Solyndra, Moneyball, and Lessons for Planning

Marlon Boarnet's picture

The Los Angeles Times recently had a story about the collapse of Solyndra – the once heralded poster-child of the Obama administration's green jobs plan.  A big part of Solyndra's demise was due to the rapidly falling price of their competitors' solar panels.  In 2008, the cost of solar panels was a bit over $4 for each watt generated.  Solyndra could beat that, offering a watt of solar power for $3 per panel.  Then the Great Recession hit, energy demand fell through the floor, the price of silicon plummeted, and China aggressively cut the price of their solar panels to maintain market share.  Prices dropped as low as $1.25 per watt, while Solyndra's price remained at $3 per watt.  Game over.

The Solyndra bankruptcy gives us a window to understand a common planning shortcoming.  Planners like visionary ideas, but are too often undisciplined in applying systematic data and principles to their search for the "next big thing."  Green jobs sound good, and the L.A. Times article noted that by 2009 lots of smart money had already invested in Solyndra.  Yet the mistake, clearly foreseeable at the beginning of 2009, was that even the best alternative energy company would have a hard time succeeding in the face of rapidly dropping fossil fuel prices.  Let's move from the debate about Solyndra to the broader lesson for planners.

The common planning approach, of instinct, fashionable ideas, and a dash of "herd behavior", hardly differs from the old-school approach to evaluating baseball players.  In Michael Lewis' Moneyball, and the Brad Pitt movie, the old-school scouts used their instincts to evaluate talent.  Sometimes they called it right, sometimes not, and some scouts were better than others, but it was an "all art, no science" approach to the game.  The Oakland A's won over 100 games in 2002 by applying statistical analysis to more reliably judge talent.  Oakland still took chances, but they endeavored to build a fact-based understanding of the gambles they were taking.  We in planning are too often the "gut instinct" scouts who put too much faith in our experience and too little emphasis on systematic principles and analytics.

In some of our more design-oriented planning schools, context and case are emphasized.  Those schools turn out planners that are more art than science.  Sometimes they guess right, sometimes not, but there is not enough systematic analysis and data collection behind their decisions to build an influential field.  On the other hand, a smaller group of planners has venerated market-oriented mechanisms to the point that they have lost their view of context.  My point is not that either design or economics is superior to or subservient to the other – certainly that one-dimensional debate has gotten us nowhere.  My point is that planning should aggressively nurture the combination of the systematic and the contextual, and that we should excel in such a hybridized approach to policy analysis.

The land use – transportation debate illuminates this point.  Some planners argue for transit-oriented development, while other planners argue for efficient pricing as if pricing alone were a panacea.  I have written elsewhere about the limited view of both schools, and about how a more powerful approach would unite market principals and transportation pricing with land use and place-making approaches.  The two approaches – urban design and pricing – are complements, not substitutes.

For such a hybrid approach, what is our planning equivalent of sabermetrics?  We need data on interactions.  How much do persons drive when faced with different congestion or externality prices?  How much does transit ridership increase as parking prices are changed to tilt the field away from solo driving?  How might carbon taxes (or cap-and-trade permit prices) influence the market penetration of electric vehicles?  How might the effect of electricity price on electric vehicle adoption vary in neighborhoods with different densities, land use mix patterns, and demographics?   We do not have nearly enough information on such questions, nor do we train our students to think in this manner.

Planning traditionally has occupied a middle ground, between abstract policy analysis that was too blissfully ignorant of place or context and case analyses that lacked sufficient grounding in theory.  That middle ground, in the 1960s, spawned a nascent effort at developing systems thinking within planning.  Partly because of lack of computing power and data, and partly because the thinking at that time was too focused on programming and not sufficiently aimed at training professionals with tools to think systematically about the interaction between abstract principle and specific context, the effort foundered.  Planning should revive the effort.  We are currently little more than the old, graying baseball scouts of the pre-Moneyball era, trading on our instinct but offering little in the way of broader systematic understanding.  We can do more, and the sustainability challenges of our era require that we do more.

