CA, Tesla and the slippery slope to crony capitalism

CA, Tesla and the slippery slope to crony capitalism

Crony_Capitalism-cover-300dpiThe decision of Tesla to locate its “gigafactory” in the Reno area instead of California offers critics of the state’s business climate a chance to once again knock Gov. Jerry Brown and other state leaders for failing to care about the private sector. I am sympathetic to this critique. Tesla has emerged as an impressive company that seems likely to have a big future.

But Tesla demanded — and won — so many breaks from the state of Nevada that the deal is an affront to any true believer in free-market economics. This is from the Chronicle:

Nevada won the fierce, five-state competition to host Tesla Motors’ planned $5 billion battery factory by offering a package of tax breaks and credits that could be worth $1.2 billion over the next 20 years, according to terms released by state officials Thursday. … Tesla won’t have to pay sales tax for 20 years. The company also won’t have to pay real property, personal property and modified business taxes for 10 years.

The size of the deal and the scope of the tax breaks makes this feel more like South Korean crony capitalism — the government in Seoul is a de facto partner of conglomerates like Samsung and Hyundai — then American capitalism.

But as Dan Morain points out in his Sac Bee column, this is increasingly common:

Nevada is simply following a trend. The Washington, D.C.-based nonprofit organization, Good Jobs First, tracks such giveaways. Tennessee gave Volkswagen $554 million in incentives. Mississippi gave a $1.3 billion package to Nissan in 2000. Oregon gave $2 billion in incentives to Intel.

“Unfortunately, it is common to see subsidies of this size,” Leigh McIlvaine, a research analyst for Good Jobs First. “There seems to be a perception on behalf of companies that they should be paid by the public sector to finance that growth. It is looking like an entitlement.”

California lawmakers are not shy about opening the treasury to help companies. They approved $420 million in tax breaks this summer for Northrop Grumman and Lockheed Martin, on condition that they build new bombers in California.

Milton Friedman: Big biz a foe of free market

I get the argument that Tesla is a unique company, and that Northrop and Lockheed are fairly unique as well, so the argument that these government gifts are hugely unfair to their rivals isn’t as apt as it when it’s made about tax breaks given to specific companies in more competitive industries. But at some point, I share Milton Friedman’s concerns, as noted by the Heartland Institute in 2012, about government and industry acting in synch.

Friedman exemplified the generous spirit behind the desire for free markets: they benefit the less-wealthy by leveling the playing field, allowing people to succeed on their merits instead of through political power bought with big money. Friedman had nothing but contempt for crony capitalism and the use of government to suppress market competition, although he was too polite and good-natured to express that feeling in any way but through sound economic arguments.

Friedman himself put this sentiment another way in a 1977 article for Reason magazine:

The two greatest enemies of free enterprise in the United States … have been, on the one hand, my fellow intellectuals and, on the other hand, the business corporations of this country.

Maybe it’s pointless to worry about this six years after the federal takeover of the banking system, General Motors and Chrysler during the financial crisis, but there’s something really ominous about big government partnering with and/or propping up certain favored big businesses.

The initiatives they work on then become, in the lexicon of 2008, “too big to fail.” It’s not hard to imagine Nevada moving from tax breaks to direct subsidies if the Tesla “gigafactory” struggles to live up to its billing and needs help to survive — taxpayer help.

That is, much, much more taxpayer help.

21 comments

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  1. SoCalSteve
    SoCalSteve 8 September, 2014, 10:33

    On the one hand, the “doomers” are complaining that Tesla is just another example of how “awful” California is for business and why companies are refusing to move here.

    On the other hand, you express concern about government propping up big business…something on which I happen to agree with you in general.

    So what does California do? If we try to attract businesses to our state it’s “crony capitalism.” If we don’t, we’re a bad environment for business.

    Reply this comment
    • terri bashaw
      terri bashaw 8 September, 2014, 14:34

      I agree. The federal tax structure has not been helpful to business, so why not let the states do what they can to draw in business and help create jobs? I don’t think this is cronyism. This is a state trying to help it’s citizens. Now, when the federal government outright gives tax payer dollars in the form of grants, choosing which business to give our money to, that is cronyism, as the we watch these business go bankrupt after taking our hard earned money.

      Reply this comment
    • Richard Rider
      Richard Rider 8 September, 2014, 19:33

      You lay out a false choice, Steve:
      1. Give businesses subsidies.
      2. To not do so is to establish a “bad environment for business.”

      You know this is nonsense. To avoid a bad environment for business, we must change the mindset that pervades CA state and local government — the mindset that business is an evil presence we must micro-regulate, while viewing such companies as government (and attorney) ATM machines.

      A more business friendly approach does not pick which firms to subsidize — instead making the main goal of a business — making a profit — a desirable (and attainable) goal in California.

      Reply this comment
  2. LetitCollapse
    LetitCollapse 8 September, 2014, 10:48

    This State is really starting to suck. Socially. Economically. Politically. About the only attraction left is the sunshine. But what good is the sunshine if you don’t have any water? The local governments are hring water cops who will beat you if you spray the sidewalk or have the nerve to water on an off-day. No surprise that nearly all our population growth comes from indigent illegals. When you live in a cardboard shack in the Tijuana hills it’s still the ‘land of opportunity’. Particularly with all the freebies.

