Cut off Elon Musk's Government Subsidy Gravy Train

December 9, 2016 Topic: Economics Region: Americas Tags: Elon MuskTeslaSubsidiesWelfareIndustry

Cut off Elon Musk's Government Subsidy Gravy Train

How government converted one of the tech sector's stars into a corporate welfare monster.

Wednesday, Leonardo DiCaprio made a visit to Trump Tower. The reason? Selling the incoming administration on the creation of “millions of green jobs.” He wants the government to put its thumb on the scale to favor his pet industries. This nonsense must stop, and President Trump's first one hundred day agenda would benefit from a plan for ending the out-of-control crony capitalism that has made this kind of activity commonplace.

DiCaprio is easy to criticize: a movie star who addresses the UN. He hectors the government to spend money on things that voters do not prioritize as highly as he does…because, you know, he knows best. But this does more than just infuriate voters. It is regulatory capture but on a grand, political scale. It warps capital markets, warps entire sectors of our economy and diverts entrepreneurs from market-driven pursuits.

It is not a theoretical point. Take the case of Elon Musk, who has become one of the more successful entrepreneurs chasing government dollars. In a sense, Musk is a tragic story of how one of the world’s most talented entrepreneurs has become sidetracked by crony capitalism.

We are all aware of President Obama's obsession with electric vehicles (EVs), for example. In 2011, he pledged that the United States would have one million new generation electric cars on the road by 2015 and pledged billions to do it. He and a bipartisan consensus in Congress wasted gobs of money and warped markets to miss that absurd goal by a yawning margin. Likewise, he threw billions at solar energy with direct and indirect subsidies. Solar power is still not cost competitive.

From that, Musk made billions.

Tesla and SolarCity: Corporate Welfare Queens

Our government bestowed upon the EV market research subsidies, development assistance, tax rebates for consumers, credit subsidies, grants and more. For example, Nevada alone gave Musk's Tesla $1.3 billion in incentives to build a battery factory. As a matter of comparison, Tesla put 0.16 of the U.S. passenger vehicles on the road in 2015.

Even after all that taxpayer money gets jammed into the front end of the EV market, the government still must give consumers tax rebates to make sure someone buys the vehicles. Customers received a $7,500 tax rebate, plus more from participating state governments (California's residents received an extra $2,500).

Even though Tesla lost $14,758 per vehicle in 2015 after ten years in business, Musk boldly predicted a $700 billion valuation. That would put Tesla in Apple territory.

To reach that $700 billion valuation, Tesla will have to broaden its customer base. Right now, only rich people can afford Teslas. The Models S and X both retail starting around $70 thousand, well out of reach for most taxpayers.

This is not a pattern confined to the EV market. Turn to another corner of the Musk empire, SolarCity. The company leases a factory for $1 in New York located on state land. SolarCity did not spend any of the $750 million to build it nor any of the $150 million to start it. On top of that, Uncle Sam kicks in 30 percent of the installation cost to put solar panels on your house. The typical installation costs about $12,500 after federal subsidies. Three hundred thousand Americans thank you for the generous support.

This is what welfare for the 1 percent looks like.

SpaceX: Government Contractor Gravy Train

The crony capitalism is not just limited to expensive toys. Another corner of Musk's empire, SpaceX, benefits from it. SpaceX builds and launches rockets. The company’s life blood is not so much government subsidies (though Texas governor Rick Perry built a spaceport for the company). Rather, the government bestows duopoly on SpaceX for a rather lucrative part of space launch sector. Few stories highlight government meddling and incompetence like SpaceX.

SpaceX is an innovator—there is no denying it. Not only have they designed and built their rockets from the ground up, they have demonstrated remarkable feats. For example, they landed a rocket onto a drone ship. Twice.

They showed enough prowess that, in 2015, SpaceX was able to muscle into an Air Force space launch program by way of a lawsuit. The settlement made SpaceX just the second contractor in the Air Force’s payload launch market.

