Home Forums Hunting & Shooting Hunter's Campfire "Did the Tesla Story Ever Make Sense?"

If you’re one of those people who bought Bitcoin or another cryptocurrency near its peak last fall, you’ve lost a lot of money. Is it any consolation to know that you would have lost a similar amount if you had bought Tesla stock instead?

OK, probably not. Still, Tesla stock’s plunge is an opportunity to talk about what makes businesses successful in the information age. And in the end, Tesla and Bitcoin may have more in common than you think.

It’s natural to attribute Tesla’s recent decline — which is, to be sure, part of a general fall in tech stocks, but an exceptionally steep example — to Elon Musk’s purchase of Twitter and the reputational self-immolation that followed. Indeed, given what we’ve seen of Musk’s behavior, I wouldn’t trust him to feed my cat, let alone run a major corporation. Furthermore, Tesla sales have surely depended at least in part on the perception that Musk himself is a cool guy. Who, aside from MAGA types who probably wouldn’t have bought Teslas anyway, sees him that way now?

On the other hand, as someone who has spent much of his professional life in academia, I’m familiar with the phenomenon of people who are genuinely brilliant in some areas but utter fools in other domains. For all I know, Musk is or was a highly effective leader at Tesla and SpaceX.

Even if that’s the case, though, it’s hard to explain the huge valuation the market put on Tesla before the drop, or even its current value. After all, to be that valuable, Tesla would have to generate huge profits not just for a few years but in a way that could be expected to continue for many years to come.

Now, some technology companies have indeed been long-term moneymaking machines. Apple and Microsoft still top the list of the most profitable U.S. corporations some four decades after the rise of personal computers.

But we more or less understand the durability of the dominance of Apple and Microsoft, and it’s hard to see how Tesla could ever achieve something similar, no matter how brilliant its leadership. Both Apple and Microsoft benefit from strong network externalities — loosely speaking, everyone uses their products because everyone else uses their products.

In the case of Microsoft, the traditional story has been that businesses continued to buy the company’s software, even when it was panned by many people in the tech world, because it was what they were already set up to use: Products like Word and Excel may not have been great, but everyone within a given company and in others it did business with was set up to use them, had I.T. departments that knew how to deal with them and so on. These days, Microsoft has a better reputation than it used to, but as far as I can tell, its market strength still reflects comfort and corporate habit rather than a perception of excellence.

Apple’s story is different in the details — more about individual users than institutions, more about physical products than about software alone. And Apple was widely considered cool, which I don’t think Microsoft ever was. But at an economic level it’s similar. I can attest from experience that once you’re in the iPhone/iPad/MacBook ecosystem, you won’t give up on its convenience unless offered something a lot better.

Similar stories can be told about a few other companies, such as Amazon, with its distribution infrastructure.

The question is: Where are the powerful network externalities in the electric vehicle business?

Electric cars may well be the future of personal transportation. In fact, they had better be, since electrification of everything, powered by renewable energy, is the only plausible way to avoid climate catastrophe. But it’s hard to see what would give Tesla a long-term lock on the electric vehicle business.

I’m not talking about how great Teslas are or aren’t right now; I’m not a car enthusiast (I should have one of those bumper stickers that say, “My other car is also junk”), so I can’t judge. But the lesson from Apple and Microsoft is that to be extremely profitable in the long run a tech company needs to establish a market position that holds up even when the time comes, as it always does, that people aren’t all that excited about its products.

So what would make that happen for Tesla? You could imagine a world in which dedicated Tesla hookups were the only widely available charging stations, or in which Teslas were the only electric cars mechanics knew how to fix. But with major auto manufacturers moving into the electric vehicle business, the possibility of such a world has already vanished. In fact, I’d argue that the Inflation Reduction Act, with its strong incentives for electrification, will actually hurt Tesla. Why? Because it will quickly make electric cars so common that Teslas no longer seem special.

In short, electric vehicle production just doesn’t look like a network externality business. Actually, you know what does? Twitter, a platform many of us still use because so many other people use it. But Twitter usage is apparently hard to monetize, not to mention the fact that Musk appears set on finding out just how much degradation of the user experience it will take to break its network externalities and drive away the clientele.

