mandate to improve government efficiency. But there is one kind of federal spending for which Mr. Musk, with his Silicon Valley roots, could offer exactly the perspective we need: the government’s overly conservative yet increasingly critical investment programs.
To get a sense of the scope of the problem, let’s start with the fact that it is challenging, if not impossible, to pinpoint how much the U.S. invests — beyond the fact it includes a portion of the roughly $2 trillion our government spends annually on lending programs to support various constituencies. And this figure excludes other types of spending that often serve investment-like objectives, such as grants and research and development. (That’s partly because the U.S. government does not even have a unified public investment definition or strategy.) As for the importance of such spending: It funded the agency that was responsible for the early internet, helped make global positioning systems a reality and even supported artificial intelligence research that produced the precursor to Apple’s Siri.
Getting the United States’ public investment strategy right is urgent business. China’s industrial policy, which includes huge government subsidies across industries, cannot be countered by relying on private markets alone. And we urgently need new solutions and technologies to address challenges such as supply chain crises and climate change. The Biden administration took a step in the right direction when it aggressively expanded investment programs with legislation like the Inflation Reduction Act and the CHIPS and Science Act, which fund the development of green technologies and domestic semiconductor manufacturing. Both the Biden administration and Donald Trump have considered or endorsed the creation of government investment vehicles to pursue strategic aims.
Unfortunately, instead of employing a unified strategic approach, the government pursues these efforts through a Balkanized set of agencies and programs with myopic mandates and disparate tools. And their success remains hampered by petty budgetary politics. If there is an overarching public investment strategy, it is a highly counterproductive one: a deep-seated aversion to loss.
Instead of taking risks on nascent technologies and emerging industries — the kind needed to drive innovation and leapfrog foreign rivals — American public investments tend to go to safe projects and mature technologies that often would have been financed anyway, though at a higher cost of capital. These investments, though less likely to go belly up, hold little promise of generating enduring competitive advantages.
For example, only a small portion of the roughly $350 billion in new lending authority for the Department of Energy’s Loan Programs Office under the Inflation Reduction Act is earmarked for truly innovative investments. In the past two years, over 90 percent of the department’s funding for batteries has gone to the current generation of lithium-ion batteries (often used in electric vehicles or grid-scale energy storage), a field in which China has already built a nearly insurmountable lead. A paltry 1 percent has gone to next-generation, solid-state technologies in which the United States has a better path to competitive advantage.
There is a reason Congress tends to design risk-averse investment programs and why officials carrying them out often compound this aversion. America’s brutal fiscal politics mean that any failed investment can become a political cudgel, leaving officials open to accusations of incompetence, mismanagement or worse. From this perspective, the Loan Programs Office’s noting of its low losses — just 3.1 percent as a share of disbursed loan value — is good politics. But it also illustrates the problem. We should want those loss numbers to be higher because it would signal the bolder risk taking needed to advance our strategic objectives.
Part of this reticence comes from the scars left by Republican attacks after Solyndra — a solar panel manufacturer that received a $535 million loan guarantee from the Department of Energy — went bankrupt under a cloud of scandal. Republicans, some of whom have accused the Inflation Reduction Act and Mr. Biden’s energy approach in general of being Solyndra on steroids, have employed aggressive oversight strategies to hunt for any financial misstep they can turn into a political football.
There are also arcane budgeting rules that treat equity investments — which give investors a share in a company’s economic upside — as essentially write-offs, deterring their use at agencies like the Development Finance Corporation. Federal budgeting rules assume these investments will be worth nothing, ignoring potential payoffs if the investments succeed. Many programs cannot make equity investments at all. If the Loan Programs Office had been able to take a small equity stake in another of its Obama-era borrowers — then a little-known elective vehicle company called Tesla, whose stock value subsequently helped make its chief executive, Mr. Musk, the richest man on earth — its gains probably would have trounced other losses. (Disclosure: I work in venture capital, and while I believe these recommendations would strengthen American early-stage technologies, they are too broad to benefit my portfolio in particular.)
Officials on both sides of the aisle look at China’s dominance of clean energy products like electric vehicles, lithium-ion batteries and solar panels with a mixture of awe and envy. But what often goes unacknowledged is how China amassed this lead: with hundreds of billions of dollars in state-backed investments, many at early stages, that often went under.
It is paradoxical to envy China’s commanding position while preventing the U.S. government from making the investments needed to build American technological dominance. While the United States need not be as profligate as China, it must learn to accept some losses as inevitable on the road to investment success. Otherwise, America is doomed to continually play an expensive game of industrial catch-up while its economic rivals make the investments needed to dominate each wave of innovation.
Republicans will soon be in charge. Mr. Musk, as a serial entrepreneur and prolific investor, is wholly familiar with the difference between outright waste and losses that arise from calculated risk taking. If he wants to help generate real economic prosperity and help America go toe-to-toe with foreign governments as a strategic investor, he should help our government become comfortable with risk.
If our investments are so safe that few ever fail, we just aren’t doing it right.
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