Elon Musk Fights The Law And Economic Freedom Wins

Tuesday, May 19, 2020

Tesla CEO Elon Musk defied state and county orders by restarting the Tesla auto plant in Fremont, California, after filing a lawsuit against Alameda County for being forced to stop production (Tesla was the only US automaker to be shuttered).

Musk’s decision showcases the growing tensions among economic freedom, public health, and shrinking public confidence in political leaders. As a David vs. Goliath story, the fight was over before it began, with Goliath blinking almost immediately. Questioned several times about Musk, Governor Gavin Newsom professed ignorance of Musk’s defiance. California assemblywoman Lorena Gonzalez tweeted a predictable and petty “F*** Elon Musk.”

Musk promptly took out a full-page ad in response to Gonzalez, stating, “I create thousands of jobs. Gonzalez, the author of AB 5, [which has outlawed many independent contractor relationships] destroys thousands of jobs.” Unlike in the battle of David and Goliath, Musk didn’t use a slingshot in this fight. All he needed was a couple of facts and an appeal to economic freedom.

What will happen to Musk? Probably not much. Perhaps a fine will be levied, but it will pale in comparison to the returns from restarting the plant. Musk is very, very smart and knew exactly what he was doing.

California needs Musk more than Musk needs California. The first rule for any politician is: don’t kill the golden goose. Musk is a golden goose, and he knows it.

Musk strategically and publicly stated just before reopening the plant: “If you are going to arrest anyone, arrest me. I will be on the assembly line. Please don’t arrest anyone else.” 

Realistically, California could do very little in response to Musk. Arrest him? That would serve no purpose other than to throw 10,000 workers back into unemployment. Newsom later said, “I hope he can open next [this] week,” conceding that the fight was over.

More broadly, Musk’s decision raises questions about how California should reopen. Currently, the most populous and productive regions in California, including the Bay Area and LA remain with some form of shelter-at-home orders. As I noted a few weeks ago, California simply cannot afford to keep its economy under wraps much longer. Last week, Newsom announced a massive $54 billion deficit, including a $40 billion deficit for fiscal year 2020–21, which begins July 1.

This general issue illustrates the most important lesson of economics: society faces tradeoffs, and these tradeoffs can be difficult to assess. Here, the tradeoff is a government-engineered depression to prevent infections and fatalities.

But a careful evaluation of this tradeoff depends on how much risk society is willing to bear, and this differs sharply across age groups. The bulk of evidence shows that those under 60 and without the comorbidities of hypertension, diabetes, or cardiopulmonary diseases have very low risk, and that many under 50 will either be asymptomatic or have symptoms milder than the flu.  

Recently three leading economists discussed how policy should respond to COVID-19, and all indicated that the benefits of opening economic activity outweigh the costs.

Two leading macroeconomists, Jesús Fernández-Villaverde of the University of Pennsylvania (full disclosure—I was very fortunate to be his dissertation advisor), along with Professor Charles Jones of Stanford, have analyzed the economic effects of COVID-19 in detail at the national, state, county and city level.  Fernández-Villaverde noted, “Many of the costs [of shelter-at-home policies] are going to those younger than 40, including missed educational and work opportunities, difficulties raising a family, and lower wages that lead to greater challenges in maintaining daily life. Any type of policy that is trying to save lives, as valuable as those are [must consider harm to education and mental health]. . . . We are facing very serious tradeoffs, and just closing our eyes and pretending those tradeoffs are not there, because we feel bad about talking about those tradeoffs, I don’t think is very responsible.”

Bingo. We must make real-time adjustments to policies as conditions change and as knowledge about the virus and its effects accumulate. California should follow other states and more rapidly restore economic activity. This should absolutely be accompanied by frequent and wide-scale testing, and if testing is limited, a trick used in World War II, in which groups of people are tested—everybody is swabbed and analyzed with a single test—can greatly economize on test kits. If the group test passes, everyone goes about their business, but if the group sample tests positive, the entire group self-quarantines for a temporary period to protect themselves and others. We should also take the strongest precautions with those at highest risk—those over 70 and with comorbidities. However, this demographic group is largely retired and thus will largely not affect production.

California’s Democratic majority needs to demonstrate political leadership that truly confronts the emergency that California now faces. Newsom’s May revision budget, which was trimmed to “just the absolute essentials,” provides $22 million for the enforcement of AB 5, the new anti–independent contractor law that has caused so much harm in the state.

Does the government really want to break up productive work relationships, particularly now? Please, take that $22 million and build some homes or provide meals for those in need or repair the many public schools that do not pass current safety standards.

If you need a one-liner for what California has become, California politicians are prioritizing the punishment of work at a time when unemployment has never been higher, even compared to the Great Depression. Sacramento, you can, should, and must do better.