WSJ What’s News - How Tesla’s Profits Are Boosted by Government Programs

Episode Date: July 25, 2024

P.M. Edition for July 25. Tesla's profits could have been worse if not for government programs. WSJ’s Tim Higgins explains why. And the U.S. economy continues to grow at a stronger pace than expected. Plus, Uber and Lyft win a California ruling to treat drivers as independent contractors. Sabrina Siddiqui hosts. Sign up for the WSJ's free What's News newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

When your celebration of life is prepaid in advance, it becomes a gift from you to your family later, because no one should have to plan for a loss while they're experiencing one. Paying in advance protects your loved ones and gives you the peace of mind you deserve. Let us help you plan every detail with professionalism and compassion. We are your local Dignity Memorial provider. Find us at DignityMemorial.ca. The U.S. economy continues to grow and at a stronger pace than expected. And Tesla's profits may have fallen, but government programs are helping boost the electric carmaker. This is money from rivals, but it is coming through government policy.

Policy is intended to move car companies towards making zero emission vehicles. Plus, Uber and Lyft win a California ruling to treat drivers as independent contractors. It's Thursday, July 25th. I'm Sabrina Sidddiqi for The Wall Street Journal. This is the PM edition of What's News, the top headlines and business stories that move the world today. The U.S. economy accelerated in the second quarter as consumers increased their spending, businesses invested more in equipment and stocked inventories, and inflation cooled. The Commerce Department said today that Gross Domestic Product,

the value of all goods and services produced in the U.S. adjusted for inflation and seasonality, rose at an annual rate of 2.8% for April through June to $22.9 trillion. That was faster than the 1.4% pace in the first quarter and well above the 2.1% rate economists had expected. Household spending, the main driver of the US economy, increased at a quicker pace as Americans' incomes continued to rise. Today's release is one of the last major readings of the economy's temperature that officials at the Federal Reserve will see before a meeting next week. The new data shouldn't change the outlook for the Fed, where officials have signaled

that they expect to hold interest rates steady at next week's meeting. But they could cut rates at their subsequent meeting in September if inflation continues to cool. More Americans are driving without car insurance, and it's making coverage more expensive for everyone else. The problem has been growing since the start of the COVID-19 pandemic, according to the Insurance Research Council,

whose latest data show the percentage of uninsured drivers rose to 14% in 2022 from about 11% in 2019. The IRC, which calculates the data based on the relative frequencies of auto insurance claims, expects the numbers have continued to climb since then. Kaylin Roan, the Wall Street Journal's finance reporting fellow joins us now to discuss. Kaylin, thanks for being here. Thank you for having me.

So what's behind this trend? Why are a growing number of consumers driving without insurance? So what we're seeing is that many drivers are battling with rising costs of car insurance while also battling with groceries, housing, and healthcare. And so some are just rolling the dice saying that they don't need it and driving their car insurance altogether. How does that impact insurance rates for other consumers? It makes it way more expensive for everyone else when people drop their car insurance. Insurance companies factor in how many people are driving uninsured in a given state. That

increases the rates on those drivers who choose to follow the law, no matter the cost. Policyholders pay about $16 billion for uninsured and underinsured motorist coverage in 2020, according to the IRC. Where are we seeing the highest number of uninsured drivers? Washington, DC, New Mexico, and Mississippi are among the states that have the highest number of uninsured drivers, according to IRC. Ohio ranked 10th on the list, said it saw an increase of 16% between 2020 and 2023 amongst uninsured drivers, according to the state's Bureau of Motor Vehicles. How are states and cities responding? Well, Michigan made a law in 2019 that no law requires residents to buy unlimited personal injury protection. Since then,

the state has seen a decrease of 6% in uninsured drivers. Local police departments are also on the hunt for local offenders. The new police chief watched in DC that there will be multiple checkpoints a month to search for those safety compliance violations. The penalties for driving uninsured vary by state. Most states will be fined for a first time offense. California, for example, charges between $100 to $200 plus other penalties. Other states will suspend a driver's license

and registration or even give you jail time for it. That was the Wall Street Journal's Kaylen Rohn. Uber, technology's Lyft and other companies that depend on gig workers have scored a victory with California's top court affirming their independent contractor model in the state. The decision caps a years-long legal battle over how their drivers should be classified. California's Supreme Court upheld a lower court ruling that said Proposition 22, a 2020 ballot measure that allowed the companies to continue classifying their drivers as gig workers,

was constitutional. Some rideshare drivers and a labor union had challenged that decision, leading to a prolonged legal fight that wound up in the state's highest court. Uber and others are in a global tug of war with regulators over whether and how to grant more benefits, such as paid sick leave and health insurance to workers in the so-called gig economy.

California sued Uber and Lyft in 2020, saying they were in violation of a new state law that sought to reclassify their drivers as employees who would be eligible for such benefits. In a statement, Uber said the ruling put an end to misguided attempts to force their drivers and careers into an employment model that they overwhelmingly do not want. Speaking of the world of work, have you ever been a digital nomad taking your job to another state or maybe even to another country?

