Streetwise Professor

February 15, 2014

The Rent Seeker, Posing as Visionary

Filed under: Economics,Energy,Politics,Regulation — The Professor @ 9:36 pm

I haven’t written much at all about Elon Musk and Tesla since the middle of last year.  I have no reason to change my opinion that the prices of Tesla and Solar City 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 US 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 (Rockefellar, Carnegie), without collecting hundreds of millions from taxpayers.

I say let him try.  And I am dismayed that the Texas legislature didn’t.

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40 Comments »

  1. All great fortunes are made by privatising profits and socialising costs. To become a billionaire you have to sell your soul. No exception. Carnegie heavily lobbied for high import tariffs on steel. He could not compete with the British otherwise. With that being said, Go Elon! There is absolutely no need to sell cars through 3 middlemen in this day and age.

    Comment by So? — February 16, 2014 @ 12:09 am

  2. I think the party will end soon, but I don’t know when and I could be wrong.

    With Tesla? Musk could probably expand their market much more if he would kiss the collective ass of the auto dealers and put more money into charging stations. As is, he’s constantly fighting them because he wants to keep everything in-house, including financing. Good luck with that, especially when they’ve got federal and state level rent-seeking protections.

    I don’t fault SpaceX for doing government launches, since that’s more or less what the space launch market is – government-funded launches. Privately funded launches are a very small part of that, and they’re done under contract for someone, so it would either be SpaceX or someone else.

    Maybe he is. If he is, he should be able to make it all on his own, like some 19th century titan (Rockefellar, Carnegie), without collecting hundreds of millions from taxpayers.

    They were a mixed bag on that. Rockefeller did pretty well with some admittedly rough business practices, but the railroad guys were playing a whole ton of shell games with financing and federal railroad subsidies.

    Comment by Brett — February 16, 2014 @ 1:27 am

  3. You are out of your mind if you think those old-time tycoons didn’t rely on government to make thier millions.

    Comment by Julie — February 17, 2014 @ 6:37 am

  4. I agree this is a profoundly cynical exercise. However, to call it rent-seeking is a bit cynical itself. The NPV of the infusion of 600 jobs, assuming they a) materialize, b) pay more than 20K and c) are sustained longer than a few years, would put the offer on par with some of the best publicly financed projects. Lots of assumptions, sure, but there are more colossal cases of rent-seeking in the oil-and-gas, cableTV, and electric power “industries” that all rely on massive, sustained socialization of risk for private gain (“natural monopoly” protections plus hefty subsidies as sacrosanct as the core defense budget). In short, the Roberts, Dolans and Kochs of this country make Musk look like a mouse.

    Comment by Brian — February 17, 2014 @ 7:40 am

  5. Correction: Monk to Musk

    Comment by Paul Pangrazzi — February 17, 2014 @ 7:49 am

  6. “Inevitably, [SpaceX] 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.”

    I’m not sure the Solar City and Tesla-type subsidy is necessarily much worse than the SpaceX-type situation. With Solar City and Tesla the government has (in theory) an interest in the development of clean technology and so it pays for development of those products–just as it has (again, in theory) an interest in supporting the International Space Station (ISS) and so it pays for supply missions to ISS. Why is the former worse than the latter?

    Would it really make you feel better if the government bought all of Solar City and Tesla’s products? Isn’t it better that the government requires those companies to find customers and release their products on the free market?

    subsidies for products or services the government doesn’t purchase (as with Solar City and Tesla) and

    Comment by Michael — February 17, 2014 @ 9:48 am

  7. Caught it. Done. Thanks.

    The ProfessorComment by The Professor — February 17, 2014 @ 10:43 am

  8. My God Professor-I am so not looking forward to them socializing the costs of your re-education. The tax payer burden for pharmaceuticals alone will be astronomical.

    In some ways Brownsville is like the northern suburbs of Matamoros. I was on South Padre a couple years ago and was surprised to see Bentleys driving on the beach through deep sand areas. There were banners up for July 4th celebrating of course Nuestra Señora del Refugio.

    Comment by pahoben — February 17, 2014 @ 11:26 am

  9. @pahoben. Bullets are much cheaper. No man, no problem. I would no doubt be marked as an incorrigible.

    Brownsville definitely is like N. Matamoros. Especially the downtown.

