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.