Tag Archives: government subsidies

02.15.2013 | A Federal Subsidy: The Tesla Test

The trip in the $101,000 Tesla Model S along part of the East Coast was supposed to be uneventful. With 2 ultra fast charging stations in Newark, Delaware and Wilton Connecticut, the power was available. For the 1/2 ton lithium battery, a 30 minute “fast charge” generated 150 miles. According to Tesla, the battery’s range was 300 miles and the EPA rating said 265.

NY Times journalist John Broder’s Tesla drive did not quite work out like Tesla expected. Perhaps because of the cold weather or maybe, as Tesla claimed, he neither charged nor drove the car as instructed, the mileage estimator plunged during a final leg of the trip on the first day and he barely made it to the charging station. Even worse, telling him, “Car is shutting down,” the Model S stopped during the second day and they wound up on a flatbed. Both times, Broder says he experienced “range anxiety.”

Fortified with a $465 million government loan, Tesla will be mass producing electric cars and projects a 90 outlet chain of charging stations by the end of this year.

The Tesla story reminded me of an electric car story in the NY Times about Denmark. With gas at $8.50 a gallon, consumers have begun to complement their stable of gasoline powered cars with electric models. Thinking of standardizing charging stations, accepting range challenges, installing household power docks, in Denmark, logistics are somewhat daunting but electric car sales are slowly rising. By contrast in the US, consumers bought 71,000 plug-in hybrids or all electric vehicles–way below estimates. (I’ve read different stats–not sure which are accurate but all are low.)

The Tesla tale starts on the supply side with a government subsidy. In Denmark, its beginning is demand. The endings sound like they will be opposite also. Both, though, are about incentive.

Charging Station in Denmark.

Sources and Resources: John M. Broder’s story of his Testa test ride is a great read. Then, the Washington Post follow-up story and Testla’s response combine to form an interesting part of the debate about government support for electric vehicles. The counterpoint example, for Denmark, is here.

Posted by: adminEcon
Tags: EPA, government subsidies, hybrid cars, incentive, Tesla
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05.12.2012 | How Government Helped and Helps Paul Revere

The year was 1800 when a 65 year old, Paul Revere said, “I have engaged to build me a Mill for Rolling Copper into sheets which for me is a great undertaking, and will require every farthing which I can rake or scrape.”

Paul Revere had been a silversmith, a copper engraver, he could make the buckles on your shoes, your teapot, your false teeth, your church bells. He knew George Washington, John Hancock, John and Sam Adams. During the Revolutionary War, he helped produce gunpowder and cannon, he made that midnight ride, and, protected by a military guard, he printed the money that paid for soldiers and supplies (and his own labor).

With $25,000 of his savings (but not the money he printed), and a $10,000 loan from the federal government with 19,000 pounds of copper, he started his copper foundry. After helping to make the first ships for the U.S. Navy, he had to write a “distressed” note to the US government asking for the $25,000 that was overdue.

Whereas in 1800, the US government helped Revere & Sons grow, now it is helping their descendant survive. Yes, the same firm that Paul Revere started and others like it again need government subsidies. New York State, where Revere Copper Products now resides, is giving the firm cheap electricity. Governments at every level are providing loans, grants, tax breaks, and other kinds of support to help businesses compete against China’s lower cost producers.

An economist might display the story of Revere’s relationship with the government in 1800 and now through one demand and supply graph. You just need to shift your supply curve to the right to show how subsidies lower cost and thereby increase production.

A classic and the source of my information, Esther Forbes’s 1942 biography of Paul Revere is wonderful . For the current Revere Copper Products story, the NY Times presents a good picture of what small manufacturers say they need from government.

This page was edited after it appeared. I changed Tom Hancock to John Hancock because the latter was well known.

Posted by: adminEcon
Tags: American Revolution, government subsidies, Paul Revere, printing money, Revere and Son, Revere Copper Products, Sam Adams, silversmith, US Manufacturing
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01.22.2012 | Tuition Intuition

With tuition and student loans skyrocketing, the Obama Administration has urged colleges to charge less and Congress to lower the cap on monthly payments.

Maybe though, they are targeting the wrong solution.

One Bloomberg View columnist suggests that government subsidies are distorting the market. At an all time high, soaring enrollment rates represent an increase in demand that elevates price. Typically though, markets work through higher prices. In corn markets, for example, when price soared, more farmers planted cropland and prices dipped. For education, it just doesn’t work that way. By subsidizing student loans through grants, tuition tax credits, default funding, state school support…we could go on and on…government is fueling the increases they are trying to prevent. When tuition rises, so too does the subsidy.

You can see that this takes us to some unintended consequences. By increasing what students could pay, government enabled colleges to charge more. Just as crop subsidies can elevate the price of farmland, might tuition subsidies lift the price of higher education?

The Economic Lesson

This Federal Reserve report on credit is fascinating. Looking at their graphs, you can see that student loans, in many states, are second in size to mortgage credit and currently total close to $850 billion. The report also shows which states have the greater proportion of student loans.

An Economic Question: On a supply and demand graph, how might you illustrate the impact of government tuition subsidies?

Posted by: adminEcon
Tags: college tuition, government subsidies, student loans, unintended consequences
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01.09.2012 | Government’s Venture Capital

The Erie Railway went bankrupt multiple times. Primarily government funded, it originally connected 2 small NY communities and cost 4 times more than initial projections when it was completed in 1851.

Citing the financial woes of the Erie Railway, a calamitous 1913 decision to build a steel plate manufacturing plant, and the Solyndra bankruptcy, financial historian John Steele Gordon says government repeatedly is a “bad venture capitalist.”

By contrast, a recent paper from the Hamilton Project tells us that sometimes, when the private sector has no incentive to innovate, the government has to step in. Focusing on energy, they suggest that government should fund basic research, development and demonstration.

The Economic Lesson

Deciding whether a government investment is successful takes us to private and social benefit. Sometimes a business can be a financial failure but have so much of a social benefit that it might be called worthwhile. One example is the Midwestern U.S. canals that declared bankruptcy during the 19th century. As links in a broader transportation infrastructure, some believe that they should be judged on the basis of the role they played. As a result, the financial cost of these canals is offset by their intangible social benefits.

An Economic Question: Explain why you support more or less government venture capital activity.

Posted by: adminEcon
Tags: energy, Erie Railway, government subsidies, social benefit, venture capital
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