The P. T. Barnum Economy

Way back in the olden thymes, when companies were getting on-line to sell stuff, it looked like Amazon picked a strange market to exploit. Buying books on-line was not a great leap forward, but Bezos knew something the rest of us did not. He knew that a business that flattered the beautiful people would have an army of beautiful people promoting it to the rest of us. It was the central insight of Steve Jobs. He was the post-modern P. T. Barnum, selling the glorious future rather than a glimpse of the wolf-boy or the tattooed lady.

Amazon never made money selling books, but before anyone could pay too close attention to that, Bezos moved onto selling other stuff. When that failed to turn a profit, he got into selling music, then it was movies and TV shows. Amazon eventually turned a profit, but the total profit for the firm over its history amounts to what a company like ExxonMobil generates in a good month. Now, Amazon is promising to have drone robots deliver your goods before you even decide to order them. The future will be glorious.

The key for Amazon making it all these years was to keep people focused on everything but their financials. This is not an exception. Faceberg will never have earnings to justify its share price. In fact, it will never have user rates to justify its ad revenue. It’s not unreasonable to think that everything about the business is fraudulent. That should trigger large scale audits and investigations into its business practices, but Facebook is on the side of angels in the cultural revolution, so its all good.

Probably the best example of our carny-barker economy is Tesla. To his credit, Musk has built a real factory that builds real cars. No one is going to say the Tesla is a work of art or even a practical car, but it is a car and the technology is impressive. The trouble is the company does not exist to make cars. It operates as a tax sink, where government subsidies flow into it and some portion of those subsidies turn into payments to the principles in the form of stock repurchases, debt service and compensation.

This only works if people think the venture will either one day turn a profit or the technology that it creates will result in something good down the road. To that end, Musk is regularly out doing his Lyle Lanley act, making all the beautiful people feel righteous by backing his ventures. He’s also telling Wall Street that he will soon be making and selling enough cars to turn a healthy profit, even without massive tax subsidies. The trouble is, that’s probably never happening, at least not with current management.

Tesla CEO Elon Musk said last week the company has run out of space at its Fremont, Calif., plant and is looking to build a second factory.

“There’s no room at Fremont,” Musk said. “It’s bursting at the seams.”

But that statement left plenty of industry watchers scratching their heads.

Tesla’s Fremont plant is the old New United Motor Manufacturing plant, otherwise known as NUMMI. The joint operation between General Motors and Toyota began in 1984 and was intended to help the Japanese automaker learn about doing business in America and teach GM the principles of lean manufacturing.

The plant, 32 miles from Tesla’s headquarters in Palo Alto, is large enough to handle around 500,000 vehicles a year in 5.3 million square feet of office and manufacturing space. Tesla, meanwhile, produces about a fifth of the plant’s capacity.

So what gives? Why is the electric-vehicle manufacturer running out of room?

It’s because in this temple of lean manufacturing, Tesla uses far more workers than NUMMI employed to build far fewer cars. In 1985, its first full year of production, NUMMI had 2,470 employees and produced 64,764 vehicles — about 26 vehicles per worker per year. By 1997, it had 4,844 ​ workers and produced 357,809 vehicles — about 74 vehicles per worker per year.

Tesla, on the other hand, had between 6,000 and 10,000 workers in 2016 and manufactured 83,922 vehicles. That puts its vehicle-per-worker number between 8 and 14, about one-seventh the efficiency of NUMMI at its peak.

What we are seeing with Tesla is pretty much what we saw with Amazon. Tesla is a great show so the tax subsidies will not be shut off. Amazon avoided paying sales taxes for years this way. Rich people think Musk is cool and it is currently hip to have one of his cars as a toy, so there will be no push to cut the apron strings. That means Wall Street investors will stay in the game, even though they have people who know there is zero chance for Tesla to profitably make cars anytime soon.