    My favorite story in this regard. I am a Civil War buff, and I went to see the site of the last battle of the Civil War, at Palmetto Ranch. It is right on the Rio Grande. I got pulled over by Border Patrol who made me get out of the car while they searched it thoroughly, looking to see whether I was smuggling in a new housekeeper or something that had paid for those Bentleys.

    The ProfessorComment by The Professor — February 17, 2014 @ 11:45 am

  10. Probable cause was what in the hell is an Anglo doing here.

    I remember the first time I showed my wife the border and at that time and place the river was a trickle. She said where’s the border. I said this is the border. She wouldn’t believe me. I think she expected passport control and customs.

    I took my wife to see Matamoros and we caught a cab back to the border. The cab driver points out what he says is the best restaurant in the city and notes it is currently closed for remodeling. Honestly it looked kind of ramshackle so i asked him how long it had been closed for remodeling. He answered-eight years.

    He said a priest and a Matmoros cab driver showed up at the pearly gates at the same time. St Peter was very happy with the cab driver but not so much with the priest. The cab driver asks why and St Peter says-you my humble cab driver have prompted far more people to pray for their eternal souls and beg for forgiveness than the priest. St Peter and i are aligned on this.

    Comment by pahoben — February 17, 2014 @ 1:59 pm

  11. @pahoben. All very amusing, in a frightening sort of way.

    What makes my experience even more amusing is that my 75+ yo parents and my 13 yo daughter were also in the car.

    “What are you doing here?” “Well you see, officer, I am here to see the field of the last battle of the Civil War.” “Uh-huh. Get out of the car.”

    The trial I testified in Brownsville was amusing. At the time (and it still may be) it was the largest bankruptcy case in US history. $10 billion in claims. The judge, who was a great guy, was obviously a little unfamiliar with the subject matter (my testimony involved valuing a Peruvian copper mine–what made the case so big dollar wise is that the price of copper had increased five-fold from the time of the disputed transaction to the time the case was heard). I knew that 90 percent of the cases he heard were drug offenses. I think he was overjoyed at having something different.

    During my walks around downtown, I was imagining the Ghost of Major Brown saying: “What the hell? I thought we won this damn war!”

    The ProfessorComment by The Professor — February 17, 2014 @ 5:41 pm

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  13. I don’t think Elon Musk cynically focused on the poorest part of the state. If one is going to build a spaceport, the best location is on the equator so that the earth’s angular velocity contributes more, eg, ESA launches Arianne rockets from French Guiana, not from Brest. it’s also good to have ocean to the east so that your burning rocket parts don’t fall on potential investors. Brownsville is the best location in Texas. On the other hand as a Texas taxpayer I think spacex should do an IPO or borrow the money to build it’s spaceport.

    Comment by @joegremlin — February 18, 2014 @ 10:01 am


  14. $20 million for 600 jobs is nothing , compared to the $800,000/job that Obama’s $850 billion boondoggle cost the American taxpayer for those “shovel ready” projects

    .

    Comment by JJ — February 18, 2014 @ 4:57 pm

  15. I notice you didn’t tag this opinion as “aerospace” or “rocket-science”. Brownsville is the municipality closest to the equator while still being part of the continental United States. To do better he would need to extend his logistics into a different country or across an ocean to build on islands (which SpaceX has with their initial trial launch out of Kwajalein). A Brownsville launch site is one of the best US options from a physics point of view, so calling it cynical demonstrates willful ignorance of what is needed to actually make a rocket launch work well.

    Comment by JimN — February 18, 2014 @ 7:52 pm

  16. @JimN. Sorry. Try again. None of that explains why the state of Texas should be paying him. Based on what you say, if anything he should be paying Texas to get such a prime location. And note that he was playing off Texas against other locations, and therefore would have been would been willing to use a less suitable location if the associated political jurisdiction had paid him enough.

    The ProfessorComment by The Professor — February 18, 2014 @ 10:52 pm

  17. I agree it’s a sorry practice. But why focus on Musk? Everyone does it. And Texas pays better than most, after all, via the TEF. http://www.nytimes.com/2012/12/03/us/winners-and-losers-in-texas.html?pagewanted=all

    Comment by jfw — February 22, 2014 @ 3:49 pm

  18. Sir – This post shows your near-sighted stupidity and rings loudly with specious arguments. To this very day, the oil majors still benefit from significant tax breaks in era when Exxon is announcing profits of $10 billion a quarter. Why are taxpayers still subsidizing these mature, highly-profitable industries? And while you are criticizing SpaceX, you forget to mention that Lockheed, Boeing, and Northrop probably wouldn’t exist if not for their influence peddling to win contracts. SpaceX by all accounts is doing it better, faster, cheaper. The same cannot be said for the JSF, which was created explicitly to achieve these goals.

