In 1978 Congress for once did the sensible thing and slashed capital gains taxes: This resulted in the supply of venture capital exploding. By the start of 1979 a massive commitment to venture capital funds had taken place, rising from a pathetic $39 million in 1977 to a staggering $570 million at the end of 1978. Tax collections on long-term capital gains, despite the dire predictions of Keynesian big-spending critics of tax cuts, leapt from $8.5 billion in 1978 to $10.6 billion in 1979, $16.5 billion in 1983, and $23.7 billion in 1985. By 1981 venture capital outlays had soared to $1.4 billion, and the total amount of venture capital had risen to $5.8 billion. In 1981 the maximum tax rate on long-term capital gains was cut to 20 percent. This resulted in the venture capital pool surging to $11.5 billion. Astonishingly enough—to conventional economists, that is—venture capital outlays rose to $1.8 billion in the midst of the 1982 depression. This was about 400 percent more than had been out-laid during the 1970s slump. In 1983 these outlays rose to nearly $3 billion….In 1982 the U.S. General Accounting Office sampled 72 companies that had been launched with venture capital since the 1978 capital-gains tax cut. The results were startling. Starting with $209 million dollars in funds, these companies had paid $350 million in federal taxes, generated $900 million in export income, and directly created 135,000 jobs.

Let me preface my response with this: I have an affinity for the work of Ludwig von Mises and while I don’t agree with all of the theories held by the Austrian School of economics, there’s a lot to like, especially in times like these.

As a fan of von Mises, you probably wouldn’t be surprised to learn that I am not a fan of capital gains taxes (assuming you are generally familiar with his philosophies on taxation).

Yet you seem to miss that there’s a distinction between taxation and subsidies.

Taxation that inhibits capital formation and entrepreneurship is bad. Government subsidies (of all kinds) that are designed to support certain types of companies that likely cannot compete on their own in the marketplace are equally bad.

When the government inhibits capital formation and entrepreneurship through taxation and when the government intervenes in marketplaces, the outcome is the same – capital is not allocated as it would be in a truly free market.

When Congress lowered capital gains taxes in 1978 (which, incidentally, was a decade and a half before venture capital started becoming an overfunded “asset class”), capital flowed in to VC coffers and VCs put it to use. They invested in the companies that they felt presented the best opportunities to create value (and thus a return). Many did an excellent job.

I have no problem with the reduction in capital gains as excessive capital gains taxes are inappropriate in the first place.

But let’s move on to cleantech.

In the case of cleantech, a significant amount of capital is being invested in companies that cannot compete in the marketplace. Many of these companies have technologies that won’t work, many have technologies that won’t scale and many have technologies that won’t be competitive at scale.

The VCs who have invested in these companies are now eager for the government to step in and provide subsidies (in a variety of forms) that they hope will make these technologies viable in marketplaces where they are not naturally viable. Additionally, they are hoping that government will act punitively to blunt certain companies that are “too successful” (after all, they’re supposedly destroying the planet and stealing our money!).

The bottom line: being able to invest your money to create wealth without having to pay hommage to government is a good thing. Asking the government, on the other hand, to “help” your specific investments, is a bad thing.

As has been said, “A government big enough to give you everything you want is a government big enough to take from you everything you have.”

If VCs believe that cleantech is going to save the world and make a lot of money in the process, they should invest their capital in cleantech and let cleantech kick ass in the marketplace. The fact, however, that they want a little help from Uncle Sam tells you all you need to know about the viability of these companies.

If you still don’t get this, I’d suggest you take a refresher course in economics.

While it’s true that most industries lobby government in some fashion, oftentimes it’s done in an attempt to protect those industries from overzealous government involvement – not to lobby for massive handouts.

The bottom line is that there’s no benefit to taxpayers when their money is used to prop up companies that are not viable on their own. Period.

I think if you were to look more closely at your financial meltdown or the collapse of the American auto industry, you’d see that welfare statism played a key role and has not served your country well. More welfare statism is not the answer.

As for your belief that handouts to cleantech companies are necessary because consumers aren’t paying for the true cost of their impact on the environment, I’d have to point out that there would be better methods to address this on the consumption side of the equation.

I’d also have to point out that I believe “global warming” is, in large part, a scam that is being leveraged to increase government involvement in all aspects of our lives and to enrich certain special interests.

I’m all for treating the planet nicely (it’s never a good idea to shit where you sleep) but while I won’t argue that our climate isn’t changing, I’d observe that the climate has been changing for 4.5 billion years and we haven’t been here for most of them. Dismissing the dynamic and cyclical nature of the earth’s climate and other factors (such as solar activity) is quite foolish and frankly, I believe we think ourselves more important in the overall scheme of things than we really are.

Bottom line: if the world’s headed toward disaster, I can’t imagine that the average person is going to feel comforted knowing that khaki-wearing VCs along with their government subsidies are going to save us. Frankly, that’s one pot luck dinner I don’t want to attend. I’d prefer to spend my final years enjoying life (and enjoying my money).

If VC are reacting to a less-than-pristine market environment by investing in technologies that can lift the US out of it’s energy stupor, the incentives are working. What’s the worst thing that happens? We distort the “free” market and come up with a solution or two for our problems.

