Tesla - The Market's Own Eddie Haskell

“Nothing is so permanent as a temporary government program.”

– Milton Friedman

The first rule of economics is two-fold - resources are scarce, and resources have alternative uses. It’s rather intuitive if you let it sink in. When it comes to politics, however, can you guess what the first rule is? We’ll cut to it, no time for hints and innuendos – the first rule of politics is to ignore the first rule of economics. 

That’s a heck of a generalization, you’re thinking. Perhaps, but even the most “aligned” politician to whatever set of beliefs you hold, strays from basic economic principles every now and again. Moreover (and a much larger issue that should concern anyone who works and invests), many politicians have never grounded themselves in fundamental economic principles to begin with.

An often-used synonym for Friedman’s “government program” quoted above is a subsidy. Subsidies sound better than “government program.” Government programs sound drab and grey, comprised of slightly overweight state employees reviewing paperwork and taking frequent coffee breaks with plastic and paper cutlery. Subsidies, however, while far from “Angelina Jolie sexy,” do beat government programs by a landslide. Yet, a pig dressed up like a princess might fool one in a thousand, but it’s a pig at the end of the day, snout and muddy toes, lest you forget. 

Subsidies are the government’s way of encouraging companies to undertake business ventures that the government deems in the public’s interest. We hear ad-nauseam that the US is a free-market system. Yet, a seminal 2012 CATO study revealed that our government spends in the neighborhood of $100 billion annually (8 years ago, imagine that amount in 2020!) in aid (code word - subsidies) to private actors covering a range of sectors:

• Farm subsidies
• Rural subsidies
• Energy subsidies
• Small business subsidies
• Export subsidies
• Aviation subsidies
• Earned income tax credit

These are the biggies, and big they are. But there are many more who’ve joined the party, and one of the biggest recipients is a company we’re all familiar with – Tesla. 

Tesla is hip, Tesla is the future, and Elon Musk is that older cousin or uncle you wish you could present to your loyal Instagram followers. Yet, Tesla owes a great deal to you and I. We know this to be true because Musk and company spend $1 million plus annually on Washington lobbyists to ensure the government (taxpayer) subsidy faucet remains open. 

Now, it’s surprisingly tough to find the exact amounts Tesla has received in government subsidies – either via direct grants, tax breaks, or “lax loans.” Early on, California shelled out $612 million in tax breaks to the auto manufacturer, and the Feds issued a $465 million “loan” to aid in building their Fremont factory. The rationale for spending taxpayer money to help Tesla develop was initially couched as an environmental initiative. Electric vehicles (EVs) will reduce harmful emissions, which will, in turn, slow climate change, and this is a public good. 

The initial tax credit for buyers of a new EV was $7,500 per car (until the end of 2018). This was implemented for up to the first 200,000 cars sold (per manufacturer), which amounts to roughly $1.5 billion in taxpayer money that went to people who could afford to purchase a Tesla. In essence, this is a tax break for the wealthy, as Tesla’s aren’t cheap and their principal buyers are the upper-middle and upper classes.

There is no doubt that a world of EVs is better for our planet than gas-consuming automobiles. But, let’s return to the first rule of economics for a second. Resources (money, in this instance) are scarce, and resources (MONEY) have alternative uses. Is the goal in subsidizing Tesla, now one of the ten wealthiest companies on the planet, the smartest path to a cleaner environment? 

There is a plethora of ways to shrink the size of our carbon footprint. In any given environment, planting trees alone yields numerous effects, removing carbon dioxide from the atmosphere, and absorbing and retaining rainwater. What’s the cost of a tree plant? Don’t bother Googling, it was a rhetorical question.  

Moreover, before Tesla, there were a host of other auto manufacturers that had already rolled out some exceptionally “clean” cars. Why is Tesla receiving the lion’s share of subsidies, then? It’s a tough question to answer, and while theories abound, at the end of the day, we now have one of the wealthiest companies in the world built in large part by taxpayer money.

It sounds counterintuitive, but when a company like Tesla is guaranteed market share, this slows innovation. Yes, Tesla has innovated, and EV technology is more advanced now, thanks to them. But their outsized market share creates barriers to entry for other individuals or corporations to compete. Second, anytime money is being dolled out, you can bet corruption is not far behind. Remember when we all lost half a billion dollars on Solyndra, the failed solar company? 

Musk and company have perfected this business model. Back in 2013, they invited government officials from seven states to their Fremont auto factory. After an extensive tour, wowing attendees with advanced powertrain chatter and who knows what else, they sat the group down and explained Tesla’s vision for the future …

The Biggest Lithium-Ion Battery Factory in the World!

The room was mesmerized, and Musk had them frothing at the mouth. “How can we help?” “We want to be part of this!” Of course, they did, and Tesla then invited the group to bid on the project. If they wanted their state to house the biggest lithium-ion battery factory in the world, they needed to “SHOW HIM THE MONEY” (in your best Tom Cruise voice). 

Weeks later, Nevada brought in Tesla with $1.25 billion in subsidies. We’d be remiss in not mentioning that Tesla has lost in the neighborhood of $5.3 billion over the last 5 years. Taxpayers continue to subsidize a company that operates with massive losses, and one that has made Mr. Musk now the world’s fifth richest person. As of a week ago, he unlocked the second part of a $55 billion bonus package, and his total net worth has soared to $74 billion. This has all occurred with a product that 99% of Americans cannot afford nor can we conclude what the return on our investment (a cleaner environment) would have been with an alternative direction.  

The rest is history, but in reality, it’s not. It’s simply how things are done now, especially when you don’t take into account that resources ALWAYS have alternative uses.