In fairness, this sort of chicanery is not new. The industrial age saw similar rackets, which is how great public works projects were built. The government turned a blind eye to the cost shifting and corruption, as that seemed like a reasonable price to pay for a bridge or a hydroelectric damn. It was not just corruption. Railroads and power companies trampled on the rights of citizens to build out their networks. Despite all that, the people still got trains, electrification, bridges and roads. People can accept those trade-offs.

Whether or not that will hold in the technological age is debatable. The collapsed retail sector has left retail centers looking like ghost towns. Getting cheap stuff on-line is not exactly a great legacy, compared to rural electrification. On the other hand, maybe battery powered, self-driving cars will be seen as having been worth the massive debt and tax shifting that is so much of the modern economy. And, unlike the robber barons, guys like Bezos, Musk and Zuckerberg put on a good show, so there’s that.

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108 Comments on "The P. T. Barnum Economy"

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Alex
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Bezos’ famous comment that “your margin is my opportunity” represents a public good in that it forces companies to become more efficient, lest the Eye of Mordor is cast in their direction.

Amazon is profitable when it wants to be. All Bezos has to do is reduce internal reinvestment of capital for a quarter and Wall Street gets all giddy.

The US has been over represented in retail square footage for too long, and Amazon is the forcing function to rationalize that situation.

William Nohmor
Guest

Hi I don’t agree that scavenging margin to eliminate competition is good for the public over anything other than the short term. Amazon is not here to help.

Eclectic Esoteric
Guest

Bezos is a presidential wannabe. He owns WAPO and has the biggest mansion in Kalorama . Narc Zuckerberg will probably run against him in the primary.

Member

The massive university health systems are on a similar track. Once they stop growing they will begin to lose money hand over fist. Then they will ask for government money that they aren’t already getting because too big to fail.

usexpat
Guest

I read a decent article that stated even with a perfect battery (zero size and infinite capacity) E vehicles will never take over the industry as it would require the the electrical grid double in size along with all that would entail. Add to that the problems with unreliable power generation (solar and wind) that is currently in vogue and there’s a nice cluster fuck in the making.

Thales
Guest

Only double? I think that’s optimistic. I did a back-of-the-envelope calculation some time ago and came up with a factor of 5.

LetsPlay
Member

And don’t forget the thermal problems (heat generation from zero size) and environmental problems of recycling, etc.

Severian
Guest

Let’s give credit where it’s really due — the robber barons were MUCH better showmen that Zuckerborg, Musk, Bezos, et al. Their antics are what gilded the Gilded Age. And they actually benefited the public — Carnegie’s libraries vs. Zuckerborg’s… what? A few years back, Bill Gates tried to be the modern Carnegie and put computers in every classroom. He got laughed out of public life for such a transparent publicity stunt.

Member

No successful hi-tech company in the past twenty years has not been a CIA project.

Member
A great article, with a few minor quibbles. You wrote “That means Wall Street investors will stay in the game, even though they have people who know there is zero chance for Tesla to profitably make cars anytime soon.”, but it’s much worse than that. Those “Wall street investors” are often not, perhaps usually not, capitalists in any real sense. They are institutional investors, meaning pension funds and the like, that have been utter enmoled and penetrated by the left. All too often their management is 100% lefty to the bone, they have been on a government-like tit their whole… Read more »
Anonymous White Male
Guest
I have always thought that online purchases have a tendency to remove people from each other. Oh sure, its been great for Federal Express, but there is no human interaction involved. By removing human contact, you have acceded to local retail destruction and a soulless automation in daily life. It may be more efficient but is it bette? This is not an old man rant about the good old days. I just think that a social contract has to be maintained by social contact. What used to be a simple process of obtaining information or solving a problem via communication… Read more »
Al from da Nort
Guest
So, the question as a potential investor has to be, “Are we back in ‘tulip time’* _again_? As in the old classic, Extraordinary Popular Delusions and the Madness of Crowds: https://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds Ah, the warm glow of memory for the ’60’s tech stock bubble, when ‘growth stocks’ first became a thing. The now humorous list of names that were going to take over the economy (Polaroid, D.E.C., Xerox, Motorola, etc., etc.) fill the greedy soul with longing. At least if you were then around the financial world. The serious point is that excess liquidity has to go somewhere and so an… Read more »
Chazz
Guest