    Reply this comment
  3. Fred Mangels
    Fred Mangels 8 September, 2014, 14:38

    Great commentary. It seems this sort of thing isn’t exclusive to California as other states- Nevada and Texas, for example- do the same thing. About all I can think of is it’s an extension of the big government mentality.

    It seems we’ve gone past the point where we just leave business alone for the most part to set up and expand. Can’t do that, can we? Instead, in the spirit of big government, we have to subsidize them. Or are we?

    I’m wondering how much this is really subsidizing business, as opposed to simply not levying as many fees and forcing as many regulations on them as government normally would. Is that really subsidizing, or is it akin to people saying you’re costing the state money because you get a break on your taxes?

    I’m not fond of the crony capitalism aspect of this. If they’re just getting a break that other businesses should get, it would make more sense to let everybody off the hook than just a favored few. If we give everyone a break, is that considered subsidizing them? In California, many would think so.

    Reply this comment
  4. Commissioner Tom Freeman
    Commissioner Tom Freeman 8 September, 2014, 16:31

    California can be a great place to do business. Our state elected leadership would be wise to reduce the cost of doing business here for existing firms , start ups, and business expansion. It takes far too long for environmental review. The State has over 100 agency’s/departments for permitting. A Fast Track option for these reviews is desperately needed. A business should know exactly how long it will take to process its permits and what it costs. Time is money. We do need reforms that make this state more competitive. A look at incentives available to all business (not just a select few) on the Texas State web page is a start. The operative word here is competitive. Tesla, Toyota, and many others have left this state. It is not too late to reduce the cost of doing business in California, its county’s and cities. Fixing our business attraction and retention challenges begins in Sacramento in the Senate, Assembly, and with the Administration. Tom Freeman, Riverside County, CA,.USA

    Reply this comment
  5. the prez
    the prez 8 September, 2014, 17:35

    Carson Valley has nice golf courses. If Tesla went belly up, or their battery is not the standard, that is what I call a Oh Sxxt moment for Nevada. The state can t guarantee success of the product, but the golf would still be good.

    Reply this comment
  6. Richard Rider
    Richard Rider 8 September, 2014, 19:24

    I thoroughly agree — oppose such arbitrary tax subsidies. It’s blatant crony capitalism, where government (not the market) picks the winners and losers.

    But here’s an interesting exercise — given the awful economic climate that is California, does anyone seriously believe that if CA matched the generous Nevada offer, Tesla would have picked California?

    Nevada has no personal or corporate income tax (not that Tesla will ever make a profit, but they DO hope to some day). But far more important is the environmental lawsuits that would tie up the potentially polluting battery factory for years, if not DECADES. And then there’s all those anti-business government agencies that believe their purpose is to drive away or close down companies (perhaps returning California to a high debt version of itself in the 19th century — or before!).

    Here’s an example of how anti-manufacturing California is:

    From 2007 through 2010, 10,763 manufacturing facilities were built or expanded across the country — but only 176 of those were in CA. So with roughly 12% of the nation’s population, CA got 1.6% of the built or expanded manufacturing facilities. Stated differently, adjusted for population, the other 49 states averaged 8.4 times more manufacturing growth than did California.
    http://www.cmta.net/20110303mfgFacilities07to10.pdf
    — prepared by California Manufacturers and Technology Association

    Reply this comment
  7. Richard Rider
    Richard Rider 8 September, 2014, 19:38

    Further evidence of California’s styfling anti-business nature:

    In 2012, our supply of California businesses shrunk 5.2%. In ONE year. NOTE: That’s a NET figure – 5.2% fewer businesses in CA in 2012 than were here in 2011. Indeed, in 2012, CA lost businesses at a 67.7% higher rate than the 2nd worst state!
    http://riderrants.blogspot.com/2013/07/in-2012-ca-lost-businesses-at-677.html

    The top U.S. CEO’s surveyed rank California “the worst state in which to do business” for the 10th straight year (May, 2014).
    http://chiefexecutive.net/best-worst-states-for-business-2014#ranking

    Reply this comment
  8. Ken
    Ken 9 September, 2014, 01:36

    What happens within a state, that does not entail federal dollars (if this can ever be forthrightly ascertained), can and should stay within that state. The individual state’s business can remain that state’s business, for better or for worse. Other states have enough to worry (in California it is Brown and the corrupt lefttie legislature) about without taking on the caprices of other states. All of us however should be worrying about the Solyndras of the world, a company favored by Obama since its principal was a big donor, and, I am damn near certain, simply passed thru federal funds sent to Solyndra by Obama right back into Obama’s campaign coffers, for which both the Solyndra hotshot (read: crook), Obama and all the sleazy intermediaries should be in jail. No matter for the moment, the principal of subsidizing business, big business, with taxpayer dollars is open to a lot of criticism and scrutiny. One might ask in the first instance: What politician gained by this action, i.e., choosing that specific business for special tax treatment? What politician will receive generous campaign donations to help him stay in office for doing a political favor for a business entity to which he assured $100s of millions of taxpayer dollars? And, ultimately: Why aren’t there laws to call for a vote, a plebiscite, whenever more than a threshold amount of tax benefits are targeted for any business in any state? Capitalism and the lowlifes we place in political office are destroying the country, the question might be how can we stop them?

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