Will Rivian Automotive Last Long Enough to Use All of Its State Subsidies?

By Marc Joffe of Cato.

"Electric vehicle marker Rivian is struggling to make cars and earn a profit, but it has proven adept at winning subsidy and tax credit packages from governments around the country. If the company cannot reverse its financial fortunes, it could go under before it uses all the incentives it has been offered.

According to Good Jobs First’s Subsidy Tracker, Rivian has gotten incentive packages from four states with an aggregate value of over $2.3 billion since 2016. The company started small, receiving $1.72 million from the Michigan Business Development Program to set up its corporate headquarters in Livonia, Michigan, and hire up to 170 employees. It later moved to the nearby city of Plymouth, Michigan, before transferring its headquarters out of state to Irvine, California.

In California, Rivian tried to obtain a $16.8 million California Competes Grant but was thwarted when two union representatives and a Rivian employee testified against it at a hearing of the committee overseeing the program. The employee complained of long hours, mandatory overtime, and frequent scheduling changes at the company’s Normal, Illinois, plant.

Rivian has also won $4.2 million of grant commitments in the state of Kentucky, where it has promised to “invest $10 million to establish a remanufacturing facility in Bullitt County, creating 218 full-time, quality jobs,” according to a press release from Governor Andy Beshear.

But Rivian obtained far bigger incentive packages from Georgia and Illinois. As discussed in my policy analysis “Reforming State and Local Economic Development Subsidies,” coauthored with Scott Lincicome and Krit Chanwong, Rivian obtained almost $1.5 billion in state and local incentives to build an electric vehicle plant in Stanton Springs, Georgia, that was supposed to open this year.

Hailing the deal at the end of 2021, Georgia Governor Brian Kemp said:

Rivian’s investment—the single largest in state history—represents the future of automotive manufacturing and establishes the leading role the Peach State will play in this booming industry for generations to come. Our Georgia Quick Start workforce training resources, world-class higher education institutions, and statewide logistics infrastructure assets are prepared to meet Rivian’s production and R&D needs. As one of the world’s most dynamic, innovative companies, Rivian’s exciting announcement begins a new chapter for Georgia, and we are honored to welcome them to the Peach State!

Unfortunately, this investment has yet to materialize and may never do so. In March, Rivian announced that it was pausing construction of the Stanton Springs facility and now says that the plant will not begin until 2028. Even that date depends on whether Rivian receives a federal loan under the Department of Energy’s Advanced Technology Vehicles Manufacturing Loan Program.

Although most of the Georgia incentive package kicks in when Rivian goes into production, state and local governments have already incurred soft and hard costs that cannot be recovered. These include a rent-free ground lease the state gave Rivian on the 1978-acre (or roughly three-square-mile) plant site and three access road construction projects the the Georgia Department of Transportation (GDOT) has initiated at a total cost of over $180 million (cost data from three projects come from GDOT).

With the Georgia plant in abeyance, Rivian continues to produce all its vehicles in Normal, Illinois. In 2017, Rivian bought a shuttered Mitsubishi manufacturing facility in the Central Illinois community after receiving $49 million in state tax credits and city property tax abatements worth $4 million over five years. In May of this year, Rivian received an additional $827 million incentive package from the State of Illinois Department of Commerce and Economic Opportunity to significantly expand the facility.

Whether Rivian can complete its Illinois expansion and build its new facility in Georgia rests in part on company performance—and this has not been promising. In the quarter that ended September 30, 2024, Rivian produced only 13,157 vehicles and delivered just 10,018. Production was down from the prior quarter due to a parts shortage. Worse, Rivian loses money on each vehicle it sells, although these losses have narrowed from $124,162 per vehicle at the end of last year to $32,595 in the second quarter of this year.

As a result, investors have soured on the company’s prospects, driving the company’s stock price down by more than 80 percent from its 2021 initial public offering price of $78 per share. Unless the company can increase production and sales while reducing costs per vehicle, it is likely to burn through its cash reserves and be forced into bankruptcy. In that event, the jobs that states expected to create from assisting Rivian will fail to materialize."

AJR’s economics Nobel is a partial victory for institutions

By Ryan Young.

"This year’s economics Nobel Prize winners are Daron Acemoglu, Simon Johnson, and James Robinson. They are frequent collaborators, often collectively called AJR. Much of their work is about institutions. Institutions are things like the rule of law, a country’s regulatory process, or the way it treats property rights. Think of institutions as the rules of the game, rather than the game itself.

Those of you familiar with CEI’s work, especially on regulatory reform, know that one of our policy mantras is that institutions matter. Since Nobels often honor a sub-field or a research program more than the individual honorees, from that perspective this is a gratifying prize. In many ways, AJR’s work complements previous institutions-matter economists like Douglass North, Oliver Williamson, Elinor Ostrom, and James Buchanan. And yet, it feels incomplete.

While AJR are right that institutions matter, they do not explore institutions’ deeper roots. They have also fallen for recent political trends, especially Acemoglu. These trends include populist anti-tech animus, cozying up to illiberal governments, and asking the fashionable questions about inequality instead of the right ones.

The first AJR paper to make a big splash was 2001’s “The Colonial Origins of Comparative Development: An Empirical Investigation.” They argued that deadly disease rates in colonial-era Africa help to explain many African countries’ economic performance today. The general rule is that the higher that European colonists’ disease mortality rates were in a given country during the 19^th century, the worse that country does today. The reason why is institutions.

