In this week’s Bygone Relics show, we investigate how government has allowed itself to be a primary partner of many multi-national businesses such as Tesla and Apple. Does this allow the government to choose winners and losers in our version of capitalism?
“Nobody should have the right neither employers nor employees to use state compulsion and force for their own use… they are creating capitalists with government help which is the worst of all economic phenomenon.”
Ayn RandWe are going to talk about the unique relationship between business and government. Last week we spoke of non-federal governments and the unique and potentially fiscally dangerous problem of spending because the only entity with a printing press for currency was the federal government. I want to peel back that onion a little further because like we discussed states are merely ideas of how to govern put into place which is basically how to allocate resources. The idea in California is to have higher taxes and more socialist ideas of caring for your neighbor than in more independently minded Texas which has a more laissez faire approach to regulation, taxation etc. These ideas will compete in the marketplace with other advantages like weather, geography, and recreational appeal for people’s discretionary income and habitation. In a fair marketplace, people will vote with their own selfish needs and desires and travel or reside in areas that offer them better opportunities. One of the fundamental tenants of economics is that people will act in their own self-interest.
I have normally assumed this to be true although it is certainly less often than 100%, which is taught in textbooks or theories, but by and large it is found to be accurate. However, that assumes a fair marketplace. Fair for whom, should be addressed? Let’s use the example of Tesla, which has grown to be one of the largest companies in the world. When Tesla was looking to expand its production capabilities, it eventually settled on Nevada. Nevada, as a state offered more than a billion dollars in tax credits.
Austerity Jones: and that’s perfectly fine, right, C Thomas? as a state they are free to compete with other states.
C Thomas: No, Austerity. I disagree. Cause what about the current car manufactures that sell cars in Nevada or the United States in general? Don’t the established companies have to pay taxes? How can this upstart that is going to take market share away from an establishment, which is currently employing people by the way, be treated better than a company that has proven itself to be able to exist in the marketplace, whose founders did not enjoy such advantage, but rise to the top and earn financial success versus hundreds of other car companies at the turn of the 20th century. People also received tax credits ($7500) for buying a Tesla which allowed Tesla to be more competitive in the automotive landscape.
This demand for Teslas was not earned in a competitive environment but from governmental interference and regulation. Established car companies were at a disadvantage allowing Tesla to steal market share and allow Tesla to make sales that perhaps they otherwise wouldn’t and stave off bankruptcy which would have resulted from non-governmental intervention. Legislation was also passed that allowed Tesla to generate revenue by selling these tax credits to the established car companies creating millions of dollars, which again generated revenue that would have been vital to stave off bankruptcy in the growing business. We put the link to this article on our website.
Austerity: my question is: How did they become so fortunate to have a business partner like the government that helps them survive in the marketplace?
C Thomas: I don’t know, Austerity. Apple is the same, right? Oil companies are being demonized for being so profitable, but Apple is the most profitable company in the world. Apple, Tesla, etc. I will say something a little speculative but, are they providing the gov’t or other stakeholders some interesting data? That’s why they are sweethearts to the government? Anyways, let’s stop here with the conspiracies and go back to Tesla.
Another key area in the survival of Tesla has been the epoch in which it was founded was defined by low, artificially low interest rates. Companies that do not have current cash flows, but the idea of future cash flows benefit due to the discounted cash flow model of valuation of securities. If I can earn 10% interest it will take me 7.2 years to double my money according to the rule of 72 but if interest is 1%, then it takes me 72 years. An investor is more willing to speculate on an unproven idea, like Tesla, if they don’t have a more profitable option like a 10% interest rate. This era of low interest rates has allowed rampant speculation so when we point out people like Elon Musk talking his book that the country needs lower interest rates, he in particular, means he needs lower interest rates. We have pointed out how these government partnered industrialists have talked their book, so we won’t belabor the point here any further, but partners they are.
Tesla has managed at its stock price peak last year to have a market capitalization of 12x greater than all of its competitors, despite making a fraction of the cars that they do. This is due to Elon Musk’s incredible talent, which is raising money, whether by selling stock, getting fellow investors to believe in his idea, or creating banking relationships that allow him to buy things like Twitter even at a valuation that was way too high. No, people realized that Elon could fight the SEC when making statements like 420 funding secured, which is a marijuana refence that Musk made when talking of taking his company private with the help of Middle Eastern wealth funds, even though no relationship existed. If someone else had tweeted that, they wouldn’t have gotten away with it, but charged with securities fraud. This is a show of Musk’s power which he enjoys flaunting and if earned, he should be able to use it as he sees fit, but however we know that the real genesis of his very survival has been his silent partner, the government.
