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Cronyist Deregulation
By Jeff Cooper (jecoopr), CC BY 2.0, via Wikimedia Commons.
As conservatives and free-marketeers, we’re familiar with the way large businesses and entrenched interests weaponize political power by passing new regulations. Given enough time, skill, and sleaze, they can use government to keep all would-be competitors at bay and achieve de facto monopolies. But there’s another model of regulatory abuse that often gets less attention and is actually more insidious: Getting tailor-made, exclusive exemptions from general laws for oneself while leaving everyone else stuck with the old system.
Tesla Motors’ continued efforts to gain exemption from laws banning direct vehicle sales are a good example. Until recently, most states prohibited car manufacturers from directly selling vehicles to consumers, forcing them to purchase vehicles through car dealerships. Tesla — a high-end electric car manufacturer — doesn’t like this model and has lobbied for exemptions from these rules, either for electric vehicles as a class or under conditions that all-but-explicitly restrict this perk to Tesla itself.
There’s no question that the laws prohibiting directly sales are little more than a protection scheme for car dealerships. It’s not that there’s anything necessarily wrong with this model of purchase — I strongly suspect it’s inefficient, but that’s neither here nor there — but there’s no reason for government to play favorites by prohibiting its citizens from freely purchasing a new vehicle in the manner they prefer, so long as no third party is directly harmed. As it is, dealers who defend the program simultaneously insist that they provide customers with an irreplaceable, valuable, and essential service and that they could not make it without government protection. Either claim may well be true; both cannot be.
The proper solution to this problem is to remove the dealer requirement entirely, not create a loophole that trades a narrow gain in liberty for the solidification of the existing scheme and an unnecessary complexity. Just like the car dealers, Telsa makes a good product that people want to buy. They should be able to sell it without the state running interference on its behalf, whether against gasoline-powered cars or other electric manufacturers. They should be pilloried for trying to do this under the guise of regulation.
Laws work best when their use is restricted to matters where the harm is clear and the exemptions few and far between. When you have to create permanent carve-outs — and carve-outs to the carve-outs — to promote justice, chances are you’re using the wrong tool.
Published in Culture, Domestic Policy, Economics, Science & Technology
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, on in some contrivance to raise prices.” – Adam Smith, Wealth of Nations
This phrase is often cited as a justification for anti-trust laws and a whole host of regulations – like the regulation against direct sales of automobiles. But, Smith went on to say,
“It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it out to do nothing to facilitate such assemblies; much less to render them necessary.”
The law in this case facilitates the contrivance to raise prices by prohibiting who can sell to whom.
If these laws were repealed, it would take years for the dealer monopolies to fold, but fold they would, as they should. The dealer, sales, service, warranty model is antiquated and almost meaningless with the improvement of the products, the rise of quick, qualified service centers, legal environment, and the Internet sales market place.
PS. Last year I valued Tesla stock. The value of the company is around the net present value of the government subsidies, credits and incentives established to sell its high priced vehicles. But, they accelerate really fast and I have looked at one to replace my sports car. The electronic driver interface/externalities are really advanced as well.
Well said.
This is similar to how certain businesses and organizations sought exemptions from various parts of Obamacare instead of working to overturn the entire law.
Principles are for suckers. We are in the Trump era. Do what you want if you can, throw insults if you can’t.
JM,
Well, of course, there should be government subsidies for wealthy sports car deletants who can afford a ridiculously expensive vehicle who’s only additional feature is that it might help with the non-existent problem of man-made global warming. Of course, the manufacture of the batteries involve a larger carbon footprint than burning the gasoline would. So if man-made global warming existed, which it doesn’t, the ridiculously expensive vehicle wouldn’t help anyway.
Electric cars are just so cool. That’s it then. We subsidize cool. Wow, how cool is that.
Regards,
Jim
Tricky.
I can be sympathetic to the idea that selective exemptions can be discriminatory, but I’m also sympathetic to the idea that even discriminatory deregulation can be better than no deregulation at all.
Look at the issue of targeted tax credits. Of course I would prefer that taxes be reduced across the board, but I’m not likely to oppose a tax credit simply because its focus is narrow. Letting people keep more of their own money is a good thing, even when I wish it applied to more people.
As for the specific Tesla case, one could argue that allowing one company the exemption might put pressure on other companies to also demand an exemption, perhaps eventually leading to the regulation being abolished entirely.
Or, another hypothetical example, while it would be best to eliminate all agricultural subsidies, it is still good to eliminate or reduce subsidies for specific crops.
If sugar, hypothetically, loses its subsidy today, it might help provide the impetus for eliminating subsidies for corn in the future. It would be counter-productive to say, “subsidies for none or else subsidies for all”.
Flag on the play! I think the word Crony is not allowed by the new CoC policy as it disparages businesses that are only trying to navigate a very tricky tax and regulatory environment.
James Gawron,
Thank you. Very funny.
You left off the best reason for Tesla subsidies – the government gives Tesla money and Tesla and its investors give the politicians money. Silicon Valley VC firms love it, http://blogs.wsj.com/venturecapital/2015/06/23/early-tesla-motors-investors-raise-400-million-impact-vc-fund/
Solyndra anyone?
