A year ago, NPR's Planet Money podcast had a show detailing one of the most horrific consumer experiences around: buying a car. The main reason it was deemed that the process was so ridiculous and unpleasant was a variety of state laws that ban car makers from selling directly, and instead require a network of dealerships. A research paper highlighted how these state laws have been a massive boon to the owners of dealerships, but have seriously harmed automakers themselves. It has also shown how these laws are open to significant corruption issues, since dealers generate tremendous local tax revenue:
States earn about 20 percent of all state sales taxes from auto dealers, and auto dealerships can easily account for 7-8 percent of all retail employment.... The bulk of these taxes (89 percent) are generated by new car dealerships, those with whom manufacturers deal directly. As a result, car dealerships, and especially local or state car dealership associations, have been able to exert influence over local legislatures. This has resulted in a set of state laws that almost guarantee dealership profitability and survival--albeit at the expense of manufacturer profits. Given these laws, manufacturers do have a financial interest in closing down new car dealerships, and in choosing which ones wil close. Additionally, available evidence and theory suggests that as a result of these laws, distribution costs and retail prices are higher than they otherwise would be; and this is particularly true for Detroit's Big Three car manufacturers--which is likely another factor contributing to their losses in market share vis-a-vis other manufacturers.
There is basically no valid reason for such laws. They serve no purpose other than to enrich local car dealership owners and state tax coffers at the expense of everyone else -- especially the public.
And yet, because these laws benefit both the politicians in charge and local dealerships, which tend to have strong lobbying power, they stay in place. That fight has been getting more notice lately, in large part because of Tesla, the innovative electric car company that has wowed nearly everyone who's driven one. A few years ago, we wrote about dealerships starting to complain about Tesla and it's plan to sell direct via the web, but with company-owned "showrooms." Tesla reasonably argued that these are not dealerships, and such laws didn't apply. Car dealers have flexed their political muscle to get various states to basically make it illegal to buy Teslas. This has even reached insane levels, with dealerships claiming that Tesla's website violates California DMV rules.
Things have been heating up quite a bit in the past few weeks. In late February, New York moved forward with some anti-Tesla legislation. On Monday of this week, Bloomberg had a long article about how dealers were freaking out about Tesla, with various challenges in Texas, Ohio, Arizona and elsewhere. Then, Tuesday morning Tesla itself announced that it may be forced to close the doors on its showrooms in New Jersey, after dealers went to the NJ Motor Vehicle Commission to complain about Tesla daring to sell direct. By late Tuesday afternoon, the Commission had officially approved the regulation banning Tesla from selling the car in the state.
This is insane on any number of levels. Not only is the car better for the environment, reviewers write about the car and talk about how it may be the best car ever built.
In response to this, entrepreneur/investor Paul Graham put it succinctly that banning Tesla "is an index of the corruptness of state governments" in the same manner as cities banning Uber or other disruptive new services. As in nearly all of those cases, the dealers are (laughingly) trying to argue that this is a "consumer protection issue." Again, the research linked above notes there's basically nothing to that argument, and safety reviews of the Tesla have suggested the car is incredibly safe. Besides, what does the safety of a car have to do with dealerships? Dealers try to claim that local dealers are "more committed to taking care of that area's customers." And yet they provide no evidence to support that -- mainly because there is none.
What's particularly hilarious, is that this move comes just days after New Jersey Governor Chris Christie talked up the power of the free market and against government intervention in business:
“We need to talk about the fact that we are for a free-market society that allows your effort and ingenuity to determine your success, not the cold, hard hand of the government.”
Right up and until the biggest supporters of state taxes demand your own government kills off sales of an innovative new competitor. Then, the "cold, hard hand of government" smacks you down.
The facts here are pretty simple: Tesla has built an innovative car, and gone with a pretty standard way of selling almost every non-automobile product: sell direct to a public who wants it. Dealers and state politicians, on the other hand, are basically teaming up in a corrupt manner to harm everyone (especially the car buying public) but themselves, and then having the gall to claim that they're doing so for the sake of "consumer protection"? No one's buying that excuse. Beyond the research above, plenty of others have pointed out the absurdity of this argument. Last year, professor Dan Crane debunked that basic claim:
A second argument is that having local dealers is necessary to ensure that customers are adequately served. For example, Bob Glaser of the North Carolina Automobile Dealer’s Association has asserted that the restrictions are a form of “consumer protection,” since “a dealer who has invested a significant amount of capital in a community is more committed to taking care of that area’s customers.” The obvious rejoinder is that Tesla has as much or more of an interest as the dealers in seeing that customers get the level of service they’re willing to pay for. If Tesla gets a bad reputation for quality, it will fail. I suppose that one might worry if Tesla were a fly-by-night operation selling customers an expensive durable good at a high price and then fleeing with its profits and leaving customers without support. But that’s obviously unlikely of a company that’s pouring billions of dollars into the creation of a new product and a recharging and battery swapping infrastructure. Car manufacturers make considerably larger fixed capital investments than do dealers and I’m sure that the dealer failure and exit rate is considerably higher than that of manufacturers.
A related argument is that dealers play an important role in complying with local laws regarding titling and safety inspection. But this argument doesn’t work either. First, observe that at present most states only prohibit manufacturers from opening their own dealerships—they don’t prohibit online sales from outside the state. (North Carolina recently passed a statute banning online sales as well). There’s no reason why a manufacturer-owned dealership should be less capable of complying with local laws than an independent dealer. Second, why should Internet sales involve evasion of state titling and safety inspection laws? Internet sales can just as easily be subject to the same titling and inspection requirements as dealer-initiated sales.
Furthermore, if it were true that consumers were harmed by letting companies sell directly, you'd think consumer advocates would be supporting the dealers. But they're not. They're supporting Tesla:
Jack Gillis, with the Consumer Federation of America, disagrees. Customers actually don't like haggling over prices, as evidenced by the fact that we haggle over almost nothing else except cars. A one-price system, like Tesla's, is fairer, Gillis said, because it's more transparent and doesn't put less belligerent shoppers at a disadvantage. If the price is too high, customers just won't buy the product.
In the end, New Jersey's actions just confirm what lots of people already knew, that New Jersey is hopelessly corrupt. But, this is nothing new. As Dan O'Connor points out in his story about all of this, a century ago, people did the same thing against the automobile, and in favor of horses. The (I'm not joking) Horse Association of America was created more or less to fight back against those evil cars, and presented talking points like the following:
If the extended displacement of horses and mules by motors resulted in economic gain to the nation as a whole, the campaign of the Horse Association of America to increase the production and use of horses and mules would not be warranted. The Association states that ample evidence has already been secured to prove that in many instances, such displacement is economically unsound, resulting in less reliable, less efficient service at greater cost. Consumers, grain dealers and grain producers alike suffer from such substitution, which, according to a leading traffic manager in New York City, is due chiefly to ignorance on the part of business men regarding the actual cost of operating horse drawn and motorized equipment.
That sounds mighty familiar. A century ago, politicians mostly saw through the insanity of it. But there wasn't so much money at stake back then. Today is different, and we all suffer because of it.
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