If so, we wanna hear how that went, how you manage or didn't manage your taxes and if you're still enjoying the flexibility that existed in the wake of the pandemic. And if you're a business owner, what's your mobility policy and has it changed with time? Send a voice memo to wnpod at wsj.com or leave a voicemail with your name and location at 212-416-4328. We might use it on the show. Coming up, Tesla's profits could have been worse had it not been for

government programs. That's after the break. for government programs. That's after the break. Where ever you're going, you better believe American Express will be right there with you. Heading for adventure? We'll help you breeze through security. Meeting friends a world away? You can use your travel credit.

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A record amount, equal to more than half of Tesla's second quarter profit, has been attributed to the sale of these credits to rival automakers that use them to meet emission rules. The latest payday came as Tesla Chief Executive Elon Musk reiterates his support for eliminating government subsidies to encourage the development of electric vehicles and is pushing for former President Donald Trump, who has pledged to reverse EV policies intended to nurture the industry in the U.S., to return to the White House. Wall Street Journal columnist Tim Higgins joins us now with more. Tim, how exactly does Tesla benefit from these regulatory credits? Well, it's something that's gone back to the early days of the company. Places like California have ruled that car makers need to sell a certain number of zero emission vehicles, and if they don't do that, they can

make up for it by buying credits from other companies that have done that. And so, Teflon as an electric car maker has a lot of credits out there globally and it sells those credits to these rivals who are short. And that has been very lucrative for the company for many, many years. Are these subsidies? They are not subsidies. This is money from rivals, but it is coming through government policies, policies intended to move car companies

towards making zero emission vehicles, electric vehicles, really driven by concern about pollution and those sorts of things. These are not subsidies, but these are an example of government policies that help these companies. Here we have Elon Musk saying that in a lot of ways, he doesn't think that government should be in the business of helping automakers, right? He thinks it should be open markets for electric cars. And it comes, we know this by the statements where he's talking about how he's okay with getting rid of subsidies for electric vehicles. We've seen the Biden administration champion laws

to try to encourage customers to buy electric vehicles and to encourage companies to bring more of that supply chain to the US. And really it's kind of an interesting situation where on one hand, Elon has benefited from government policies. And on the other hand, he, in a little bit of a way, is okay with cutting other helpful programs off,

in some ways, for helping his rivals. In a lot of ways, he's arguing that he's better positioned as a company to take advantage of that kind of situation. How do things stand to change if Donald Trump or the expected Democratic nominee Kamala Harris is elected president? Well, Donald Trump has been very critical of EV policies. He wants to get rid of what he calls the EV mandate. There really isn't technically a mandate at the federal level,

but under the Biden administration, there's been a tightening of emission requirements, effectively pushing automakers to sell increasingly large numbers of electric vehicles to meet those requirements in the future. And then in California and some other states, they have even tougher future requirements. California's ultimate goal is to ban gas-towered vehicles. And Republicans are really kind of against this idea. And Trump has been very vocal about pushing back against that. You can kind of imagine a world if Trump is elected again

to the White House, a situation where electric cars could face tougher challenges at the federal level. If it's a Harris administration, it would seem likely that it would be a continuation of what we've already seen, which in some ways has been beneficial for Tesla as well. We've seen tariffs against Chinese electric vehicles and major landmark legislation aimed at kind of improving the environment for electric vehicles sales in the U.S. That was Wall Street Journal columnist Tim Higgins.

The US economy has held up well against higher inflation and interest rates. Inflation has eased significantly since the pandemic and predictions for a recession this year have faded. We just heard how the US GDP grew in the second quarter more than expected. But Americans who need to borrow now stand on shakier ground. After the Fed raised rates nearly a dozen times in the past couple years, the costs to borrow for a home, a car, or on a credit card are at the highest levels in decades. My colleague Pierre Bienneme spoke with Gina Heap, who covers banking for the Wall Street Journal, about some of this data. So Gina, it's kind of rough out there for U.S. consumers. What struck you the most from the numbers you looked at? One area that was very striking was in credit cards.

So people are spending big on credit cards these days, even with rates very high. Total credit card balances in the US rose to over $1.1 trillion in the last quarter, according to the New York Fed. That was the second highest balance on record, only after a high that we reached last year. So people are borrowing a ton on these credit cards, even though interest rates are at the highest level in decades. That gives us the signal that more households are stretched in this area.

And that's credit cards that could be spent on anything. What about home loans? So the mortgage space continues to be very challenged by higher interest rates. Mortgage rates are still at the highest level in decades and higher mortgage rates can make monthly payments much more expensive. So a lot of people are just locked out of the market right now. And meanwhile, renters are also falling behind on other types of debt at higher rates than homeowners. Water bills, gas bills, phone bills, car payments, credit cards. And that's according to a recent Fed survey. That was Gina Hebe, who covers banking for The Wall Street Journal, speaking to my colleague

Pierre Bienenves. The Dow Jones Industrial Average bounced today after fresh data showed the US economy humming along in the second quarter. The blue chip index added just over 81 points or 0.2%. The S&P 500 fell 0.5%, bringing its losses over the past three years to almost 3%, the biggest such decline since October. The tech-heavy Nasdaq Composite fell 0.9% after dropping 3.6% in the prior session, its biggest decline since 2022. And the Russell 2000 Index of small companies jumped 1.3%, continuing its banner stretch. And that's what's news for this Thursday afternoon.

Today's show was produced by Pierre Bienneme and Anthony Bansi with supervising producer Michael Kosmitis. I'm Sabrina Siddiqui for The Wall Street Journal. We'll be back with the new show tomorrow morning. Thanks for listening.