Industrial Policies, Green Jobs, and the Challenge of Picking Winners

The story of Fremont, California, illustrates the promise and the pitfalls of big-push industrial policies. As traditional manufacturing continues to shed jobs, some communities have sought to create innovation-driven green jobs in solar and wind power, electric cars, and more efficient batteries. The passing of the baton is nowhere more evident than in the city of Fremont, a mixed-income community that is trying to reinvent itself as a center for green R&D.

Until recently Fremont’s economic engine was automobiles. The largest employer in the city was New United Motor Manufacturing Inc. (NUMMI), a large car factory that produced two of Toyota’s leading models, the Corolla and the Tacoma pickup truck. Driving along Fremont Boulevard, you pass large factories, warehouses, rail yards full of freight cars, and diesel gas stations for trucks. A local greasy spoon with unwashed windows and a faded yellow sign offers a $3 bacon-and-egg breakfast. Fremont has the classic industrial landscape found in countless communities across America. If it were not for the occasional palm tree, you might think you were in Detroit.

Over the past two decades, with the loss of manufacturing jobs, Fremont’s economic future started looking increasingly shaky. When NUMMI finally closed its factory and five thousand jobs disappeared, most residents braced for the worst. But unlike Detroit, Fremont has been able to attract a number of clean-tech companies, some of which have opened in old manufacturing plants. In fact, the old NUMMI factory is now occupied by Tesla Motors, best known for its Roadster, the first serially produced highway-capable electric car available in the United States. For a while the future did not look grim. “You can’t throw a Frisbee in Fremont without hitting another solar company,” Dan Shugar, the chief executive of the solar power company Solaria, told the press in 2010. At the time, Lori Taylor, Fremont’s economic development director, was optimistic that clean-tech companies would eventually become the city’s new growth engine.

 But in 2011 the city experienced a serious setback when one of its largest employers, a solar panel company called Solyndra, filed for bankruptcy. Solyndra was supposed to be a poster child for enlightened industrial policy, but it has instead turned into a painful cautionary tale. In 2009 the U.S. Department of Energy provided the firm with a loan guarantee of about $535 million, which enabled Solyndra to open a major production facility in Fremont and hire more than one thousand workers to make solar panels. High-profile ribbon-cutting ceremonies followed, together with a visit by President Obama, who confidently presented Solyndra as “the face of a brighter and more prosperous future.” Countless news articles touted the promising future of America’s “advanced manufacturing.” But Solyndra’s business model was based on a seriously flawed premise. It depended entirely on the competitiveness of a new type of solar array, which was supposed to generate power more cheaply than silicon-based solar cells. When silicon was expensive, Solyndra’s technology seemed inspired. But even then a smart analyst would have realized that the price of silicon was unlikely to remain high forever, because high prices inevitably create a strong incentive for other producers to enter the market, expand supply, and eventually drive down the price. By 2009, when the federal government approved the loan guarantee, the price of silicon was falling precipitously. (Another setback was the decision of the Chinese government to flood the market with heavily subsidized silicon-based solar panels.) In the end, the drop in price caused Solyndra to go bankrupt.

The media frenzy in the wake of Solyndra’s collapse focused mainly on whether political contributions were behind the loan guarantee and overlooked the two most important lessons. First, while one mistake does not condemn an entire program, the track record on industrial public subsidies in the United States and Europe is not great. It is simply too difficult for policymakers, even the brightest and best-intentioned ones, to identify winning industries before they become winners. At the beginning of the last decade, clean tech seemed like an industry on the verge of an explosion. While there has been growth, the employment gains have not been stellar: since 2003, jobs in this sector have grown less than jobs in the rest of the economy. Even if it were clear which industries would drive future growth, it would still be difficult to pick winning companies within those industries. In the Solyndra case, the Department of Energy deemed Solyndra’s business prospects worthy of public investment even when its business prospects were rapidly worsening.

 The second and most important lesson is that anytime we spend public money to support private enterprises, we need to ask

whether there is a sound economic rationale for that decision. Providing early financial support for American solar companies was seen as a way to seed a cluster of companies in the United States that would ultimately attract a growing share of global employment in the industry. In essence, the idea was an industry-wide big push in renewable energy. If an industry is characterized by strong forces of agglomeration and requires a large initial investment, international competition becomes a winner-takes-all race, where the first mover captures all the market. In this case, government subsidies early on could have helped anchor the industry in America. Once national companies gained market share, the subsidies could be removed. As noted by my colleague Severin Borenstein, however, both Germany and Spain had already attempted their own big push in this area. They made enormous investments in the production and installation of solar panels but saw their share decline as soon as the subsidies evaporated. This suggests that the production and installation of panels are not characterized by strong forces of agglomeration—if they were, the industry would be concentrated in Germany and Spain—and therefore a big push does not make much economic sense in this case.

 A large array of solar panels covers the entire south side of the roof of my house. In the middle of the day, when the sun is strong, I can see the meter rotating counterclockwise as my panels sell electricity back to the grid. It feels great to contribute to reducing the need for fossil fuels, especially in the middle of the day, when power consumption in California peaks. My panels are ten years old and were made in America. But newer solar panels are increasingly made elsewhere. Many American companies keep their headquarters and research labs in the States but manufacture the panels in such places as the Philippines and China. If this sounds like the story of the iPhone, well, it is.

From the environmental point of view, globalization of the solar-panel industry is good news, as it makes solar energy more competitive with fossil fuels. Buying my solar panels today would cost half as much as it did ten years ago, in part because they would come from Vietnam. From the employment point of view, the real question is what kind of big-push policies makes sense for the United States today. When the government engages in industrial policies, it should mainly be to correct some form of market failure. In the case of green tech, this means externalities associated with the innovation phase, not the production phase. As we will soon discover, there are solid economic (and environmental) reasons for the government to subsidize basic research and applied R&D of green technologies, since this research generates large spillovers. But in light of the experience of Germany and Spain, there seems to be little justification for subsidizing the actual physical production of solar panels.

Where does all this leave Fremont? The city is still courting clean-tech employers and has exempted clean-tech companies from payroll taxes. Although the closing of Solyndra was a major setback, local growth is still driven by R&D-intensive clean-tech companies, along with new biotech and high-tech firms that have also cropped up in recent years. There are now twenty-five clean-tech firms in Fremont, up from six in 2006. While some of them depend at least in part on federal subsidies, others are operating purely on private venture capital. It is still too early to tell whether Fremont’s strategy will turn out to be sustainable in the long run. But for now, at least, jobs are being created and the city’s prospects look brighter than Flint’s or Detroit’s.