The government is choosing winners and losers while injecting taxpayer funds—or tax advantaged benefits—into preferred (supposedly capitalist) pet projects. The obvious question arises: is it appropriate for government to arrange economic experiments and take unproven risks with public funds? Or, as an alternative, would the free market do a better job at experimentation using private risk capital? The next question is, that based upon financial risk and potential reward, are there significant long term economic and social benefits that will be shared by most or all taxpayers, or just a select few specially chosen cronies?
Let’s discuss one current example: The Electric Vehicle (EV), is a market that has been created only by use of significant government subsidies. Buyers of EVs have received approximately $5.4 billion worth of federal and state subsidies. To be clear, I am not suggesting whether EV’s are good quality or pretty cars, but whether it makes economic sense for the government to reallocate taxpayer funds into these projects. To date there are about 540,000 electric vehicles sold in the US, including: Tesla, Chevy Volt, Chevy Bolt, Ford Fusion, Fore C-Max, BMW-X5 and i3, Nissan LEAF, and the cute little Fiat 500e.
Purchasers of a Tesla, and other EVs, receive up to a $7,500 tax credit and up to a $4,500 state rebate. Many consumers are making the decision to buy based primarily upon the tax incentive. Additional incentives may include driving in the shared freeway lanes, free rental cars for longer trips, and reduced electricity bills for the owner’s residence. Rebates, are also available for fuel cell and hybrid vehicles.
What would happen if the tax incentives were removed, and the EVs had to compete on the open market with other types of fuel-based vehicles, such as gasoline, diesel, hydrogen, and natural gas? Would sales plummet? Elimination of the federal and state tax credit subsidies could likely devastate the entire EV market. Every country that has removed the tax credits has seen sales of EVs go down 90%… or more. Norway, France, and China, have announced that they intend to eliminate or phase out the subsidy.
Tesla loses approximately $7,500 for each vehicle. Not bad for a car that retails for up to $120,000 for a top-end model. Tesla has been burning through hundreds of millions of available cash every quarter to continue manufacturing money-losing cars. They have recently introduced a much less expensive model, the Tesla 3, that should sell very well, it is an attractive car. They just are unable to manufacture them fast enough for current demand.
In a bit of a unique perspective, let’s compare Tesla with other major auto manufacturers market capitalization. Using the calculation of total numbers sold worldwide in the twelve months ending 12/31/2016, and dividing that by the total market capitalization for the year, we’ll determine: How much does each car sold attribute to the value component of the car maker’s total market capitalization?
Market capitalization as of 12/31/16 was $55.42 Billion. Tesla sold approximately 83,922 in 2016. $55,420,000,000/83,922 = $660,375 allocated value per auto.
Market capitalization as of 12/31/16 was $49.49 Billion. Ford sold approximately 2,614,697 vehicles. $49,490,000,000/2,614,697 = $18,927 allocated value per auto.
Market capitalization as of 12/31/16 was 177.13 Billion dollars. Approximately 10,083,783 were sold in 2016. 177,130,000,000/10,083,783 = $17,565 allocated value per auto.
Market capitalization as of 12/31/16 was $68.65 Billion. VW sold approximately 10,312,400 in 2016. $68,650,000,000/10,312,400 = $6,657 allocated value per auto.
Market capitalization as of 12/31/16 was $52.37 Billion. General motors sold approximately 10,000,000. $52,370,000,000/10,000,000 = $5,237 allocated value per auto.
Market capitalization as of 12/31/16 was $15.49 Billion. Approximately 4.7 million autos were sold. 15,490,000,000/4,700,000 = $3,296 allocated value per auto.
To sum this up, the market capitalization values attributed per auto sold range from $3,296 to $18,927. except for Tesla, with a whopping $660,375 allocated value per auto sold.
Why would a manufacturer that produces a tiny fraction—less than one one-thousandth of the cars sold—have a greater market value than a company that sold 1,000 times more? Clearly, the only way is to for government to create an unequal basket of incentives, through tax subsidies.
This is not the free market. This is crony-socialism at its best. Let’s review the definition of socialism: “A political and economic theory of social organization that advocates that the means of production, distribution, and exchange should be owned or regulated by the community, as a whole.” The community is the U.S. government, that regulates the economic benefits attached to the production and sale of the electronic and hybrid vehicles. The government has chosen winners and losers. There are absolutely no free market forces in place.
What would happen to Tesla’s stock value if it were required to compete in the open market without government subsidies, rather than being propped up like the spoiled rich child… it would drop like a rock?
On the idea of whether Electric Vehicles are economically or environmentally superior, one quickly forgets that electricity may be generated by coal-fired methods with emissions much higher than the corresponding gasoline consumption of the internal combustion engine. Electricity in the U.S. is generated from various sources: 30.4% from coal-burning furnaces; 33.8% from natural gas; 19.7% from nuclear; and 14.9% from various renewables. It may be noted that the extraction of natural gas consists of a process, like petroleum, in that it must be extracted, processed, and then delivered to the end user, generally with a huge diesel petroleum burning truck. Burn‘em, baby!
The new “low-cost family car,” Tesla 3, has been touted as a new-wave, environmentally sensitive prestige automobile. With reasonable and expected up-grades, it will cost $50,000 and higher. Assuming a driving habit of about 50 miles per day for 5 days per week, the charging cost would be about $2.50 per day or about $650 per year. Over a 5-year period you can also contemplate a replacement battery of $6,875. Amortize that over 5 years… $1,395 per year. Given the normal upswing of new or better technology, the price of batteries may go down over time. Combined electric charge price and amortized battery replacement is $2,025 per year.
I will compare the Toyota Corolla with a small internal combustion engine and the new Tesla 3. The Tesla is about the size of a Toyota Corolla.
A new top-of-the-line Toyota Corolla can be purchased for under $20,000, less than half the cost of the Tesla. The Corolla will get about 36 MPG using regular gasoline fitted with a standard 13.2-gallon fuel tank, yielding a range of 475 miles. National average for regular gasoline is currently about $2.30. But, in California, where additional taxes are needed to pay fat public employee pension obligations, the price is about $3.00 per gallon. If you drive the same 50 miles per day for 5 days per week, based upon $3.00 per gallon your annual fuel cost would be $1,042 per year plus an occasional oil change. With very similar monthly expenses, your daily driving habit will provide much more flexibility.
Perhaps, the only significant difference for the spending of an additional $20,000 to $25,000 would be the prestige for participating in a questionable social engineering experiment while driving your newest prestige automobile. Your club members will certainly be impressed. Yes, I admit that the Tesla 3 is an attractive automobile, better looking than the Corolla, but for well over double the price? Prestige is expensive.
The best overall method to compare the lifespan cost of an automobile is how many BTUs’ (British Thermal Units) are consumed from the beginning of the production process, including the extraction of raw materials from our planet, to the construction and completion of a brand-new automobile, to the on-going utilization costs of fuel, maintenance, and replacement parts, until the crushing of the scrapped junk at the end of life. As of this date I have not been able to find convincing evidence that electric is a superior alternative.
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