Until 2015, one company had dominated it: United Launch Alliance (ULA). ULA is a joint venture between Boeing and Lockheed Martin that has sent 106 payloads into space as of the cost of $350 million each, according to the Government Accountability Office. Boeing and Lockheed Martin created the company at U.S. urging, and it has maintained a monopoly over a Pentagon program estimated to hit $70 billion in 2030.

Enter SpaceX, which promised to launch the rockets for under $100 million. That seems like a great deal until you consider that ULA has not exactly been charging market prices — because we have no idea what market prices would be.

ULA relies on the RD-180 rocket engine, an engine built in Russia and derived from the RD-170, an engine that first flew in 1985. SpaceX offers an alternative to it. SpaceX exposed the huge dollars going to a government-created monopoly. All good things. But the government has now painted itself into an absurd corner with its foolish cronyism. Because ULA uses Russian engines, and because we have trade sanctions against Russia, that almost makes SpaceX the monopoly now. I say “almost” because this summer Congress allowed the use of up to eighteen more Russian engines before 2022.

SpaceX is the only other company certified to launch payloads under this Air Force program. One must assume the Russian sanctions will go away for one reason or another. The U.S. government is spending billions to create a non-Russian rocket engine alternative by 2022. So, why would a private company risk billions to develop an engine that will face two — possibly three — competitors, one of which will be government-sponsored?

A duopoly is certainly better than a monopoly, but it still chokes off the possibility of real competition down the road.

All of This Robs the Consumer of Choice

This kind of distortion ultimately deprives consumers of choice. In the case of SpaceX, the government is wrestling with its own mistakes. Past market distortions left us dependent upon a Russian rocket engine, and current government distortions will leave us dependent on the SpaceX rocket engine, in addition to some as-yet-developed government-controlled alternative.

In the case of Tesla and SolarCity, the government picked winners. It made sure its favorites glistened in venture capital beauty pageants. Then it provided subsidized debt, research, and even subsidized consumer prices.

This distortion leaves taxpayers in an unenviable position. If the companies succeed, investors stand to reap handsome rewards. If the companies fail, taxpayers get stuck with the bill, as was the case with Solyndra.

Entrepreneurs compete for a finite pool of risk capital. Those companies who do not have the government eliminating downside risk starve for capital. We will never know what companies did not get funded because the government favored Elon Musk.

Absurd Rationalizations

You often hear arguments rationalizing government meddling that go a lot like this: “Well, the nation needs product “X” and investors would not otherwise put their money into it.” True, but that necessarily implies voters having a say. Americans are generous and kind. Things like development costs for vaccines to combat rare diseases with infinitesimally small demand will probably get a fair hearing from the public. But I am going to venture out on a limb and stipulate that government support for Tesla's luxury EV sports car that goes zero to sixty in 2.5 seconds is more an example of the progressive hand of the government ignoring the voter. I do not know many taxpayers willing to write checks so that Ben Affleck, Will Smith, Steven Spielberg, Leonardo DiCaprio, among others, can upgrade their Prius or convert their mansions into virtue signaling billboards. Nor are Americans likely to be happy that government market distortion has left the Air Force dependent upon Soviet technology.

Defense of government meddling often resorts to moral equivalency. “Big oil and automobile companies receive subsidies, so we have to subsidize this company to level the field.” By all means, level the playing field, but do it by getting rid of the subsidies for everyone. Just creating new distortions to fix the old distortions only creates more problems.

And so President-elect Trump has before him the perfect populist agenda item and one that just so happens to hew closely to conservatism: Get rid of subsidies. Get the government out of the EV, green energy, space and all other markets.

This type of thing is good politics. The EV is practically California's state animal with some cities fielding 25 times the number of EVs as the U.S. average. Why should voters in red Nebraska be forced to subsidize blue Californian drivers?

Mercatus Center fellow Veronique de Rugy calls Musk, “The most prominent case of cronyism in modern history.” But Musk is not really the problem here—he is the lamentable symbol of the problem. He shows how government meddling coopts even the best and brightest.