It is often observed that shoppers go to the brick and mortar stores to examine the goods then go to Amazon to buy them. Lately I have noticed that I go to Amazon to read the reviews, then go to the producer to make the purchase.

tim
Guest

Yeah telsa is a money sink, but launching a rocket, sticking a landing of the used main body on a barge at sea and sucessfully re-supplying the space station and putting up sattelites, now that is flat out incredible, nasa with all it’s amazing capability hasn’t done that. Great design work, simple engine technology scaled up as the rockets get bigger, what a concept.

FaCubeItches
Guest

“nasa with all it’s amazing capability hasn’t done that”

Well, according to top NASA brass, their primary job is either Muslim outreach or climate change study, not spaceflight.

roger
Guest

“nasa with all it’s amazing capability hasn’t done that”

they never had to. they had infinite money…

LetsPlay
Member

You are mixing apples and oranges my friend. Tesla is not SpaceX. But you are correct that the recovery of rocket bodies by landing them for reuse is quite astounding.

But I think your statement about “simple engine technology” is a bit too simplistic.

Karl Hungus
Guest

i see movement towards replacing the mass production of things (remotely) with local production. the mass produced stuff is of poor quality, and in the case of food, toxic. this will keep more money in the local ecvnomy, and start starving the huge companies. makes it harder for the federal govt to mess with things, too.

LetsPlay
Member

That’s one area I hope Trump can cut regulations. The government has been a tool of the big chem companies, Monsanto, etc., for GMO’s, pesticides, and all kinds of flagrant abuses including the BLM control of water and other mineral resources. When people can’t collect rain water in their back yard or have their own gardens, then the government is again forcing the public into certain directions for their food supply. The big thing again is limiting competition which is where Bezos is going now with his Whole Foods purchase.

Ryan
Guest

Self-driving cars will eventually be seen as one of the greatest inventions of history. 35,000 people died in car accidents last year. Self-driving cars will eventually lower that number to something like 35 or fewer.

In the end I wouldn’t be surprised if the masses mistakenly think Musk/Tesla were responsible for self-driving cars. He is a hell of a showman.

Nunnya Bidnez, jr.
Guest

” 35,000 people died in car accidents last year”..

…and 59,000 died from suicide.
What has Musk/Zuckerberg/Gates/Bezos done to reduce that number?

Member

I know we are way overdue, but flying cars are just around the corner.

Anonymous White Male
Guest

I think for some car junkies, not being able to drive a car would be akin to a meth-head not being able to get a bump.

Rod1963
Guest

It amazes me that people will up their autonomy so easily.So you can smoke a blunt and drink a pint of Johnny Walker or look cool to your hipster friends.

Well some of us don’t like being tracked, monitored and our conversations in the car being recorded by Uber or Google. Let those idiots who have facebook or Ipods buy them.

I buy my cars at salvage auctions and fix them and at least I own them unlike the clowns who buy/rent a robo-car.

TomA
Guest

Eventually it will become apparent that all of the loans that are being used to fund political ends cannot be paid back, and after confiscation has done all that it can to further kick the can down the road, then a melee will ensue and the survivors will get to start over. May you live in interesting times.

Member

Amazon’s electronic “book” was an idea I resisted for maybe five minutes, but living in a place where print books in English aren’t easy to come by, it seemed a good idea to buy one, so seven years ago I did, only to be mistreated by the seller. As a result, of my 19k or so volume digital library, two (not 2k) have been purchased from Amazon. Great gadget! Provides high calibre reading. Raise high the black flag! Long live local foods and 17 year old gasoline powered autos!

joe_mama
Guest

Apple seems to be the one of the big 4 tech companies to buck this trend. Though it’s hard to tell how much exactly the stock price is inflated by.