Which brings us back to the question of why Tesla was ever worth so much. The answer, as best as I can tell, is that investors fell in love with a story line about a brilliant, cool innovator, despite the absence of a good argument about how this guy, even if he really was who he appeared to be, could found a long-lived money machine.

And as I said, there’s a parallel here with Bitcoin. Despite years of effort, nobody has yet managed to find any serious use for cryptocurrency other than money laundering. But prices nonetheless soared on the hype, and are still being sustained by a hard-core group of true believers. Something similar surely happened with Tesla, even though the company does actually make useful things.

I guess we’ll eventually see what happens. But I definitely won’t trust Elon Musk with my cat.

Krugman is legendary for being wrong.

Paul Krugman: Always Wrong, Never in Doubt

He’s a stopped clock who has yet to be right about Trump.
This Thursday, Federal Reserve chairman Jerome Powell told the House Budget Committee that there was “no reason to think, that I can see, that the probability of a downturn is at all elevated.” Not every economic indicator is perfect, but wages are rising (especially on the lower end), unemployment is still at historic lows, and markets are booming.

You might remember that only a couple of months ago, there was a torrent of stories cautioning us about the imminent downturn. Some of the scary coverage, as Robert Shiller warned, consisted of “self-fulfilling prophecies.” Some seemed almost giddy about the political prospects of a downturn. Others just said what they felt. “I feel like the bottom has to fall out at some point,” Bill Maher explained at the time. “And by the way, I’m hoping for it because I think one way you get rid of Trump is to crash the economy. So please, bring on the recession.”

One of the nation’s leading doomsayers has been the New York Times’ perpetually mistaken Paul Krugman, who warned shortly after the 2016 election that Trump’s victory would trigger a global recession “with no end in sight.” We could file that under “post-election hysteria,” but as late as April of this year he was still telling crowds that the bond-market signals predicted “a pretty good chance of a recession sometime in the next year or so.” And he has kept this going all year:

February 11: Paul Krugman expects a global recession this year, warns “we don’t have an effective response.”

August 1: “Why Was Trumponomics a Flop?”

August 15: “From Trump Boom to Trump Gloom”

September 5: “Trumpism Is Bad for Business”

October 3: “Here Comes the Trump Slump”

October 24: “The Day the Trump Boom Died”

A couple of weeks after the Trump Boom expired, CNBC reported that “October job creation comes in at 128,000, easily topping estimates even with GM auto strike.” This cycle has been going on for three years.

(My favorite Trump-era Krugmanism, though, is when the esteemed economist explains away his bad predictions by claiming that the economy’s successes are really just driven by instances of his own political preferences playing out — “Impeaching Trump Is Good for the Economy,” “The Economics of Donald J. Keynes,” and so on.)

At some point, of course, doomsayers such as Krugman are going to be right. In the past 60 years the United States has been hit with recessions in 1960–61, 1969–70, 1973–75, 1980, 1981–82, 1990–91, 2001, and 2007–09. History says we’re probably due for another one soon. When it hits, Krugman will blame tax cuts, unfettered capitalist greed, a dearth of regulations — and maybe climate change, or whatever hobbyhorse he’s riding at the time. MSNBC hosts will hail him as a seer.

Much like most economists, I have no clue what the future holds. But I do know that Barack Obama, who oversaw the slowest recovery in American history, was constantly being given credit for averting disaster by adopting smart policies (read: spending). Years after the bailouts — which is to say years of D.C. gridlock in which the former president, by his own admission, couldn’t enact any of his preferred economic policies — Democrats were still claiming that short-term first-year spending fixes were the impetus for growth.

There’s a more rational explanation: Washington stopped helping.

Voters vastly overestimate the role that presidents play in economic growth, to be sure. But Trump-era job creation was a far tougher task, since he was operating with less room for job growth than his predecessor. And considering the (self-inflicted) trade wars, political turmoil, and foreign-policy concerns that have dominated much of his first term, conventional wisdom tells us we should be struggling. Yet it’s clear that we’ve had a pretty resilient economy.

What has Trump done? The two things Paul Krugman hates most: Regulatory rollbacks and tax cuts. And yet here we are.
https://www.nationalreview.com/2019/11/paul-krugman-always-wrong-never-in-doubt/