We have talked about the dazzling stock trading performance of Nancy Pelosi and her husband Paul. She has a net worth of $135 million, pretty good for a government employee earning a couple hundred thousand a year. Barack Obama has a net worth of $70 million, Bill and Hillary Clinton have a combined net worth of $120 million, and lest we be partisan even Mitch McConnel is worth $30 million. I think we should teach kids to be politicians at university. Teaching kids that lies like we have every intention of balancing the budget this year and we care about our constituent and we can empathize with their plight while they sit in their Martha’s vineyard homes and deport illegal immigrants out of their towns or mandate small businesses like hair stylists close while video shows Nancy Pelosi getting her mane brushed and currycombed during Covid angers me. Ayn Rand in her novel Atlas Shrugged has a character that curries favor and acts as the go between industrialist and government. The shocking immorality of the character written 75 years ago has come to life today. When governments can choose companies that can succeed at their discretion over others, when some necessary industries are allowed to remain open while others are shuttered as during Covid, and when future companies can benefit at the expense of currently profitable companies as during the manipulated low interest environment of the last 40 years, the line between government and industry has been blurred. This is a most dangerous situation. Remember, when we spoke of the corrupt National Bank of Argentina when the wealthy depositors used their wealth and influence to peddle favors as a form of rent-seeking. Which brings us to the word of the week rent-seeking.
Rent-seeking- the fact or practice of manipulating public policy or economic conditions as a strategy for increasing profits.
This was when the country of Argentina started to turn toward malinvestment instead of operating with a profit motive which rewarded good investment. Are you starting to see the parallels in the US today? We have used the phrase farming the government is more profitable than farming, which is true for farmers, health care workers, and even it turns out auto makers. The problem with this is multi fold, but let’s remember two large reasons why before we wrap up. The government itself is not interested in nor guided by the profit motive, only its agents are. When the government makes a malinvestment, who must pay for the lesson which a company learns during bankruptcy? The answer to that of course, is that it doesn’t. It prints more money and terrible business investments like Solyndra, the green energy solar panel company that we discussed that lost over 95%. The taxpayer owes or more specifically, little Johnny the future taxpayer.
The bigger question and one we can discuss next week is this, how is it that the government is in a position to partner with all these companies? How did the small and limited government of our founding fathers- become tax credit granters, loan guarantors, and interest rate manipulators for the cohorts in the private sector. We will try to scratch the surface next week on those questions and more because I fear that we have created “capitalists with government help which is the worst of all economic phenomenon.” You, the listener, are probably saying duh, C Thomas, you are just now figuring this out? Fair and deserved criticism, but bear with me as I am a little slow. Although slow, we will peel back this onion a little more because identifying a problem and trying to figure out a cure are completely different things. Let me leave you with a little quote from Ayn Rand about the period of time of robber barons before central banks, before government programs and partners, Medicare and Medicaid, social security, and income taxes.
“America’s industrial progress, in the short span of a century and a half, has acquired the character of a legend: it has never been equaled anywhere on earth, in any period in history. The American businessman, as a class, have demonstrated the greatest productive genius and the most spectacular achievements ever recorded in the economic history of mankind”Sincerely yours,
C Thomas Printer
This week’s financial tip
Did you do your homework? I’m sure you are sad if you live in Kentucky, Illinois, or New Jersey and see that your state pension is funded at the worst rate in the nation at sub 53% of necessary obligations whereas if you are residing in Washington, Tennessee, or Delaware you can see that your pensions are over 100% funded and you can sleep easier tonight. This week’s homework- when was the last time the gold price was this high? You are watching the dollar, gold and silver prices? Of course you are…
On this date in history
61 years ago to be exact Walter Kronkite took over the CBS evening News and developed the reputation as the most trusted man in America. Who would the equivalent be today?
Also born on this date
Speaking of industrial geniuses, Wilbur Wright, one of two brothers that invented the airplane.
Sources of the episode
Unfunded liabilities for state pension plans
SEC pushes Tesla to reveal how regulatory credits boost profits