Clearly, oil has been the beneficiary of a distorted market – unfortunately the “technology” of oil leaves a wretched corpse. We know what we need to do – and we know we can do it – it just takes time and money.

If private industry is capable of developing alternative sources of energy that can compete in the marketplace, we will all benefit. If they cannot and taxpayers are forced to subsidize products that are not viable, taxpayers will, without end, end up footing the bill for companies that are not naturally viable. You need look no further than other industries that survive and thrive only with subsidy to see this.

I can tell you have no exposure to the energy industry because you seem to believe that government is simply going to provide a “jump-start.” It doesn’t work this way. As Neal Dikeman pointed out, “at scale, there is no capital efficient strategy in energy.” Billions will be wasted in R&D for technologies that can’t scale and billions more will be wasted trying to scale technologies that aren’t competitive at scale.

As for oil, it has been used by civilization for thousands of years in various forms. The reason is simple: it has significant energy density per unit of volume, it’s easily transported, it’s abundant (I won’t get into “peak oil” theory here) and notwithstanding the recent spike which we now know was precipitated by hedge fund speculation, it’s cheap.

In other words, it’s a superior product and there’s good reason that, without the incentive of government handouts, men like John D. Rockefeller and the legions of wildcatters who made their fortunes (both large and small) in the frontiers of oil country risked their own capital (and in many cases, lives) trying to supply the demand for oil.

If VCs think they can help develop better sources of energy, they should do so without the expectation that government will be there to help guarantee their “success” at the expense of taxpayers.

Apparently lots of people (you included) think that your inept and bankrupt government knows the right strategy and all it requires is time and money.

I’ll conclude by pointing out that, in my experience, anyone who tells you he knows exactly what needs to be done but that he needs a lot of time and a lot of money is someone you should run (not walk) away from. He wants more time and money than you have.

“it’s a superior product” Right.

IRAQ, the Gulf War, OPEC, climate change, need I go on?

Get your head out of your rump and realize something needs to be radically altered.

the “jump start” I refer to is “creating” a market for solutions in various technologies in order for them to scale and bring price down. Solar is a perfect example – prices are expected to fall 20% next year. The growth of “net metering”, allowing the excess power to flow back to the grid and be bought back by the power companies is spurring adoption of solar and wind.

These energy sources are clean, local, and distributed. They’re as American as apple pie. Can’t argue with self-reliance – independence from the oil nipple.

If you can’t look at the physical properties of oil and understand why it has been so widely-used, that’s your problem.

The bottom line is I don’t care about your political beliefs – I care about money and markets. The latter work better when the former minds its own business.

All of this said, contrary to the direction this discussion has taken, I’m not opposed to any technology on ideological grounds.

Solar is not a panacea (there is no panacea) but great strides have been made with solar, as you point out. Let private industry pay for these advances and let them compete in the marketplace on their own merit, reaping the rewards when they succeed. In that situation, the interests of all parties, including taxpayers, are aligned.

As for Oracle: don’t be disingenuous. There’s nothing wrong with government contracts. Government buys products and services like any other business. It wasn’t as if the government was buying Oracle to subsidize the database market – it was buying from Oracle because it had a need for Oracle’s products.

You make my point for me. The energy issue is so big and all-encompassing that politics is a central part of the discussion. The politics of America’s energy policy have been overwhelmingly tipped in oil’s favor for decades (while renewables have been buffeted with remarkably sporadic support – thus ensuring they’re limited success).

Back to my original point – the role of government. Energy policy is central to our economic health and our national security. If there is a viable path to achieving economic growth while making us less vulnerable to the vagaries of international threats (militarily and economically), the government should do what it can to promote same.

If that means outlining incentives to speed a transition to renewables I think that’s the right thing to do. Essentially it’s a way to accelerate the time line.

We can argue whether that’s appropriate or not (Adam Smith and all that). But I think because of the massive implications of finding a solution to this problem, the use of incentives is well justified – and effective.

On Oracle – it’s all a shade of gray – tax incentive, buying some software – it’s still money from taxpayers being used to subsidize a business in one form or another. Oracle was the beneficiary of massive gov’t contracts early in it’s growth. The same will happen when the gov’t buys fleets of new electric cars for their use (ensuring enough demand to justify continued production until organic demand is in place.)…

Anyway – good back and forth. Have a sunny day…

“Energy policy is central to our economic health and our national security.”

I hate to tell you (as an objective outsider) that you have no economic health and no national security.

The United States of America is effectively bankrupt. When you throw in entitlement programs like Social Security and Medicare, it’s possible that the total US debt exceeds 2007’s global GDP, which was about $54 trillion. Mathematically, it is impossible for you to pay off your debt. You are making over $400 billion in interest payments every year.

As for national security, I’d point out that this cannot exist in the absence of economic security. Additionally, your borders are about as porous as Jessica Simpson’s face. Not pretty.

Apologies in advance for challenging your illusions. Have a sunny day. Should be a good one for your solar panels.

So while we’re printing money and the rest of the world is willing (for now) to accept that confetti, we might as well use it to promote the right energy policy. Less oil, more clean, local energy.

Cheers.