Monday, May 27, 2013

Do Tesla Buyers Need a Nanny (State)?

From Tarheel State to Nanny State?

As previously explained on this blog, government exists to protect and enhance the individual right to exercise one's faculties, including the faculty of creating and possessing property.  Moreover, this right necessarily includes the right to cooperate with others, including by market transactions embodied in private contracts.  By creating background rules of contract, property and tort law, for instance, the state can enhance the exercise of such faculties.  Such an institutional framework can facilitate the emergence of a thriving market economy based on specialization and continuous voluntary market transactions that presumably increase the welfare of parties to them.

The North Carolina Senate apparently has a different view of the appropriate role of the State.  Earlier this month that body passed a bill that, instead of protecting and enhancing the exercise of individual faculties, would coercively infringe those faculties in two different ways.  In particular, Senate Bill 327 would ban automobile manufacturers from communicating directly with customers for the purpose of selling automobiles to them.  The bill would also ban any such sale, whenever the seller sells five or more cars in any 12 month period.  According to published reports, threat of competition from Tesla Motors, which has taken the innovative approach of declining to sell cars to independent dealers or otherwise sell from a fixed location, prompted the North Carolina Automobile Dealers Association to support the bill.  (This article provides some additional detail about the controversy.)

Innocuously titled "An Act to Clarify the Motor Vehicle Dealers' and Manufacturers' Licensing Law," the bill would, if enacted into law, prohibit both certain communications between manufacturers and consumers and sales over the internet as follows:

First, North Carolina Law already requires all "Motor Vehicle Dealers" to be licensed by the state.

Second, North Carolina Law prohibits all such dealers from selling automobiles except at "an established showroom." 

Third, the bill expands the definition of "Motor Vehicle Dealer" to include any person that, "use[es] a computer" or "other communications facilities, hardware or equipment" located within North Carolina to "engage in the business of selling automobiles," and "transmitting applications, contracts, or orders" for motor vehicles purchased by consumers in the state, unless that person sells fewer than 5 such vehicles in any 12 month period.

Taken together, these provisions would ban any company from using the internet or, for that matter, old fashioned telephone calls, to sell five or more automobiles annually to willing purchasers on terms mutually agreeable to both parties.  Any such seller would constitute a "Motor Vehicle Dealer" selling automobiles from somewhere other than an "established showroom," contrary to North Carolina Law.

There are, of course, very good reasons that many consumers might rely upon independent dealers when shopping for a new or used car.   For instance, consumers might rely upon dealers to provide expertise and information that consumers lack or could only obtain at great expense.  Consumers might also rely upon a dealer's hard-earned reputation for trustworthiness when selecting a car that the dealer recommends.  Manufacturers, too, may, wish to rely upon independent dealers to distribute their products.  After all, such dealers possess the sort of local knowledge that a distant manufacturer might lack.  Moreover, because they are independent and take title to products they sell, dealers possess powerful incentives to discover and employ effective promotional strategies.  (See pp. 586-607 of this article for a detailed analysis of why manufacturers choose to rely upon independent dealers to distribute their goods.) 

However, reliance upon dealers, especially those that must have an "established showroom," entails costs as well, costs that consumers  must ultimately bear, given that the price of a product includes the cost of distribution.  It is thus no surprise that some consumers wish to purchase automobiles directly from the manufacturer, thereby avoiding the extra costs of reliance upon dealerships.  Nor is it surprising that a firm like Tesla might wish to avoid the expense associated with established dealers by dealing directly with consumers.

As previously explained on this blog, free societies enforce voluntary agreements between parties that are capable of understanding their own interests, so long as these agreements do not cause harm to third parties or result from force or fraud.  Application of this straightforward principle requires rejection of the sort of coercive interference with individual freedom that the Senate bill entails.  Sales arranged over the internet do not harm third parties, and North Carolina Law no doubt provides adequate remedies to individuals who are defrauded via internet sales or, for that matter, by local dealers.  Thus, the Senate Bill appears to be a form of economic protectionism that will enrich dealers  at the expense of consumers.  Such legislation will also protect manufacturers that rely upon a dealer system of distribution, by making market entry by Tesla and other new manufacturers more difficult.

Hopefully the North Carolina House of Representatives will decline to pass the Senate bill, thereby protecting the state's consumers from such coercive interference with their basic economic liberties.  If local dealerships really do provide the sort of services that justify their costs, then consumers will, despite Tesla'e entry, continue to flock to such dealers in droves, gladly paying the prices necessary to support the operation of such dealerships.  If not, then  such dealerships should go the way of other outmoded economic activities.  In short, consumers should be allowed to choose whether Tesla's innovative approach makes economic sense.   Government should not pick economic winners and losers.  The alternative exemplified by Senate Bill 327 is a form of Nanny Statism that stultifies society's dynamism and thwarts wealth creation and economic growth.