    Before you make these accusations, you should consider the bailout of GM, Chrysler, and all the major investment banks. If you have a problem with rent seeking, you should attack the companies collecting the most rents without changing their knitting. At least Musk is changing the dialogue.

    Comment by MB — February 26, 2014 @ 8:37 am

  19. Brownsville was not “cynically” chosen because it is poor. It happens to be just about the lowest latitude place in the U.S. with water to the east. Those things are essential for the economics of rocket launch to orbit. Ever wonder why NASA launches where it does? If Musk were doing this without subsidy it would be better if the launch facility was placed outside the US, say on the northeast coast of South America — where the European Space Agency does it.

    Anyway, subsidies are a valid way to jump-start new ventures to compete with entrenched interests (NASA, oil/gas/coal, etc.) where the risks are high and capital needs are great. Would rather they go to a visionary than some dope.

    I would also like it if the taxpayer got an equity interest so we can participate in the upside but presumably there is a public interest/upside in having a solar industry, electric cars, and private space launch or we would not subsidize in the first place.

    Comment by Brent — February 26, 2014 @ 9:02 am

  20. One of the things not mentioned is that the Tesla drive train is based on the work of AC Propulsion who created the tZero, a Miata sized electric vehicle. If it was not for Elon Musk, his visional drive, and deep financial pockets, I am sure the state of electric vehicles would not be as alive today as it is. His challenge to the other car companies is for them to do better. At this point, a very high bar.

    As our fossil fuel energy supplies become more expensive to produce per standard quantity. Solar energy stored in batteries is emerging as a viable option. Musk’s goal is to build a state of the art battery manufacturing plant to supply his Teslas with supply constrained packs. The offshoot of this is that the utilities will be able to store electrical power with the goal of eventually having more efficient management of the grid. He is looking for a location in the American southwest where he may be able to power his plant in part or totally from solar and use of his battery packs for storage for night time production. I am sure we see various locations compete for that plant.

    I had a vision that still remains where a young lad is viewing Orville Wright’s take off on “First Flight” at Kitty Hawk. The young lad tugs on his uncle’s trousers and says: “Uncle Boeing, what do you mean by “inflight meals”??? Orville didn’t have time to unwrap a sandwich.”

    Should be an interesting century.

    Comment by PeterEV — February 26, 2014 @ 9:31 am

  21. While I don’t agree with government involvement in any aspect of business nor using the theft of taxation to redistribute, I applaud Musk on many fronts. He is creating businesses that meet a need that create jobs. Hats off to him. He would be a fool to bring a potentially huge business to a state without getting some concessions. The privatization of space launches is long overdue and while may provide few jobs today, will be a big job market in the future. It is GOOD for Brownsville. The fact that the USG is its biggest customer is not his problem, it’s ours. What are we voting for politicians who fund massive expenditures for defense, communications and space exploration? As far as Tesla goes, until you have driven a car made by them, I would hold my opinion. Let’s just say that I will continue to buy Tesla and short GM. One is a capitalist driven innovative company and the other is a crony capitalist, quasi government run company. Hmmm…I wonder which one will produce economic gains for society?

    Comment by Richard — February 26, 2014 @ 9:49 am

  22. Are the pinkertons not rentseeking, suddenly?

    Comment by Lal — February 26, 2014 @ 11:38 am

  23. Professor: I am intrigued by some of the concepts in your article (like rent seeker vs. visionary as opposing positions) and it is refreshing to see criticisms of Musk outside of the cars his company produces. Quick question: did Paypal, Musks original wealth maker, have anything to do with government subsidies or handouts? Otherwise it would seem only his transformational products have received government subsidy. Which if he was forced to publish what he has learned from those handouts would be a lot like simply funding research. Maybe we should compel rent seekers to publish what they discover if they received gubmint cash?

    It would be nice of the world was as black and white as your article would like us to believe it is. First, the government provides subsidies to all the primary players in the markets Musk competes which makes him extremely homogenous, not noteworthy. Second, Musk is attempting to break the hold dealerships have on car buyers. This is unique in the auto business. Perhaps if the DOJ would dust off some of the Sherman Anti-Trust laws and use them, new competitors would not require government subsidies to compete.

