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Saturday, June 13, 2015

Elon Musk has received billions in subsidies

While receiving subsidies is nothing new for the Forbes 400 or even multi-hundred millionaire pikers like Mitt Romney, a recent story in the Los Angeles Times (via Good Jobs First) shows that Elon Musk (#34 in the Forbes 400) is a champion at getting subsidies for his companies. According to the Times article, Musk's three companies, Tesla, Solar City, and SpaceX, have received a total of $4.9 billion (nominal value) in subsidies over the years. The article says that Tesla and Solar City stand out in the importance of the subsidies relative to the size of the company.

While SpaceX has received only $20 million, both Tesla and Solar City have received over $2 billion each, if you count the value of the subsidies their customers have received for buying Tesla vehicles and Solar City installations. This is more significant in the case of Solar City (about $1 billion) than for Tesla (about $321 million). Even without these sums, the companies have directly received about $3.5 billion, most notably for the new Gigafactory in Nevada and for a solar panel facility in Buffalo, New York.

Regular readers will remember that I have long argued in my books and elsewhere that these subsidies represent a transfer from average taxpayers to the much wealthier owners of the companies involved, worsening the already substantial inequality in the United States. These investment incentives have to be offset by higher taxes on others, reduced government services, or higher levels of government debt. While they are not the biggest driver of inequality, they do their part. Moreover, location subsidies reduce the country's economic efficiency: It may well have made more economic sense to locate the battery Gigafactory as close as possible to Tesla's assembly plant in Fremont, California.

While Musk refused to be interviewed for the Times story, he responded the next day on CNBC. Among other things, he argued that it was wrong to report a single figure for subsidies, which makes it seem like he received one big check. This is right as far as it goes. However, I think it would make more sense to give a single present value for the subsidies rather than the nominal value, which overstates the value of multi-year subsidies such as those for Tesla. Moreover, as Good Jobs First points out, it is perfectly necessary for taxpayers to know what their long-term liabilities are for multi-year subsidies in order to properly assess the impact on government finances.

Musk also defended the Tesla subsidies as merely necessary to make the project happen faster, rather than necessary to happen at all. Yet it conducted a multi-state auction in an all-too-common use of its location decision for rent-seeking. As I analyzed at the time, the deal was below average in terms of cost per job and aid intensity compared to other automobile facilities, and it is 13 times larger than Nevada's previously largest incentive package.

Ultimately, the Musk story is far too familiar on a number of dimensions. Most importantly, it is a tale of rent-seeking and the policy/political drivers of inequality.

Cross-posted at Angry Bear.


  1. I think your fundamental premise, that government subsidies extract wealth from the middle class is wrong. Superficially money from the Government has sponsored a successful business and made Elon Musk and his backers richer.

    What I object to is the idea that increases in Government spending and taxes is stealing from the middle classes. This could not be more wrong. Government taxing and spending is pretty much the only sure way to redistribute wealth. In the case of Tesla the social and economic benefits of promoting the transition from ic to electric make it an incredibly good investment for society as a whole. The government is right to sponsor selectively in this way. Of course they don't always get it right but spending public money in this way is not extractive. Spending money always promotes economic activity. And this is just about the most important role of government.

  2. Reasonable post. I've got a gut-based understanding of your annoyance with Musk and his ilk. But I think Sion's got a reasonable objection, that what looks like crony capitalism here has in fact created wealth which benefits all of society.

    Your post was copied over at Angry Bear and I've got a longer response to it there.

  3. Sion, while selectivity is cheaper than across-the-board business tax cuts, selective tax breaks still have to be paid for. Now is actually a good time to run deficits since interest rates are so low, but we are seeing plenty of program cuts around the country and tax increases (and tuition increases) that hurt the middle class. Those are the three choices. Our experience with program cuts at present certainly suggest they hurt the middle class and poor: education cuts, pension cuts, etc. Debt may not have an immediate impact on the middle class but we have seen since 2010 that debt is being used as an excuse to attack Social Security and Medicare.