Marlon Boarnet, currently a Professor in UC Irvine's Dept. of Planning, Policy and Design, will join the faculty of the University of Southern California effective January 1, 2012.

Comments

Comments

Solyndra, Moneyball, and Lessons for Planning

Marlon Boarnet makes the statement that "Planners like visionary ideas, but are too often undisciplined in applying systematic data and principles to their search for the “next big thing.” "; but I think he misses an important economic lesson. That is the economic viability of "green" efforts.

The usual approach to encourage programs such as green energy or affordable housing is to provide government subsidies and/or credits to foster development of these concepts. What we need to realize is that subsidies and tax credits are not "FREE" money.

We currently are experiencing record deficit spending that will need to be corrected. When government provided subsidies and tax credits that further exacerbates the deficit.

In terms of a balanced budget, subsidies and tax credits means that others will have a higher tax burden. There is no free lunch.

Subsidies and tax credits also invite the specter of fraud. Whether Solyndra was a "fraudulent" company remains to be determined.

The better approach to fostering "green" efforts is to add a "sin" tax on the behavior to be discouraged. For example, raise the tax on gasoline.

The private sector will step in and supply "green" products when it becomes economic. This will avoid the moral hazard of fraud, companies producing uneconomic products, and will not contribute to the national debt.

The Phony Solyndra Scandal

"...if we could just stop playing gotcha for a second, we might realize that federal loan programs — especially loans for innovative energy technologies — virtually require the government to take risks the private sector won’t take. Indeed, risk-taking is what these programs are all about. Sometimes, the risks pay off. Other times, they don’t. It’s not a taxpayer ripoff if you don’t bat 1.000; on the contrary, a zero failure rate likely means that the program is too risk-averse. Thus, the real question the Solyndra case poses is this: Are the potential successes significant enough to negate the inevitable failures?

"I have a hard time answering “no.” ... The federal guarantees help lower the cost of capital for technologies like solar; they help spur innovation; and they help encourage private investment. These are all worthy goals."

http://www.nytimes.com/2011/09/24/opinion/the-phony-solyndra-scandal.html

PS: It is easy to say that a "sin" tax would be better, but did you actively support cap-and-trade when Waxman-Markey went through the House and a companion bill was killed in the Senate? If you had, you would know that "tax" is not a very popular word on Capitol Hill.

Charles Siegel

Government Guaranteed Loans Are an Abomination

One of the economic "discussions" currently swirling is the role of government in the private sector. You wrote: "... virtually require the government to take risks the private sector won’t take.". If we live in a free-market system; why?

Products come into existence when there is a market for them. Please note that I support government funded research. By concern with something like Solyndra is that I find government/private "partnerships" to be a disaster for the tax payers. Consider the implications of the concept "playing with other peoples money"; there is little incentive for the recipient to actually handle money responsibly.

Furthermore, government guaranteed loans create an extreme moral hazard, that is those who apply for the loans and receive the loans may have actually NO incentive to actually produce (invent) something. The economic incentive becomes receiving grant funding, not the production (invention) of the new technology.

To repeat your quote: "... virtually require the government to take risks the private sector won’t take." OK - lets assume, for the sake of argument, that there is a role for government to take risks that the private sector won't take. The problem with Solyndra is that their production costs were higher than their competitors. Their business model was fundamentally uneconomic. So if the business model is fundamentally uneconomic, this is an obvious risk that should be avoided and was raised by those reviewing the loan to Solyndra.

CNN Money article: "What went wrong at Solyndra" wrote: "Chinese solar panels are 10-20% less expensive than U.S.-made panels; but by some estimates, Solyndra's panels were 100% more."
http://finance.fortune.cnn.com/2011/08/31/what-went-wrong-at-solyndra/

New York Times article: "Solar Firm Aided by Federal Loans Shuts Doors" wrote: "In the case of Solyndra, some experts said that regardless of the competition, the company’s unique designs, which were expensive to manufacture, were to blame for its failure. ... “There’s definitely a crisis in traditional technology,” he said. But Solyndra, he said, was “a wild-card technology,” and both Solyndra and Evergreen products had “questionable attributes.” "(emphasis added)
http://www.nytimes.com/2011/09/01/business/energy-environment/solyndra-s...