In places with high mortality rates, European colonizers set up extractive institutions. Rather than take on a long-term project like building a sustainable liberal democracy, colonists instead extracted resources as quickly as they could and got out. After independence, these countries’ new governments kept these extractive institutions, which are keeping their people poor to this day.

European colonizers in countries with lower disease rates tended to think more long-term. They built more inclusive institutions, which also persisted in post-independence governments. As a result, low-disease mortality countries in the 19^th century are more likely to have relatively stable and liberal governments today.

When I was in grad school, the economics discipline was gushing over how AJR used such a subtle correlation to tell such a big story. One professor of mine called it the “killer variable” of the last twenty years. Journals were saturated with copycat articles. AJR were already on the Nobel short-list, and the main surprise is that it took them until 2024 to win.

Acemoglu and Robinson have coauthored three books on institutions, starting with 2006’s Economic Origins of Dictatorship and Democracy. Their second book, 2012’s Why Nations Fail, brought them popular acclaim. As with their previous work, they contrast extractive and inclusive institutions. Countries with extractive institutions tend to be corrupt, oppressive, and poor. Countries with inclusive institutions tend to be freer and richer.

Their chapter on Nogales, a city that has the US-Mexico border running through it, is a fantastic example of the effect institutions can have in otherwise identical places.

Even more vivid is the difference between North Korea and South Korea. Like the two halves of Nogales, the two Koreas share the same language, culture, and geography, and over a thousand years of history. But the country split into communist and liberal halves in 1950.

Extractive North Korea may be the only place on Earth that still regularly experiences famines in peacetime. Inclusive South Korea transformed in two generations from one of the world’s poorest countries to one of its richest, and it has become a stable democracy.

Acemoglu and Robinson’s third book, 2019’s The Narrow Corridor, tells a similar story. But instead of repeating Why Nations Fail’s black-and-white story of institutions being either extractive or inclusive, Acemoglu and Robinson fill in some of the colors and shades of gray. Their onslaught of terminology, distinctions, and metaphors makes it a bit of a muddle, but the general picture is clear enough.

A country should have a government powerful enough to protect people’s rights, but not powerful enough to abuse them. That is the narrow corridor within which states should be kept. My review of The Narrow Corridor takes a deeper look.

My colleague James Broughel argues that the economics Nobel is an insiders’ club, with the same few universities and dissertation trees winning in most years as friends reward their friends. AJR teach at MIT and the University of Chicago, which are both in the club. Johnson is also the IMF’s former chief economist.

Even for insiders like AJR, it often takes a fair amount of lobbying to get the prize. Researchers’ ambition to win can color their research agendas and the positions they take. This may explain why Acemoglu in particular has lost the plot in the last few years.

Acemoglu and Johnson in 2023 coauthored Power and Progress, which is about inequality. They argue that technological innovations over the last thousand years have tended to benefit powerful people at regular people’s expense. Like other voguish inequality analysts such as Thomas Piketty, they focus on levelling income ratios, but not on making poor people richer. This is opposite to the approach Iain Murray and I favor in our paper “People, Not Ratios.”

Acemoglu has had two other slipups recently.

One is his signing onto an open letter endorsing the Brazilian government’s ban of Twitter for political reasons. Whatever one’s opinion of Twitter or its owner, Brazil’s ban was outside of the narrow corridor Acemoglu endorses in his book with Robinson.

In a separate incident, Acemoglu showed a poor understanding of the knowledge problem. The short version of the knowledge problem is that nobody has all the knowledge they need to plan or direct an economy. This makes life extremely difficult for policymakers, however well-intended.

As early as the 1920s calculation debate, aspiring planners have argued that advances in computing technology would overcome knowledge problems. This was in the age of mechanical calculating machines. The predictions repeated themselves with the transistor, the mainframe computer, the PC, the Internet, and the search engine. Yet each time, the knowledge problem remained unsolved.

Maybe this time will be different, Acemoglu argues. In a 2023 Twitter thread about artificial intelligence, he writes: “Coming back to Hayek’s argument, there was another aspect of it that has always bothered me. What if computational power of central planners improved tremendously? Would Hayek then be happy with central planning?”

The answer is no. The knowledge problem isn’t about the amount of knowledge. It is about the type of knowledge. The type of information Hayek wrote about is tacit, qualitative, hyper-local, difficult to verbalize, and often impossible to quantify. It is inaccessible to planners, no matter their computing power.

Think about the factory worker who knows the quirks of the machines he works with. Or the teacher who knows her students’ learning styles. Or the entrepreneur who spots a hole in the market and has an idea for how to fill it that comes from their unique life experiences. Computers can’t model that. AI cannot generate those human discoveries. Acemoglu misunderstands the knowledge problem at a fundamental level, which in turn affects his and his collaborators’ policy prescriptions.

The Nobel Committee could have made a worse choice than AJR. Despite their inconsistencies and trend-following, all three understand the importance of institutions, at a time when many academic economists in top-five departments do not."

For the last four quarters and in 7 of the last 8 quarters, Asian women have outearned White men

Tweet from Mark Perry.

"For the last four quarters and in 7 of the last 8 quarters, Asian women have out earned White men. For weekly earnings in Q3 this year, there was a 7% gender pay gap favoring Asian women and White men earned only 93 cents for every $1 earned by Asian women ($1,292 vs. $1,393)"

Also see USUAL WEEKLY EARNINGS OF WAGE AND SALARY WORKERS THIRD QUARTER 2024 from the BLS.