Space economics: Hunting Stags in Space

Matt Weinzierl is the Joseph and Jacqueline Elbling Professor of Business Administration in the Business, Government, and the International Economy Unit at Harvard Business School (HBS) and a Research Associate at the National Bureau of Economic Research. His research focuses on the optimal design of economic policy, in particular taxation, with an emphasis on better understanding the philosophical principles underlying policy choices. Recently, he has launched a set of research projects focused on the commercialization of the space sector and its economic implications.

Matt serves on the Commonwealth of Massachusetts Tax Expenditure Commission, the board of the National Tax Association, and on the editorial boards of Social Choice and Welfare and National Tax Journal. Prior to completing his PhD in economics at Harvard University in 2008, Professor Weinzierl served as the Staff Economist for Macroeconomics on the President’s Council of Economic Advisers and worked in the New York office of McKinsey & Company.

Interview by Alfonso Delgado-Bonal.

1.- Most people ascribe SpaceX’s success to the reusability of its rockets and the reliability without over-engineering. However, in your HBS case about SpaceX, you included a third factor: Vertical Integration. How is that important for scale economies?

It’s hard to ascribe shares to the various factors driving the economies of scale for SpaceX. That said, it seems unlikely to me that reusability can be the key at this point. After all, launch cadence is still relatively low for SpaceX relative to the pace that makes reusability a big win. Not over-engineering is definitely important, and in fact I think that’s closely related to vertical integration. The thread connecting them is that in a cost-plus, low-competition, politically entrenched model, all the incentives are to over-engineer and pass along the costs of a complex, multi-step supply chain. In a fixed-price, competitive environment like that which COTS encouraged, companies like SpaceX realized that there was room for them to succeed by bringing production in house, cutting out the margin at all those intermediate stages, and avoiding over-engineering.

2.- Collaboration is always a great idea, but in reality, can we say that SpaceX and Blue Origin are hunting stags by themselves?

It’s clear that big players create an asymmetric Stag Hunt, but that can be quite powerful, actually. Take the Stag Hunt payoff matrix from my example in the ISPCS talk. Suppose that SpaceX is the first player and a little space startup the second player, and assume SpaceX can hunt the stag by itself but still does better if it cooperates. Then, the payoffs in the lower left box may be 5,1 rather than 0,1; the payoffs in the lower right box may be 10,5 rather than 4,4 (for example). The big difference in the game is that SpaceX will now always choose to hunt the Stag, so coordination will automatically happen on Stag. And I think that’s very much what we see happening between SpaceX and those startups that hope to build off its momentum (Axiom, for example).

3.- One fundamental aspect (which is often forgotten) to explain the success of Blue Origin or SpaceX is NASA’s funding. For example, SpaceX won $5.2 billion in contracts from NASA from 2006 to 2018. Nowadays, it would be difficult for a startup to compete for space contracts, and thus funding sources seem to be moving towards private entities (Angels, VC, etc). How is that going to affect their success?

I don’t agree that startups now find it harder to compete for NASA money. My sense is that NASA has been focused on extending its reach to startups all along, and it is still the essential player. And success breeds success, so I think that NASA’s positive experiences with funding commercial space will encourage its appropriators in Congress. Now, heavy launch may be tough to enter at this point, as SpaceX has a big head start with NASA, but it’s also true that ULA had a big head start with NASA before SpaceX came along.

4.- Commercialization can, in many cases, help to fix inefficiencies. As more private space companies are starting to provide data and services that overlap with some public goods, do you think the government will buy data from those companies or will continue developing its own space missions?

Absolutely. In fact, I think this dynamic is one of the most important meanings of the phrase “commercialization of space.” Increasingly, private providers (such as Spire) will exceed the capabilities of states in data gathering from space, and government agencies will become their customers.

5.- Space is hard, and usually associated with aerospace engineers or natural scientists. How can economists or lawyers help the space industry?

Economists and lawyers can help structure the institutions that will govern our use of and expansion into space. Another important group of actors are businesspeople. As the space industry grows and becomes a more typical industry, management expertise will be increasingly valuable.

6.- In “The Long Space Age: The Economic Origins of Space Exploration from Colonial America to the Cold War,” Alexander MacDonald, Chief Economist at NASA, argues that the US government intromission in the space sector during the 20th century was the exception rather than the norm. Before the World Wars triggered the massive state investments in space, founding for space observations in the US came mostly from philanthropists. However, those philanthropic efforts were very different from today’s “active philanthropists,” Bezos or Musk, who claim that their companies are their gift to humanity. Is it really philanthropy or business as usual?

Alex’s observation is important because it reminds us that space isn’t just about public goods; both public and private interests can drive investment in space. The changes over the last century—and last two decades—in what we mean by “the space sector” make it hard to say what the “norm” is, however. In particular, the recent surge of private space activity is not, I believe, best understood as philanthropic.

7.- The shift from public to private priorities in space means more money in fees and government taxes. For example, in 2018, the Silicon Valley company Swarm Technologies admittedly launched satellites from India without US authorization. This first-ever illegal launch was settled with a five-year compliance plan and a $900,000 civil penalty. Should the government lower the taxes and be more flexible with space startups to potentiate the market in these early stages of privatization? after all, entry barriers to the space industry are already very high.

I would be skeptical that taxes will discourage space investment any more than they do in other sectors. And space companies benefit from the activities of the government, including all the research and infrastructure spending through NASA, that are funded by taxes. Research and Development tax credits have much to recommend them, and I would hope space companies can take advantage of those.

9.- It was recently reported that Bezos and Musk’s space facilities are in areas designated as opportunity zones. This allows them to avoid capital gains taxes, and the investment in those zones can grow tax-free. Were those “opportunity zones” created for these kinds of businesses?

I hesitate to judge which type of business is better than any other in an opportunity zone.

Joseph and Jacqueline Elbling Professor of Business Administration

Chair, MBA Required Curriculum

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