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The Tesla Bubble Reveals The Tech Media’s Bubble


New York Times technology columnist Farhad Manjoo recently touted electric cars—Tesla, actually—as a case where government regulations can have an economically beneficial effect by promoting innovation. “Researchers who study regulation and its effects on business said there have been numerous instances in which regulation speeds along, rather than impedes, technological progress.” After all, we wouldn’t want U.S. automakers to get left behind by “a future ruled by electric motors rather than the internal combustion engine.”

This claim might seem to have been vindicated in the past few weeks as Tesla’s value soared upward on the stock market to surpass General Motors, making Tesla the most valuable American auto manufacturer.

But this is actually an example of exactly why the regulatory boosting of Tesla is so destructive.

For all the fabled libertarianism of the Silicon Valley of old, today’s technology media leans solidly and uniformly to the left, which really does them a disservice. It puts them in an ideological bubble and causes them to miss important facts and ideas. The economic arguments in favor of electric car regulations, for example, would make a whole lot less sense if anyone had the slightest familiarity with pro-free-market economics.

I particularly recommend Frederic Bastiat’s essential essay “What Is Seen and What Is Not Seen,” because this is exactly what Bastiat was warning against. What you see is the electric car company that has been boosted by subsidies and regulations. What you don’t see are all the other innovations and new productive endeavors that would have been created with the same money if it hadn’t been spent on subsidies and regulatory compliance. So it’s not exactly true that regulations pushed innovation forward. What actually happened is that government pushed forward this politically favored innovation, at the expense of other advances—things that people would have valued more if they had been free to make their own decisions in the marketplace.

In economic terms, the danger is malinvestment, the diversion of capital from a more productive enterprise to a less productive one. Which leads us back to Tesla’s share price, a bubble so blindingly obvious it makes the tulip mania look sober and calculated.

Tesla is more valuable than GM? Yet it manufactured fewer than 100,000 cars last year, while GM manufactured just under 10 million. And Tesla still loses money on every car it sells—it posts losses of nearly a billion dollars every year—while GM is finally profitable again.

Yes, the irony here is that GM is profitable only after a massive taxpayer-funded bailout, which took money away from more productive uses—such as other, non-bailed-out automakers like Ford. The double irony? We were assured that a government bailout was going to make GM profitable by pushing them to shift their production over to electric cars—which didn’t happen, yet somehow GM is now making money while the electric car makers are losing it.

But maybe Tesla is being valued as a “growth stock,” rather than as a stable, mature company. So what exactly is the future growth investors are expecting? If all goes insanely well, if Tesla hits a whole series of targets that it is extremely unlikely to hit, then someday the company will sell as many cars as…General Motors. In other words, investors are anticipating the potential future value Tesla might grow into after a decade or two of spectacular success. Yet they’re pretending it’s worth that much now, today.

The real insanity is that if Tesla hits its most immediate goal, by rapidly expanding production of its new, mass-market Model 3, its biggest government subsidy goes away. Federal subsidies for electric cars begin to phase out once an automaker sells 200,000 electric vehicles—in other words, 2 percent as many cars as GM sells in a year. And what happens when subsidies go away? Sales tend to crash.

Tesla’s overpriced luxury cars have been a little more resistant to this effect, because wealthier buyers—you have to be pretty well off to shell out $100,000 for a Model S—are less price-sensitive. But as one observer notes, the Model 3 is supposed to be a more affordable, mass-market vehicle. “Buyers with large amounts of money were seemingly less concerned about the credit cut—but those aren’t the people Musk wants to market the Model 3 to.”

A similar subsidy cutoff in Georgia turned out like this.

The idea of the subsidies, I guess, is that they would help the electric vehicle industry during its struggling infancy, after which it would become so profitable and self-sufficient that it would no longer need the support. But that’s the question, isn’t it? When you start to subsidize economic activity, you tend to encourage the kind of economic activity that needs subsidies—and always will.

Tesla has carved out a small niche by selling a $50,000 car for $100,000 to customers who are willing to pay a premium to be able to say that they’re on the cutting edge or that they’re saving the planet. It’s now trying to go to a larger market by selling a $20,000 car for $35,000. It’s not clear that this business model works without government subsidies.

What the regulatory support for Tesla has actually managed to achieve is to inflate a massive bubble that sucked billions of dollars of private capital into a company that probably doesn’t have a sustainable long-term business model. At the very least, money and capital are being diverted from places they would otherwise have gone and instead are being used to support a politically favored innovation at a very high risk of failure.

The elephant in the room here is global warming. The real reason electric vehicles are politically favored is because they are supposed to be absolutely necessary to fight global warming. That’s why Manjoo blithely proclaims “a future ruled by electric motors rather than the internal combustion engine.” There’s no overwhelming economic or technological reason to think the electric motor is superior to the gasoline engine. So far, consumers are overwhelmingly voting for internal combustion. The only reason you would assume electric cars will definitely rule the future is because you think they have to in order to save the planet.

There are some dubious assumptions behind that, but boosters of electric cars should at least be forthcoming about their real motive. Electric car subsidies and gas mileage mandates are costs they are imposing on us for what they claim is a greater environmental good. They can at least recognize it as a cost, and as one that we’re going to have to keep on paying, and stop pretending that they are really doing us a favor by diverting our money from the places we wanted to put it.

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