    And finally, just curious, why harp on Musk for the homogenous things and ignore the one that actually might be a huge benefit to consumers? Is it the “posing’ aspect that has panties bunched?

    And thanks for getting my noggin working…

    Comment by Yaw — February 26, 2014 @ 12:50 pm

  24. I think your article points to two real issues. First, note that it’s a rentier world and there’s very little to be done about it. Technology has made production so efficient that the world can support a much larger population with much less tangible capital than previously.

    It’s simply not possible for everyone who cannot work, to live off of equity-type capital. (Real estate, tradable goods, stocks, etc.) There aren’t enough of such things. Therefore, most retirees must be rent-seekers by sheer mathematics.

    Working backwards, those who would like to survive past their able-to-work age (i.e., retire) must spend a fair amount of their energy figuring out how they can collect sufficient rents to survive in retirement. This is one reason why debt-to-income levels are so high across all categories.

    But second, while the rent-seeking impulse is natural and even necessary, a people should try to cultivate leaders who will structure the economy so that the work of the rent- and profit-seekers (such as Musk, and the other corporate titans) also benefits the whole population. Right now it seems that far too many leaders are simply getting into bed with the rent- and profit-seekers, taking care of themselves only, and not working for the good of the people.

    Comment by Sustainable Gains — February 26, 2014 @ 3:08 pm

  25. In case you weren’t paying attention, those oft mentioned titans of business like Rockefeller, Carnegie, JPM Morgan and the like were also rent seekers. You don’t corner markets by playing nice or playing fair. It’s crony capitalism 101. I think it’s a wee bit judgemental (or maybe just naïve) to single out Musk for playing the game and hold out some of the largest crony capitalists in our history as morally superior.

    Take a look at Apple, Amazon, GE, the current JP Morgan (how many $billion in fines and counting for JPM just in the last few years?). These corporate monstrosities feed at the trough of subsidies provided by taxpayers and labor, and when it’s time for them to pay back to the infrastructure that fosters their very existence, they bitch and complain for even more subsidies and tax breaks.

    That fairy tale of American business you seem to be alluding to is just that, a fairy tale.

    Comment by JustSayin — February 26, 2014 @ 3:11 pm

  26. Really though, regardless of the company, wouldn’t you try to work the best deal possible and play states against each other to compete for the location? I would think most shareholders expect that of you.

    Comment by Sarath — February 26, 2014 @ 7:49 pm

  27. @Sarath . . . (1) yes, that’s par for the course but it doesn’t make it right, (2) it is hardly deserving of the title “visionary”; if you are right it is better described as “ordinary”, (3) I am as critical of the state of Texas for playing this game and paying this price as I am of Musk for taking advantage of it.

    The ProfessorComment by The Professor — February 26, 2014 @ 10:25 pm

  28. @Brent. If a Brownsville launch location saves Musk money compared to other locations, the state of Texas should have extracted rents from him, not given him money. If Brownsville is such a super launch location, Musk’s threat to go elsewhere was a bluff.

    FFS, can’t Texas legislators play Texas Hold ‘Em?

    Your analysis of the social benefits of subsidies is flat wrong. And your analysis of why subsidies exist is naive, to say the least .

    I would rather that money go to neither visionaries or dopes.

    Finally, most subsidies are the opposite of what you would like. Taxpayers don’t get calls. They write puts, and collect no premium. Very bad deal.

    The ProfessorComment by The Professor — February 26, 2014 @ 10:35 pm

  29. You can make the same argument with Apple which relied on government funded innovation to develop the Apple I or Google which was totally reliant on the government funded internet. The private sector rarely innovates, except perhaps in coming up with new ways to collect rent. The public sector is where the game is at.

    Comment by Kaleberg — February 26, 2014 @ 11:24 pm

  30. Agree that if it’s such a good location, it doesn’t make sense for Texas to pay for it (France doesn’t pay you to buy a house on Riviera either). Either the location has a value, in which case state should tax it, or it doesn’t in which case why build there?
    That said, 20m for 600 jobs means about 33k wages per job, so it could still work for the state if it would get Musk to (unconditionally agree) to fix the wages at least at that level for at least two years and employ only unemployed locals (who cost the state money anyways). Doubt it though.

