Obama Plays Venture Capitalist-in-Chief With Clean-Energy Bets

Racks of lime-green batteries awaited inspection on the factory floor when the well-connected investor swept through Smith Electric Vehicles in Kansas City, Missouri, last month. A week later he broke ground on an advanced vehicle battery plant in Holland, Michigan, the ninth battery facility his money has helped jump-start in the last year.

Meet the country’s venture capitalist-in-chief, President Barack Obama. By the end of 2011, the White House plans to channel more than $50 billion to thousands of clean-technology companies through tax credits, low-interest guaranteed loans and grants. Add in money for a “smart” electric power grid, research and consumer tax breaks, such as the $7,500 credit for buying an electric car, and the commitment rises to $69 billion.

Obscured by the epic political battles over health care and financial regulation, Obama has turned the government into the chief financier of a manufacturing base for clean-energy technology, Bloomberg Businessweek reports in its Aug. 9 edition. He envisions thriving new industries putting Americans to work churning out green products such as high-performance batteries, electric cars, low-energy lights, super-efficient air conditioners, wind turbines and solar panels.

That level of government intervention in a selected business sector adds up to a new American industrial policy -- and it’s stirring a heated debate among economists and academics. The administration’s clean-energy assistance is “undoubtedly one of the larger efforts” to create an industrial policy in U.S. history, says Harvard Business School Professor Josh Lerner.

‘Broken Dreams’

A skeptic, Lerner wrote the 2009 book “Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed -- and What to Do About It.”

Obama’s biggest gamble is on electric cars and related components, on which the U.S. is spending more than $5 billion. In auto batteries alone, the White House says that it will take the country from two factories producing 2 percent of the 2009 global output of high-performance batteries to 30 factories accounting for 20 percent of the world’s output by 2012. Much of the focus is on producing lithium-ion batteries, found in many laptops, that will power autos and yet be lighter in weight and hold more charge than existing auto batteries.

The country has been down this road before. During the oil shocks of the 1970s, President Jimmy Carter created the public-private Synthetic Fuels Corp., which was supposed to free the country from OPEC dependence by nurturing an industry producing synthetic oil and natural gas from domestic shale and coal.

$4 Billion Cost

When oil prices collapsed, so did the enterprise’s business plan, at a cost to taxpayers that an Energy Department study put at $4 billion in 2005 dollars. Adventures in industrial policy by governments around the world have squandered tens of billions of dollars chasing fashionable but ill-conceived ideas.

In 1981, for example, the French government tried to shore up its electronics industry by acquiring a number of lumbering corporate giants and pressuring smaller companies into mergers. The effort choked off innovation by smaller companies and led to large losses, Harvard’s Lerner says.

Still, the U.S. has successfully nudged along many emerging industries throughout its history, including railroads that were built in the 19th century with government loan guarantees and land grants. The jet engine and semiconductor industries received government seed money, as did the Internet.

“You will not find an advanced economy on this planet that has not undertaken to help a private industry overcome market barriers,” says Jared Bernstein, chief economist for Vice President Joe Biden. China may spend $738 billion over the next decade to develop cleaner energy, Jiang Bing, head of the National Energy Administration’s planning and development department, said last month in Beijing.

Early Stages

Most economists agree that government support works best when it’s limited to a risky, early stage of development. The financial crisis caused private capital to retreat from clean energy just as Obama was hoping to ramp it up. After the government started committing funds, private money moved back in, with a record $2.1 billion in U.S. clean-energy venture deals in the second quarter, according to Bloomberg New Energy Finance.

Will consumers buy any of this? Electric cars, typically smaller and more expensive than gasoline-powered autos, could be a hard sell. With the debate over caps on carbon emissions unresolved, the economics for many clean-energy businesses are more uncertain than ever.

“If the policy is going to have any effect, it also has to address the other side of this: How are you going to create a demand for these products?” says James Manyika, a director of McKinsey & Co.’s economic research arm, McKinsey Global Institute.

Winners, Losers

The biggest knock against industrial policy is the prospect of bureaucrats and politicians picking winners and losers. The torrent of U.S. clean-energy money has allowed Obama to attend high-profile events in recession-weary Midwestern states likely to be 2012 political battlegrounds.

Auto analyst David E. Cole says favoritism does not appear to have been a factor in award decisions on technologies such as advanced batteries.

“These companies have the right organizations to accelerate the development of the technology,” says Cole, chairman of the nonprofit Center for Automotive Research, in Ann Arbor, Michigan. Still, he questions using federal money to assemble electric vehicles, which he says diverts funds from research that could lead to technology breakthroughs.

The administration says grants and loans are vetted and ranked by independent experts to insulate awards from political pressure. That could be tested as pressure builds to extend money to struggling companies.

When the stimulus funds run out, will the White House cut off companies that don’t make the grade and turn its back on well-connected donors and factories the president has personally promoted? Says Dani Rodrik, a professor at Harvard’s Kennedy School of Government: “What determines success in industrial policy is not the ability to pick winners but the capacity to let the losers go.”

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