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Thursday, August 2, 2018

Economic Evolution: The Tesla Scam

Before we delve into statistics on the structure of the U.S. economy, there is one story on corporate welfare that belongs right in the middle of this subject: the Tesla electric car scam. 

First things first: I don't like electric cars in the first place. I don't see how it can be healthy for us in the long run to drive around in high-voltage magnetic field generators. There is a notable silence in the academic literature on this subject, but you can find quite a bit of studies on the harmful effects of magnetic fields in other contexts. 

I also don't like electric cars because they are lousy in snowy weather and you cannot get them with a manual transmission (like God meant for all cars to have). But all of this is beside the point - just declared, again, in the interest of full disclosure. If people want to ensconce themselves in a high-voltage chamber on wheels, that is their choice and their right. 

That is, so long as I don't have to subsidize their choice with my tax money. 

Which is exactly what has been happening with Tesla since the first day Elon Musk invented the project. As reported by Zerohedge, Tesla car sales would implode, and rapidly, if there were no government subsidies involved in either production or sales of their "cars".  

Christopher Koopman of the Mercatus Center agrees:
These subsidies have become so central to Tesla's business model that it advertises them to customers as a way to cover the cost of a down payment. And for states that do not yet offer subsidies for electric cars? Tesla's website provides links to help consumers encourage state and local legislators to subsidize the purchase of such vehicles. The company's site even goes so far as to recommend consulting a tax professional.
Koopman also notes that while Tesla paid back a low-interest loan from the federal government, the very project itself that is Tesla Motors would not have come about, were it not for precisely that low-interest loan. The fact that it was a low-interest loan is very important: the interest on a loan to a start-up business reflects the risk that the credit market attaches to the borrower's project. If the credit market places the interest rate too high to make the project financially realistic, it means that the credit market deems the project not worthy to get off the ground. The risk of losses on the loans is simply too high. 

Government can never change the risk of loss. The fact that the federal government decided to give Elon Musk's electric car scam a loan at a low interest rate does not alter the financial risk assessment. The market placed its interest rates higher than government because it did not believe that it would get its money back, with reasonable probability, if it were to lend its money at a lower rate. 

In other words: the federal government ignored the risk that Tesla would fail and taxpayers would lose their money. 

As it happened, Tesla survived and was able to pay back its loan. The reason for this is not that Tesla became a thundering free-market success once the loan was paid out; the reason is that government continued to subsidize Tesla even though the company was up and running. In 2015, the Los Angeles Times asked the pointed but pertinent question if Tesla would ever be able to operate without the help of taxpayers. 

We who have been skeptical of the Tesla scam already from the start have long suspected that the company would indeed founder once the taxpayer faucet was turned off. After years of noisy derision from Elon Musk's fan club, it looks like we are now being vindicated, as Tesla burned through $430 million of its cash reserve - in last quarter alone.

A business that has been up and running for as long as Tesla has (it was founded in 2003) and which claims to be in the fortunate position of having much more demand for its products than it can fill, should not be burning through investor and creditor money, especially not at Tesla's rate. It should be building cash and paying out employee bonuses, investor returns and shareholder dividends like other profitable companies do. 

The fact that Tesla, after fifteen years, is not raking in more cash than it spends on building cars raises two red flags over the company. The first pertains to Elon Musk himself. He clearly does not know what it means to run a business. The guy is a flaky, fast-talking socialite. Without corporate welfare he would be sell Brooklyn bridges and snake oil, like his kind did back in the 19th century. 

A more important reason for Tesla's chronic inability to pay its own bills is the political infatuation with electric "cars". The broader picture, of course, is the delusional fixation with "climate change" that has brought most of our politicians into believing that carbon dioxide is a toxic substance killing life as we know it. (As it happens, there is global warming on Mars, too, and so far the Mars Rover has not sent a single picture back of Ram Trucks and Escalades roaming the Red Planet.) However, below that big, faulty picture is the prevailing idea that government not only can, but should pick winners and losers in the evolution of our economy.

It does not matter much what motive politicians have for wanting to throw taxpayers' money after some businesses while leaving others to fend for themselves on the free market. Below the federal level, state politicians tend to claim that they want to "diversify the economy" by paying new businesses, which are often computer-heavy or in "green energy", to come to their state. The problem is not primarily their motive - although that matters when the issue is brought up in legislative budget debates - but the utter waste of capital that follows in the footsteps of this corporate-welfare spending. 

The waste is of both taxpayers' money and of private venture capital that is attracted to government-favored businesses. The private capital goes to these businesses because the market assessment of them is distorted by government; if there were no artificial intervention with tax money, the private investments that go into favored businesses would be available for other, genuinely promising ventures. 

Proponents of "economic development" tout success stories claimed to show that this practice of picking winners and losers is working. The problem with practically every story is that it fails to compare the government intervention to a free-market solution providing a low-regulation, low-tax economic environment. 

It is easy to point to a dollar spent and say "if that dollar had not been spent, nothing would have happened". But that is precisely the point: the question is not what would have happened if the dollar had not been spent - we already know nothing would have happened. The real question is why nothing would have happened. 

So long as "economic development" is motivated by narratives that do not even mention a free-market alternative - let alone evaluate its potential - our elected officials are given plenty of reasons to carry on with corporate welfare. As I explained yesterday, this lopsided reasoning around "economic development" goes well with the destructive philosophy that government can engineer the economy as politicians intend, and thereby be the engine of tomorrow's prosperity. 

Tesla's downfall, which is inevitable, will be be a day of reckoning for corporate-welfare advocates. Hopefully, it will mark the beginning of the end of a practice that fuses government and capitalism into a destructive, wasteful bastard of an economic system.

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