As for cool, the Model S which I drove can do 0-60 in 2.8 seconds. Definitely cool. But a real electron eater in Ludicrous gear. I am still mesmerized by gas fired bangers. You might call me primitive. Conservative even. Perhaps averse to the subsidies. I do have a GMC SUV – and it still bugs me when I see the logo and think, “Government Motors.”
Musk is one of the most corrupt dirty operators in popular business going.
He is everything that was ever wrong about railroad barons.
A buddy of mine bought a hybrid Lexus SUV a few years ago – because the tax breaks made it a good deal. I reminded him frequently to thank me for helping him buy his car.
Wait. I thought after PayPal Elon Musk was the entrepreneur of all time? You mean he relies on federal gov’t largess and carve outs for his later success? That can’t be correct, I know because I read it on Ricochet.
This is interesting. When you valued Tesla in your NPV analysis, what did you assume for annual long run volumes for them? How many units did you forecast them selling in say 2025 and what was total revenue in that year? What were you assuming for annual capital expenditures in that year? Could you tell me what you assumed for cumulative capital expenditures over the next ten years? Last what discount rate did you use? thx.
Defending car dealership monopolies is like the guy in the movie “Office Space” who is trying to justify his job as a liaison between the customers and the engineers.
“I have people skills dammit!”
Not so fast.
The laws were allegedly written to protect dealers who had already signed agreements with manufacturers and dealers who might sign future agreements.
In many states the franchise laws did not prevent any manufacturer who had not already set up a franchised dealer system from selling its own cars. To block Tesla, new laws or forced interpretation of old ones were required. The latter includes the idea that because the franchise laws mention agreements between dealers and manufacturers, the functions have to be separate.
In many states, Tesla has been fighting such efforts by the dealer conspiracy to change the laws and fighting to get exemptions from the changed laws where it failed.
The elephant in the room is Chinese car companies who may want to enter the US market. The existing US dealer groups are salivating over these and are terrified of being shut out. Tesla’s attempt to sell its own cars was a wake-up call to the dealer groups and the politicians they own. They are acting more to address the Chinese than to address Tesla. That is also the reason behind Tesla being able to attempt to secure exemptions not personal to itself but for the EV industry generally.
The other side of the coin. I had a friend who owned the first Jeep dealership in the world therefore the oldest. He later had a Chrysler dealership as well. He was a well known Republican having held several local offices. Obama and the government took it from him. He was not compensated nor did he have any recourse.
Car dealerships are the buggywhip manufacturers of today. With the internet, I could go to a website, pick out the exact make, model, color, options I want, and order a car.
A fixed price would also be nice, because I hate the back-and-forth haggling that goes on.
As for how to get the car, I could either go and pick it up from the factory, or have a driver deliver it.
Dealers are middlemen, and like all middlemen, they provide a service and are paid for it.
I’m not sure that the economics of it are so different if the manufacturer operates its own sales locations. There will be similar delivery costs, inventory costs, sales force costs, warranty repair costs, and overhead costs. I don’t know that the consumer will be that much better off if the manufacturer does it all.
The purchase of a car on the internet without benefit of seeing it in the flesh, so to speak, and without test driving it, does not strike me as the equivalent of buying from a dealer, and so might not be a valid comparison of dealership vs. non-dealership car sales.
Stad, think of it this way, the manufacturer needs a place to park the overflow of production and someone to pay for it. You are so right about the Internet. I just bought a new Ford and dealt with four dealers before buying. There was a $1000 difference between high and low. It used to be I would always sell my own trade in but I have gotten lazy in my old age. This is a service the dealer provides. I was in and out in 30 minutes. I usual pay cash but they offered a 1.59% rate which is too low to turn down. These are some of the things the manufacturer would need to duplicate along with many others. These would not be done for free by the manufacturer. As for haggling ,I love it. I was once chased down the street over a set of mud flaps when I walked out on a truck purchase. The salesman bought them out of his commission finally.
Tomathy, do we know that Tesla is pushing for this deregulation specifically so it give them a leg up? Maybe they feel the same as you, but since they can’t make headway, maybe they are saying “Well here’s a way around it for us.” See what I mean?
Also, wasn’t it Harry Wormwood who extolled the government for finding ways to test the ingenuity of the American businessman? That’s all this is!
I think your idea works for cutting of subsidies, because you’re taking a benefit away from a previously favored crony class, which then has motivation to join in the effort to reform the whole system. I don’t think it works for tax breaks or selective deregulation, because in that case you’re giving a break to a favored crony class, which removes incentives for it to join the good fight for reform, and in fact, gives it motivation to block overall reform. In one case you add to the constituency for reform; in the other you subtract from the constituency for reform.
Restrictions are bad, then. Just not as bad as removing them improperly.
A possible reason the proposed law is narrowly tailored is simply to avoid the wrath of the dealership lobby. Don’t worry, GM can’t dump you! Don’t worry, the Chinese can’t come in without you. We’re no threat alone, let us sell using the permits we already have. (In Indiana GM has pushed a bill that will revoke the store permits Tesla already has. I guess they’re just the right kind of crony.)
I’d like as few restrictions as possible. Every step in that direction will be fought, and accommodations to even take a small step will be fought even here.
I suspect a lot of the Tesla hate around here comes from Tesla being on the eco-loon side of the party, and the tribes take their sides. “I might agree with you about regulations, but I won’t agree with you.”