Investing, Subsidies and Mandates
Investors typically seek to identify opportunities for achieving appropriate returns by assessing the outlook based on anticipated free market forces. Government subsidies and/or mandates tend to distort free market forces with the potential for unexpected results.
This phenomenon – government interference in the market process – is so wide ranging as to make it difficult to provide generalized guidance for investors. Each investment opportunity should be carefully assessed with a view to recognizing the nature and permanence of government regulation, subsidies and mandates.
For example, the auto industry is constantly subject to a wide range of government edicts, with respect to fuel economy, safety, and emissions, to highlight a few. This regulatory maze also tends to vary by jurisdiction.
Consider the auto industry’s substantially mandated search for zero emission vehicles (ZEVs). While the industry continues to explore various, hopefully practical alternatives, the current regulatory choice for meeting the stringent ZEV requirement, appears to be plug-in, battery-powered electric cars. Unfortunately, even with significant financial subsidies, electric cars remain a hard sell. However, in certain jurisdictions, notably California, Atlanta, GA, and Norway, ZEV electric car market shares have significantly exceeded national averages. Why? It appears that the big winner subsidy, far ahead of cash, is unfettered access to restricted traffic lanes. In California and Atlanta it’s the HOV (high occupancy vehicle) car pool lanes, and in Norway, it’s the bus lanes. Unfortunately, this is already disrupting bus schedules to the annoyance of both bus drivers and passengers.
Of course, access to special traffic lanes will be a self-limiting subsidy. Once there are enough qualifying vehicles on the road, the HOV lanes will become sufficiently crowded as to eliminate the advantage of owning a ZEV.
Investors should be very careful when evaluating regulatory interference with free markets. There will almost certainly be winners and losers, but the effects may prove to be temporary. Do your homework, consult with your advisor(s), and be alert for “unintended consequences”.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA