The Rent Seeker, Posing As Visionary

Includes: TSLA
by: Craig Pirrong

I haven't written much at all about Elon Musk and Tesla (NASDAQ:TSLA) since the middle of last year. I have no reason to change my opinion that the prices of Tesla and Solar City (SCTY) stock were manipulated in April-May, but by the same token don't believe that their subsequent increases are primarily the result of manipulation. Those stock prices are partying like a 1999-era dot com company. I think the party will end soon, but I don't know when and I could be wrong.

But my main issue with Musk was not about the stock price. It was about the fact that all of his companies were heavily dependent on government subsidies and support. This support socialized the potential losses, and allowed Musk (and other major investors, notably Goldman) to capture the upside. My point was if his products and business models were so great, he could succeed on his own, by attracting private capital.

One company that I mentioned in passing was SpaceX, his space launch venture. Inevitably, this company is dependent on government contracts, given that a very large fraction of space launches carry government payloads. This is something different from Solar City and Tesla, where the government is providing subsidies but not receiving any product or service in return. But still, it means that Musk depends crucially on cultivating government support. Government contracting- especially big ticket contracting- is hardly a pristine activity. A firm does not succeed or fail at it primarily on the basis of the superiority of its product, but instead on the basis of its ability to influence politicians and bureaucrats. And a lack of scruple is often a feature, not a bug in that regard.

SpaceX was looking for a commercial launch site, and seeking state subsidies in order to build it. The company has been playing states off against one another, looking for tax benefits. My current home state, Texas, has been one of his targets. Cynically, Musk focused on one of the poorest parts of the state-Brownsville- and dangled the prospect of a mere 600 jobs, in exchange for $20 million dollars or so in tax benefits. Some of which will come from the taxpayers of that very poor community. And sadly, the state legislature has succumbed.

I've been to downtown Brownsville. I testified at a trial there in 2008. (The reason that what was the biggest bankruptcy case in U.S. history was being heard in Brownsville is a story in itself.) The law office for the local counsel in the case was at the edge of downtown, and during breaks I wandered around. It was an educational experience. I had just flown in from Milan (another story), and to be honest, I felt more foreign in downtown Brownsville than I did in Italy: and I certainly got far more puzzling and suspicious looks in Brownsville than around Lake Como. Let's just say it ain't the Bay area. And that Elon Musk wouldn't be caught dead there. Well, maybe if he did go there . . .

The poorest people in Brownsville will not benefit the slightest from the SpaceX venture. But he and his lobbyist successfully importuned the state and county to take taxpayer money and give it to SpaceX by invoking their poverty. It was utterly cynical for a billionaire to extract tens of millions from Texas taxpayers in the name of the poor Mexican Americans of Brownsville.

I know this is the way the game is played. And that's the problem: the game is cynical and wrong. It is mere rent seeking. Musk is particularly appalling because he is a rent seeker posing as a technological visionary. His businesses all depend on extracting rents from the government, which he pockets. But he has a cult of personality that portrays him as some towering visionary genius. Maybe he is. If he is, he should be able to make it all on his own, like some 19th century titan (Rockefeller, Carnegie), without collecting hundreds of millions from taxpayers. I say let him try, and I am dismayed that the Texas legislature didn't.

Disclosure: No positions