Al from da Nort
Guest

One way to decode the approach of the inevitable Apple revenue plateau would be to look at ‘insider transactions/sales’ if this information is still published. The insiders will know before anyone else when plan revenue forecasts start being missed or become hard to achieve so that they have to resort to such tried-and-true-yet-questionable measures as ‘channel stuffing’.

Dutch
Guest
Apple has already hit its revenue plateau. Now, for how long are they going to be able to keep their fat margins on iPhones, when no one, including Samsung, has ever made big margins on phones, ever? The only reason I would pay the current price on Appe would be if they brought Elon Musk into the company. Imagine how much he could hype Apple from here, with the resources Apple has now, compared to what he has done on a relative shoestring at Tesla? Whether his hype would turn into something real, neaningful, and lasting would be interesting to… Read more »
William Holmes
Guest

This post reminded me of the “rational actors” concept and it’s associated problems. If consumers rationalize their purchases afterwards for things like shoes and beer based on brand loyalty or image signalling I suspect shareholders do the same thing.

Lorenzo
Guest

A small point. Amazon still doesn’t pay sales taxes, it collects sales taxes.

Wilbur Hassenfus
Guest

We visited a few of the robber barons’ old summer mansions in Newport, RI this Christmas. If Zuck ever puts on a show half that good, I’ll be impressed.

Member

“It operates as a tax sink, where government subsidies flow into it and some portion of those subsidies turn into payments to the principles in the form of stock repurchases, debt service and compensation.”

John Michael Greer calls these things “subsidy dumpsters.” He uses the same term to describe the nuclear industry.

originalguest
Guest
Tesla? Impressive tech? Au contraire: “Teslas solution to improving battery life appears startlingly simple” disappointing even! The magic sauce is simply an array of 7000 off the shelf Panasonic 3400mAh lithium ions cells, which look like slightly larger heavy duty AA batteries. The motor is nothing special as well, it’s a standard three-phase Alternating Current (AC) induction motor, stuff that was patented 100 years ago. Or in other words, there is no breakthrough new technology, no magic smoke. They get the extra boost from hype and momentum… people want to believe. Having said that, Elon Musk is still my favorite… Read more »
LetsPlay
Member

what a maroon. someone who has a salesman/conman as a hero!

Sam J.
Guest

I don’t get why you people hate Musk so much. The point is he did what he did and no one else would. He made it work. The tax subsidies were not made just for him. The subsidies were for valid public reasons or at least a decent case can be made for them./ If people are throwing money on the ground would you berate them for picking it up?

originalguest
Guest
Your buddy Karl Denninger just the other day: “It was recently pointed out that Amazon among other “high flying” tech stocks is basically a 2-n-20 hedge fund for its higher-level employees. That is, the cash flow of the company has turned from a source of innovation and advancement into a means to funnel billions of dollars to those people via stock-based compensation. That cash flow is supposed to inure to the benefit of all the shareholders but instead is being taken up to a huge degree by a handful of insiders. This isn’t illegal, but it’s something that the market… Read more »
Member
The entire foundation of Western style free market capitalism rests on the principle of two people exchanging money for goods and services which the buyer does not need, using money he borrowed, and which solves a problem he did not know he had. Until they are rocked by a financial hardship, many people never realize that they can live on less than half of what they’re living on today, and live a happier, more contented, more fulfilling life. For all the Zuckerberg’s many flaws, Facebook does for free, instantaneously, what I once had to commit time and energy to put… Read more »
Allan
Guest
Maybe there’s room in American politics for a Sarcasm Party which demands that all commerce be subject to rigged market capitalism. Opportunities for rigging commerce abound. For instance, The Sarcasm Party would advocate for the abolition of subsidies for airlines, aircraft makers, car makers, fossil fuels, and petrochemicals. This rigging would involve abolishing government ownership and government subsidization of airports and controlled access expressways (e.g. the DDE National System of Interstate and Defense Highways). Another target would be the banking industry, which would be rigged, in part, by repealing the Federal Reserve Act and its amendments. Incorporation with limited liability,… Read more »
Member

“Nonprofit” is a scam. All it means is that the company doesn’t show a profit at the end of the year. That’s easy to fix, just pay everybody 10x more.

