Government-backed loans can be a risky way to increase employment

In some cases, state governemnt’s will try to attract businesses and increase hiring by offering guarantees on major loans. However, if government leaders aren’t careful then they could end up putting the state on the hook for major losses.

In 2010, the state of Rhode Island gave Curt Schilling’s 38 Studios a guarantee on a $75 million loan in the hope of adding jobs. And while the firm quickly hired many new workers, it struggled and eventually defaulted on its sizable loan. According to experts, Rhode Island did not properly look into Schilling’s gaming company before making the disastrous financial decision.   

"I think it’s kind of stupid for anybody who isn’t familiar with the industry to invest in it," said gaming industry analyst Michael Pachter, in an interview with The Associated Press. "You want to believe that the state did their homework and they’re sophisticated investors and understood the risks, but clearly they didn’t. Obviously they thought they were buying jobs."

The federal government has also made critical errors when guaranteeing loans to increase jobs. In March, 2009, the United States Department of Energy loaned solar panel firm Solyndra $535 to assist with operations. However, the firm was forced to file for Chapter 11 bankruptcy protection and laid off 1100 workers.

Content provided by executive search organization, MRINetwork.