Obama: Clean Energy's Venture Capitalist-in-Chief

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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, director of the McKinsey Global Institute.

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 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. 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 in coming years when pressure builds to extend money to struggling companies that a cold-hearted capitalist would pull the plug on. 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 Kennedy School of Government Professor Dani Rodrik: "What determines success in industrial policy is not the ability to pick winners but the capacity to let the losers go."

The bottom line: Economists and academics disagree over whether Obama's $69 billion investment in clean technology is smart industrial policy.

Dorning is a reporter at Bloomberg News.

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