Nonprofits are how people get rich while rubbing other people’s noses in sanctimony. “What do you do?” “Oh, I work for a nonprofit providing clean water to displaced cats,” and earn $143,000/yr.

hosswire
Guest
I have recently started advertising my solopreneurial venture on Facebook & what I am seeing is giving off a very strong whiff of fraud. Essentially, Facebook entices me to pay them for advertising with the all-but-assured prospect that X dollars spent will result in Y number of “likes”. Though Facebook doesn’t say so, I am supposed to believe that these “likes” will in turn translate to people “following” my page and buying my product. And sure enough, my ad spend does in fact result in “likes”… but there is definitely something a bit “off” about the likers. They aren’t anything… Read more »
Dutch
Guest

Friends reining on line businesses tell me that Amazon is the only one that treats them fairly. Google, EBay, and Yelp are horrible.

But Amazon will steal your business with a house brand alternative if you hit the jackpot.

The Usual Suspect
Guest
Yep, in this state of flux for the marketing sector there is opportunity for great amount of ”latitude” in the world of commerce. We are still in the gold rush stage of tech. Anything goes and who’s to say they wrong or any different than the ones that built the railroads or any other great undertaking? Amazon et al are buying the market as the Japanese did in the 70s and 80’s they were kings. Once Bezos and friends own the retail sector then the pricing structure will be to their advantage, a simple business plan. A hundred years from… Read more »
Drake
Guest

Good timing. Amazon just bought Whole Foods with $13 Billion in imaginary money.

Christopher S. Johns
Guest

An excerpt of some of the gory details at Zero Hedge:

“Amazon expects to finance the acquisition with debt.

Amazon enters into commitment letter for 364-day senior unsecured bridge term loan facility in an aggregate principal amount of up to $13.7 billion.
Expects to finance deal with debt financing, which may include senior unsecured notes issued in capital markets transactions, term loans, bridge loans, or any combination thereof, together with cash on hand, co says in a filing.

Goldman Sachs, BofA-Merrill Lynch to lead debt financing.”

Grocery stocks globally are tanking on the news:

http://www.zerohedge.com/news/2017-06-16/amazon-buy-whole-foods

DMW
Guest

Amazon buys Whole Foods. A perfect example of your commentary!

Ripple
Guest

Where the heck does the author of the quoted article get the idea that Fremont and Palo Alto are 32 miles apart? The two cities are right across San Francisco bay via the Dumbarton Bridge, more like 15 miles.

Member

Welcome back, my friends
To the show that never ends.
We’re so glad you could attend!
Come inside! Come inside!

Korezaan Su
Guest

In the old days when Tesla was only making their sports car, the amount of money they’d make assuming every single cent collected from every single car sold over a year was pure profit, they wouldn’t be able to keep NUMMI’s lights on for a month.

These days that calculation maybe manages to pay rent.

Source: someone who knows how much it costs to keep NUMMI’s lights on per month.

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Abelard Lindsey
Guest

This P.T. Barnum posting is 100% spot on. I will only add that it is the FED induced bubble economies since 1995 that has made the behemoths such as Amazon and Google even possible. The solution is relatively simple. Congress should abolish the so-called “dual mandate” of the FED and limit the role of the FED to the single mandate of maintaining price stability only.

Sam J.
Guest

“…NUMMI employed… 74 vehicles per worker per year.

Tesla…vehicle-per-worker number between 8 and 14, about one-seventh the efficiency of NUMMI at its peak…”

I think you may be comparing apples and oranges. Tesla has said that he likes to produce every thing he can in house so he may be making most all the parts for the Tesla in the same factory while GM was building dashboards, engines, transmissions and all other kinds of parts in other factories. You’re not counting them. I bet when you count all of GM’s imported parts workers Tesla will have less workers.

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