Loans and Incentives

"government guaranteed loans create an extreme moral hazard, that is those who apply for the loans and receive the loans may have actually NO incentive to actually produce (invent) something."

In reality, investors make money if their business is successful, and lose money if their business is not successful, regardless of whether their loans are government guaranteed.

The government guarantee obviously gives the banks an incentive to make loans that would be risky without the guarantee. But businesses ultimately have to make enough money to service those loans. Solyndra didn't, which is why it went bankrupt.

A loan is a loan. It is not a grant.

I have heard that Solyndra's business model made sense when they started, but China lowered the cost of their solar panels more quickly than anyone expected.

I do think the government was wrong in the way that they restructured this loan, but that is not a reason for condemning the concept of government-guaranteed loans.

Charles Siegel

A Loan is NOT a Loan in Bankruptcy

You are correct that the success of a business or failure of a business can be independent of whether the loans are or are not government backed. I will also acknowledge that there may be compelling reasons, in certain cases, for government backed loans.

You wrote that: "I do think the government was wrong in the way that they restructured this loan," Do you realize that the loan was restructured in such a manner that the government was not to be paid back first?

"During congressional hearings, Silver took much of the heat for the program's support of Solyndra and its subsequent decision to restructure the loan guarantee in a way that placed the federal government behind other investors in recouping its money in case of bankruptcy. (emphasis added)
Clearly this indicates that the loan negotiations were NOT "clean".
http://articles.latimes.com/2011/oct/07/nation/la-na-obama-solyndra-2011...

To conclude, in casually observing the operation of government backed loan programs, it seems that they tend to become a liability for the taxpayer.

More on Guaranteed Loans

Yes, I am aware that the government restructured the loan in a way that put itself behind other creditors in case of bankruptcy. That is what is being investigated by Congress now, and that is exactly why I said that they made a mistake in restructuring the loan.

Charles Siegel

Stretching the analogy.

The Solyndra bankruptcy gives us a window to understand a common planning shortcoming. Planners like visionary ideas, but are too often undisciplined in applying systematic data and principles to their search for the “next big thing.” Green jobs sound good, and the L.A. Times article noted that by 2009 lots of smart money had already invested in Solyndra. Yet the mistake, clearly foreseeable at the beginning of 2009, was that even the best alternative energy company would have a hard time succeeding in the face of rapidly dropping fossil fuel prices.

o I don't know how the planning profession can be falsely equivalenced with this story. We all know by now there were a number of folks who didn't like Solyndra's numbers (their product is fine, BTW), but the loan went through anyway. Unless you mean politicians ruin the analyses of analysts, then I'm with you.

o The mistake was not that fossil fuel prices are too low, but that China is investing in solar power and subsidizing its development. That is more important than fluctuating carbon energy prices, yet it is "forgotten" in this essay.

All in all, the argumentation is a stretch at best, and any lesson attempted is not passed on.

Best,

D

Economists and policy analysts think in this way

to some degree. The questions you posed may beg data-driven responses, but many debates still get lost in the rhetoric or ideology. Elected officials make the decisions and too often such questions like "how much do persons drive when faced with different congestion or externality prices?" become "do I get re-elected instituting a congestion tax or road pricing?" I don't know how much planning education will change that. You might be better off training sales people and trying to convince the masses of your desired changes. If all else fails, you can do what lobbying firms do - hire ex-politicians skilled in fundraising or attractive women to wine and dine the decision makers. Insufficient data or evidence is rarely the limiting factor in political decision making, more like not enough data to support my position. But, all that said, it probably wouldn't hurt if planners thought this way and were educated as such, I just question what would be different from now.

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