Thursday, May 02, 2013

Government's electric car driving record

Writing at The American Prospect, Paul Waldman argues that "on the whole the government has a good—and necessary—track record on electric cars." Sifting through the piece, the sum total of the evidence presented to support that claim appears to consist of the following two passages: 
  • So did the [Department of Energy] drop the ball? They certainly kept a close eye on [electric car maker] Fisker. While they originally agreed to provide the company $529 million in loans, they cut off disbursements after Fisker failed to meet some of the goals of the original loan agreement. As a result, Fisker only received $192 million, less than half the agreed-upon amount, before DoE cut off payments nearly two years ago (they've recouped $21 million of the $192 million, but there's no telling how much more the government will be able to get back).
  • On the other hand, along with some high-profile failures the federal government has helped produce some notable successes. Tesla, another recipient of ATVM loans, is now making profits, has seen its stock rise to record levels. The company recently announced it will be paying back its DoE loan five years ahead of schedule.
In other words, Waldman thinks the government has a good record on electric cars because the Feds only lost $171 million of taxpayer money on Fisker rather than the entire $529 million it agreed to loan the company, and Tesla seems to be doing alright. The first point seems to be a classic case of setting the bar for success rather low, while the second one has Waldman bragging about the provision of taxpayer money to a successful private company which makes products for rich people (the Roadster's base price is over $100,000 while the Model S starts at $62,400 *after* a $7,500 federal tax credit). Once upon a time our friends on the left used to deride such government handouts as corporate welfare, while now it's celebrated.

But did Tesla even need such federal funding to get off the ground? As wikipedia describes the company's financing:
Musk's Series A round [of financing] included Compass Technology Partners and SDL Ventures, as well as many private investors. Musk later led Tesla Motors' Series B, US$13 million, investment round which added Valor Equity Partners to the funding team. Musk co-led the third, US$40 million round in May 2006 along with Technology Partners. Tesla's third round included investment from prominent entrepreneurs including Google co-founders Sergey Brin & Larry Page, former eBay President Jeff Skoll, Hyatt heir Nick Pritzker and added the VC firms Draper Fisher Jurvetson, Capricorn Management and The Bay Area Equity Fund managed by JPMorgan Chase. The fourth round in May 2007 added another US$45 million and brought the total investments to over US$105 million through private financing. 
In December 2007, Ze'ev Drori became the CEO and President of Tesla Motors. In January 2008, Tesla Motors fired several key personnel who had been involved from the inception after a performance review by the new CEO. According to Musk, Tesla was forced to reduce the company workforce by about 10 percent to lower its burn rate, which was out of control in 2007. 
The fifth round in February 2008 added another US$40 million. Musk had contributed US$70 million of his own money to the company by this time. In October 2008, Musk succeeded Ze'ev Drori as CEO. Drori became Vice Chairman. He left the company in December. By January 2009, Tesla had raised US$187 million and delivered 147 cars.

On May 19, 2009, Germany's Daimler AG, maker of Mercedes, acquired an equity stake of less than 10 percent of Tesla for a reported US$50 million. In July 2009, Daimler announced that Abu Dhabi's Aabar Investments bought 40 percent of Daimler's interest in Tesla. 
In June 2009 Tesla was approved to receive US$465 million in interest-bearing loans from the United States Department of Energy. The funding, part of an US $8 billion program for advanced vehicle technologies (Advanced Technology Vehicles Manufacturing Loan Program), supports engineering and production of the Model S sedan, as well as the development of powertrain technology that Tesla plans to sell to other automakers. The low-interest loans are not related to the "bailout" funds that GM and Chrysler have received, nor are they related to the 2009 economic stimulus package. The Department of Energy loan program was created in 2007 during the George Bush administration in order to get more fuel-efficient vehicle options to U.S. consumers and to decrease the country's dependence on foreign oil. 
The company announced in early August 2009 that it had achieved overall corporate profitability for the month of July 2009.
This is most certainly not an example of a company with a good idea that private financiers ignored and which was only able to prosper after securing backing from the federal government. Before the federal government even lent Tesla a dime, it had already secured five rounds of financing from the likes of Daimler, JPMorgan Chase, the Google co-founders and various venture capital firms. Then, only weeks after the DoE approved its loan for Tesla, the company announced it had turned a profit. It's not difficult to conclude that the company would have done just fine absent any government intervention. 

This, of course, nicely captures the entire problem with government funding of private ventures: either the government ends up subsidizing failure or it gives money to a venture that probably would have succeeded anyway. Remember, the entire logic for giving public money to privately-owned companies rests on the premise that government is better suited to identifying successful ventures than venture capital firms and other private sector actors looking to make a buck. If one doesn't believe this, then the government is either wasting money or is providing superflous financing.

Problems with government funding are further underscored by this admission from Waldman:
In fact, some have complained that the DoE has been too strict in giving out loans under the [Advanced Technology Vehicles Manufacturing Loan Program -- ATVM]. A cumbersome application process and Department oversight has likely discouraged companies from applying. That may be why they haven't approved a new loan since 2011, and according to the Government Accountability Office, the program has $16.6 billion in loan authority that has never been used, out of the $25 billion Congress initially gave it.
Why, it's almost as if government is pretty poorly suited to the venture capital business or something!

Meanwhile, the notion that the government has a "good" record on electric cars is only half of Waldman's argument, as he also argues that public funding is "necessary." He fleshes out that in the following paragraph:
The point of the ATVM was that while broad adoption of electric vehicles could have wide-reaching benefits to the environment and national security, at this stage of their development there are some real challenges inhibiting them, like the cost of existing batteries and the lack of a charging infrastructure spread throughout the country. Once these challenges are overcome, government help won't be necessary anymore.
Fine, except that doesn't justify government funding for private corporations at all. All government has to do is identify the problem -- in this case environmental degradation and national security -- and then impose a tax equivalent to the costs imposed on whatever is responsible for the problems. With proper pricing in place, the market rather than government is then positioned to identify possible solutions (a much more difficult exercise than identifying problems). 

Lastly, towards the column's conclusion Waldman offers up what is perhaps his most ridiculous piece of logic:
Finally, there's the argument that conservatives always make when it comes to federal investment in green technology: "Government shouldn't pick winners and losers." It has a certain simplistic appeal, were it not for the fact that government at all levels picks winners and losers all the time. Every time a state or local government offers a company favorable tax treatment to get them to build a factory in its borders, they're picking winners. 
When General Electric's army of lobbyists works with pliant members of Congress to ensure that the corporation ends up paying virtually nothing in taxes, the government has picked winners and losers. When the Defense Department decides to buy its next trillion-dollar fighter jet from Lockheed Martin and not Boeing, it picks a winner and a loser.
Got that? Essentially, because government distorts the economy all the time, what's the big deal about one more distortion? Apparently multiple wrongs really do make a right. What appears to have completely escaped Waldman is that he just made a great argument for smaller government, given his admission that by its very nature it is constantly picking winners and losers, thus tilting the economic playing field. 

While Waldman attempts to make grand arguments which justify the dispensation of corporate welfare by government, perhaps the real reason why electric car subsidies is such catnip to the left is simply that spending other people's money and bending the economy to one's will -- basically, wielding raw power -- is a lot of fun.

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