James Surowiecki: Regulation and the auto industry. – New Yorker
The electric-car company Tesla seems like everyone’s darling these days. Its stock, even amid a pervasive selloff in the tech sector, is up nearly forty per cent this year. It has announced plans to build a five-billion-dollar battery factory, which various Southwestern states are vying to host. And it’s now starting to sell cars in China. But there is one place where Tesla is getting no love: New Jersey. Last month, the state decreed that the company would have to shut down its showrooms. In doing so, New Jersey joined states like Texas and Arizona, where it’s effectively illegal to buy a Tesla. Pretty soon, you’ll be able to get a Model S in Beijing but not in Paramus.
Why was Tesla banned? It sold cars. It built showrooms where customers could check out a vehicle, arrange a test drive, and buy a car. The hitch was that Tesla sold cars directly to the public, without going through independent dealers. In most industries, this would hardly be a radical idea. Dell built its business on selling direct to consumers, and the most successful retail phenomenon of the past decade is the manufacturer-owned Apple Store. But the auto industry is different. In its early years, companies tried all kinds of ways of selling cars; you could buy them right at the factory, or at local department stores, or even from the Sears catalogue. But by the nineteen-twenties the industry’s major players had settled on a system of local, independently owned car dealers. Today, almost every new car in the U.S. is sold this way. In forty-eight states, direct sales by car manufacturers are restricted or legally prohibited, and manufacturers are often prevented from opening a dealership that would compete with existing ones. If Ford wanted to open a flagship store on Santa Monica Boulevard, it couldn’t.
Tesla, since it’s starting from scratch, has no existing dealers, and so in theory it isn’t encroaching on anyone’s turf. But auto dealers around the country have still been lobbying state governments to force the company to change its ways. Dealers like the existing system, and they don’t want other automakers to get any ideas. Fiona Scott Morton, an economics professor at Yale who has written extensively on car dealers, told me, “There isn’t a rational argument for why a new company should have to use dealers. It’s just dealers trying to protect their profits.”
Of course, no one involved presents it like this. State legislators insist that the status quo benefits consumers: the relevant Florida statute claims to be “providing consumer protection and fair trade.” We’re told that only independent dealers can guarantee service and warranty coverage. But look at the Apple Store: manufacturer-owned, and yet famous for the customer service and tech support provided at the Genius Bar. And while the argument is sometimes made that the use of independent dealers lowers prices, it’s hard to see how forcing Tesla to sell its cars through middlemen would make them cheaper. Indeed, a series of studies in the nineteen-eighties found that the various rules protecting dealers led to higher prices—six per cent higher, according to an estimate by the Federal Trade Commission. And in 2001 the Consumer Federation of America estimated that restrictive franchise laws could be costing consumers as much as twenty billion dollars a year. In any case, no one expects dealers to disappear. The question is whether automakers should be legally banned from trying out new ways to sell their cars.
It isn’t just auto dealers. State regulations are littered with provisions designed to protect incumbent businesses. In most states, retailers and restaurants have to buy alcohol from wholesalers rather than directly from producers. And there’s an ever-growing thicket of occupational licensing regulations. For some professions, a licensing requirement makes sense. But, according to a 2008 study, almost thirty per cent of jobs now require a license in some state or other, including many—auctioneer, shampooer, home-entertainment installer—where licensing seems totally unnecessary.
State governments have been looking out for local businesses since way back—in the nineteenth century, they forced travelling salesmen to pay extortionate fees—and they haven’t minded too much when this protectionism comes at the expense of consumers. Besides, as Scott Morton says, “dealers employ a lot of people and they generate a lot of sales-tax revenue, so they have great influence over state legislators.” Auto manufacturers, by contrast, are typically based out of state, while consumers are too amorphous a group to really exert much political pull. And, as the political scientist Mancur Olson famously noted, when the benefits of a regulation are concentrated and the costs are diffuse, the party that gets the benefits is almost certain to win.
Of course, you might ask, who really cares if some luxury-sedan maker has to sell through dealers? But what the New Jersey ban exemplifies is the tendency for businesses to use state power to divide the economy between insiders and outsiders. This discourages innovation, raises prices, and makes life hard for people trying to start new businesses—or even just get a new job. Does it really make sense to force someone, as Utah did until 2012, to go through two thousand hours of cosmetology training to work as a hair braider? Such statutes delegitimatize the idea of regulation, by making it look merely like a way for governments to indulge special interests. As the financial crisis showed, there are plenty of areas in real need of regulation. But maybe car buyers can take care of themselves. ♦