    Re subsidies. Well, they do have place. Look at 19th century, and the protectionism (which is a subsidy) of US and Germany (or China now). That’s how they went from non-entities (agrarian state in US, small artisans in Germany) to superpowers. Also, post WW2 lots of subsidies to some parts mean we’re where we are (AT&T springs to mind).

    Sometimes the payoff is in the tail, and no reasonable commercial entity (which generally doesn’t look further than 5 years) would, or even responsibly (to their shareholders) should, take it.

    And the payout for taxpayer is/can be there – not always immediate, but don’t you think that babyboomers benefit massively from the subsidies that US govt poured into various industries in 50s/60s?

    Comment by vlade — February 27, 2014 @ 6:55 am

  31. His online presence managers will be out if full smile.

    What happened to the fart powered vegetarian rocket to mars? I’d support the subsidy if he pilots it.

    Comment by bob — February 27, 2014 @ 7:30 am

  32. There are three locations that work. Brownsville, SE Florida, outside the US. If we want Musk to have a launch facility in the US then it may be appropriate to provide him federal incentives. SE Florida already has infrastructure and people to support space launch. Brownsville does not have that infrastructure but does satisfy the physical need of low latitude and water to the east. So Brownsville is competing against SE Florida and to do so must make it economical for Musk to build the infrastructure and attract the people that SE Florida already has. [In a real sense, Fl is already offering Musk subsidies in the form of past investments the US taxpayer has made in NASA launch facilities in FL].

    As to the broader subject of subsidies: I believe that there are times when the people of this country, acting through their fedral state and local governments, can and should provide subsidies to help jump-start industries that are in the public interest. Solar, electric cars, private space launch all fall in that category for me. Your mileage might vary.

    Comment by Brent — February 27, 2014 @ 8:36 am

  33. […] this recently was an intriguing article by University of Houston professor Craig Pirrong. In “The Rent Seeker, Posing as Visionary,” Pirrong criticized the long line of government-support programs that Elon Musk’s many […]

    Pingback by Musk: Innovator or Rentier? | The Big Picture — February 28, 2014 @ 7:57 am

  34. Your comments reveal badly non-linear thinking and lack of knowledge of history and even current events. Therefore you should refrain from spreading your confusion. Please confine your blogging to Texas Republicans who operate with their gut reactions, independently of data and incapable of learning from even recent experience.

    Comment by Len — February 28, 2014 @ 10:29 am

  35. “(1) yes, that’s par for the course but it doesn’t make it right, (2) it is hardly deserving of the title “visionary”; if you are right it is better described as “ordinary”, (3) I am as critical of the state of Texas for playing this game and paying this price as I am of Musk for taking advantage of it.”

    @Professor: yes, I can see that. I’m certainly not a Musk fanboy. But I think most of the blame to be given to the state. If we don’t want them doing this stuff, then we need to pass legislation removing their latitude to set per-company tax policy. But as long as they are doing that, any company would be stupid not to incorporate it into their analysis.

    Comment by Sarath — February 28, 2014 @ 5:17 pm

  36. He’s looking for a subsidy amounting to about 0.2% of his net worth, and people think it’s OK?!
    Cynically manipulative any way you slice it.

    Comment by Doug — March 2, 2014 @ 5:07 pm

  37. @Doug-Disgusting, isn’t it? I am at a loss to explain his cult of personality.

    The ProfessorComment by The Professor — March 2, 2014 @ 7:13 pm

  38. Professor, the game is already rigged (subsidies to oil companies, military excursions to protect oil assets, etc.). It already would not be the “free-market” if Musk competes without subsidies. I’d agree with you that the government should probably get out of subsidizing either side, but Musk is playing the game with the rules that are in place, and not the rules of some libertarian utopia.

    Comment by Brian — March 7, 2014 @ 3:30 pm

  39. Brian: N wrongs do not make a right. And most of the companies/CEOs who suckle at the teat of the state are not lionized as visionaries. The whole point of the post is that Musk is no different than your run of the mill rent seeker playing the game. He is not some transformational tech Messiah.

    The ProfessorComment by The Professor — March 7, 2014 @ 5:40 pm

  40. Is the answer “both” not possible? He and his companies are innovating, and providing jobs, including manufacturing ones? The use of some government subsidies (which all the competitors are use) does not negate those facts, do they? I’m not so sure if comparing Elon Musk to a CEO of a TBTF bank is fair.

    Comment by Brian — March 8, 2014 @ 9:09 am

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