    Even with all that, I don't think selective subsidies are always a bad policy. Subsidies to regenerate poor areas that genuinely benefit the residents can be justified if the cost isn't excessive. I'm not opposed to technology subsidies in all cases, either. In this post, what I'm emphasizing is that subsidy programs have, for some rich individuals, been a big part of their rise to wealth beyond the famous Elizabeth Warren rant on how no entrepreneur does it alone.

  4. Yes, NPV of subsidy streams should be calculated. One benefit of near zero rates is the mere sum of payments looks like NPV.

    And yes, subsidy to individuals may be NPV positive to aggregate wealth, but it is unlikely to be the *most* positive. To argue these points we must be in the habit of calculating public investment ROI and NPV, which we do not do. yet we argue.

  5. Kenneth,
    This topic has been kicked around a fair amount now.
    I am not sure exactly what your point is, or what you have added to clarifying that point.

    What ever subsidies Musk is receiving, they are miniscule compared to the subsidies the fossil fuel electric generation supply chain receive and have received, and miniscule compared to the subsidies the internal combustion engine supply chain for automobiles receive and have received.

    You object, that fact naturally doesn't make the Musk company subsidies either good or bad.
    Exactly, neither has anything you have noted in your post. I am sympathetic to the idea that corporate rent seeking has run amok, not least by extorting tax concessions.
    But, I don't have any idea whether Musk's companies are an example of that or not.
    Large numbers are thrown around regarding Musk's tax concessions, but almost certainly those numbers are exploited and promoted by his competitors, or opponents to alternative energy.

    My guess, given your blurb at the top of your blog, is that you are one of the good guys.
    My guess is that this blog post will be exploited and enjoyed for all the wrong reasons.

  6. Elon Musks recieves subsidies from Norway as well. Electric vehicles are exempted from all car taxes (and Norway`s car taxes are the highest in the world). On average the taxes on a Tesla should have been app 70 000 - 80 000 dollars, instead they are zero. In addition they are exempt from road tax, app 400 dollars per year, road tolls which for an average city dweller can easily reach 1000 dollars a year, they park for free in public spaces, another 500 dollars a year, and they recieve free power from a number of public charging spots.

    This has resulted in Norway being the second biggest market for tesla app 6000 cars sold so far, or 10 pecent of all Model S sold so far to a country with 5,2 mill inhabitants. Your angle is very interesting, it had not really occyred to me that the Norwegain ataxpayer has subsidizing one of the richest man in the world with at least 450 mill dollars and counting.

  7. Dan, yes, both Tesla and Solar City have gone into full rent-seeking mode when conducting site location searches. Tesla said it wanted $500 million, but it turns out that was the minimum it would settle for. It got $1.1 billion (present value, by my calculation) for the Gigafactory. Solar City got $750 million (nominal) to build a factory in New York state. I have covered Tesla before but was not aware of Solar City until I heard about it from the LA Times reporter. As for my work being used for the wrong reasons, it is something that goes with the territory, given that conservatives criticize subsidies for efficiency reasons whereas progressives criticize them for equity reasons. That is why you see some odd-bedfellow politics (Ralph Nader + John Kasich, for example), as I discuss in my book *Competing for Capital*.

    Anonymous, thanks, that is very interesting. Do you have any links?

  8. I think it's worthwhile to distinguish between subsidies that benefit one company and "improvement" subsidies that broadly favors everybody who happens to be in a certain line of business. Norway's tax breaks are after all aimed at changing society, and every company that makes electric cars (or components) happens to benefit from that. Currently Tesla is one of a few major makers of electric cars, which means they gain disproportionately from this tax policy, Nevertheless, if more countries adopted similar policies then the field would broaden double-quick and eventually subsidies could be phased out once the transition is well underway.

  9. I would point out that the tax subsidies from the State of Nevada are not the only reason Musk has located his Gigafactory there. Nevada is currently the only source of lithium in the US so locating the factory there close to the supply of raw materials makes sense. This is in addition to fact that the cost of land where he has located the factory is far less then the cost would be in California near his Tesla assembly plant.

    1. colnago80, if Nevada is the most efficient location for the Gigafactory, then why would it need subsidies to be there rather than California? And why would it need more subsidies in Nevada than California was apparently willing to offer? I feel quite confident it all comes back to rent-seeking.