President Trump's Twitter outburst against General Motors Co. (GM - Get Report) marked an important milestone in his commentary on the automotive industry. Why is that? To my knowledge, for all of Trump's automotive commentary over the years, this is the very first time he has ever addressed electric car subsidies specifically -- whether in a tweet or in a speech.
Of course, this all comes on the back of GM's decision to "unallocate" new products to three of its North American automotive assembly plants in 2019. That does not necessarily mean shutting down those factories permanently. It may mean that those factories could return in the future with some new products. GM has not said one way or the other.
As for Trump's reaction to the matter, there are so many levels of the analysis. On the one hand, a free-market person should be aghast at how any politician has opinions on how a business is being run, let alone threatening the corporation for exercising is constitutional property rights.
On the other hand, one can also ask why Trump was not equally upset in June 2018 when Tesla Inc. (TSLA - Get Report) laid off 9% of its workforce, all while touting its imminent decision to build a new car factory in China.
I mean, if it's so terrible for GM to lay off employees and instead build car factories in China, why was Trump silent only half a year ago when Tesla did the same thing as GM this week? One suspects Trump barely had paid any attention to Tesla, despite having intersected with Elon Musk a few times in the prior year or two.
That, of course, brings us to electric car subsidies, from which almost all automakers are benefiting. The U.S. federal subsidy is up to $7,500 per car until you hit 200,000 sold in the U.S., after which a six-quarter phaseout period begins, during which time the automaker can sell an unlimited number of eligible vehicles.
These subsidies go overwhelmingly to people living in California's richest coastal ZIP codes, where people recently have been the most hostile against Republicans in general, and Trump in particular. And who are the people who pay for these cars purchased by rich Californians? Regular Americans in the heartland, of course. These people buy regular cars, and disproportionately pick-up trucks from companies such as GM, Ford Motor Co. (F - Get Report) and Fiat Chrysler Automobiles NV (FCAU - Get Report) .
One wonders if the recent GM-Trump spat has awoken some sense in Trump about this radical wealth transfer from America's heartland, to California's richest coastal ZIP codes. If so, will this mean he will make it a new cause?
That is also where the matter will have to go outside just GM. Whether the U.S. president or the U.S. Congress, they probably can't selectively abolish these subsidies for just one company. If the subsidy will be abolished, it would have to be for all automakers -- not just GM.
All of that brings us back to Trump's relationship with Musk, Tesla's CEO. Has Trump forgotten what Musk said about Trump shortly before the 2016 election?
"Obviously I think Hillary's economic policies, her environmental policies in particular, are the right ones, but, yeah ... Also I don't think this is the finest moment in our democracy in general ... I feel a bit stronger that probably he's not the right guy. He just doesn't seem, he doesn't seem to have the sort of character that reflects well on the United States. I don't know... no."
-- Elon Musk, November 4, 2016
This GM-Trump spat had been brewing under the surface over the last month. GM and other automakers had asked for more electric car subsidies. At some point, the Trump administration would have to answer these requests by the automakers for more electric car subsidies.
Given these recent conflicts, and that it is all coming to a head, this is the right time for Trump to finally engage on this issue of electric car subsidies. What should be the new policy of the U.S. government?
The answer is as simple as it is self-evident, from the viewpoint of basic economics 101: Subsidies are bad, period. We can't rationally base an economy on subsidies. They distort competition and the natural market forces. Adding insult to injury are two more political no-nos when it comes to electric car subsidies.
The U.S. Federal government is running a near-record annual budget deficit. If there were a more evident place to cut expenditure than subsidies to help millionaires buy muscle cars, I can't think of one, and secondly, the electric car subsidies constitute a major wealth transfer from the average Joe Sixpack in the American heartland, who buys a Chevrolet Silverado or Ford F-150 pickup truck, to the wealthiest and most Trump-hating ZIP codes on the bluffs of the California coastline.
For all of these reasons, and because Trump has suddenly addressed electric car subsidies for the first time, he ought to call for their immediate abolition. Congress should join him in this effort to clean up our budget deficit, and address the wealth transfer from most of America, to California's extremely richest neighborhoods.
Does Elon Musk, worth somewhere in the ballpark of $20 billion, need regular Americans to pay higher car prices so that he can enrich himself and his wealthy California friends and fans? Trump needs to be firm on this.
At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.