Will Georgia Reject Liberty for Tesla (and Consumers)?

Protecting Economic Liberty

???????

The nation's automobile dealers are at it again, attempting to thwart basic economic freedoms in a manner that protects themselves, and their manufacturers, from fair competition.  The battleground this time is Georgia, where the state's automobile dealers' association has filed a petition seeking to bar Tesla from selling automobiles in the Peach State to willing purchasers from outlets owned by Tesla.  The petition claims that Tesla, which holds an automobile dealership license in Georgia, has violated the state's Automotive Franchising Law by selling automobiles to willing consumers from a single Tesla-owned retail store.  That law makes it unlawful for any automobile manufacturer to:

"own, operate, or control, directly or indirectly, more than a 45 percent interest in a dealer or dealership in this state[.]"

Just last week, Tesla filed a motion to dismiss the dealers' anti-liberty complaint. (See here, for a report about Tesla's filing).  Hopefully the Georgia courts will look north for guidance on how to rule on Tesla's motion.  Earlier this fall, the Supreme Judicial Court of Massachusetts struck a blow for economic liberty and the welfare of consumers, by rejected a similar petition by automobile dealers demanding coercive economic protection.  See Massachusetts State Automobile Dealers' Association et al. v. Tesla Motors, MA, Inc. and Tesla Motors, Inc.   As in Georgia, the plaintiffs, an association of automobile dealers and an individual dealer, claimed that Tesla's direct sales to willing consumers violated Massachusetts' own statute governing automotive franchising, General Law Chapter 93B, entitled: "Regulation of Business Practices Between Motor Vehicle Manufacturers, Distributors and Dealers."

Section 3 of chapter 93B prohibits what it calls "Unfair Methods of Competition and Unfair or Deceptive Acts of Practices."  Section 4 in turn defines various practices that violate Section 3. Section 4(c)(10) provides that it shall be a violation of Section 3 for:

"a manufacturer, distributor or franchiser representative to . . . own or operate, either directly or indirectly through any subsidiary, parent company or firm, a motor vehicle dealership located in the commonwealth of the same line [or]  make as any of the vehicles manufactured, assembled or distributed by the manufacturer or distributor.”

Tesla obviously manufactures automobiles, and it distributes such vehicles in Massachusetts via Tesla Motors of Massachusetts, a wholly-owned subsidiary.  Nonetheless, the Supreme Judicial Court concluded that the legislature did not mean to protect the state's dealers from competition by unrelated manufacturers.  Instead, the court said: "93B is aimed primarily at protecting motor vehicle dealers from injury caused by the unfair business practices of manufacturers and distributors with which they are associated, generally in a franchise relationship."  In other words, if a manufacturer, say Ford, relies on independent dealers to distribute its vehicles, it may not then open its own dealerships that compete with such dealers.  On the other hand, a manufacturer such as Tesla that only engages in self-distribution is perfectly free to do so, even if the resulting sales reduce the profits of established manufacturers and their dealers.  As the court put things later in the opinion:

Chapter 93B "was intended and understood only to prohibit manufacturer-owned dealerships when, unlike Tesla, the manufacturer already had an affiliated dealer or dealers in Massachusetts."

While the court couched its ultimate holding as resting upon the plaintiff's lack of standing, the opinion's rationale also suggests that Tesla's self-distribution does not violate the statute in the first place.  If so, then a party that did have standing to challenge a purported violation would nonetheless lose any challenge to Tesla's practice on the merits.

Of course, the ruling by the Supreme Judicial Court is not binding on Georgia courts interpreting their own statutes.  Moreover, the operative language of the Georgia statute is somewhat different from that of the Massachusetts statute.  Still, both statutes govern the franchising relationship between manufacturers and existing independent dealers.  Moreover, both statutes ban numerous practices that manufacturers might employ to the detriment of such independent dealers.  Read as a whole, then, neither statute seems designed to govern manufacturers that, like Tesla, have no independent dealers whatsoever.  Perhaps the Georgia courts will recognize this apparent function of the statute and reiterate the Massachusetts approach.  Failure to do so would place red-state Georgia in the embarrassing position of rejecting a form of economic liberty recognized in blue-state Massachusetts, an a potentially ironic twist given credible rankings finding that Massachusetts otherwise lags far behind Georgia when it comes to protecting basic economic freedoms.

Even if courts in both states embrace a pro-liberty position, the respective state legislatures are still perfectly free to amend their statutes so as to abridge basic economic liberty by banning self-distribution by firms like Tesla.  Indeed, less than a year ago, and as reported here, a member of the Massachusetts legislature introduced a bill intended to "clarify" Chapter 93B. The bill included the following language that would have banned Tesla's strategy of self-distribution.

"The blanket prohibition on manufacturer ownership applies notwithstanding whether a manufacturer has used independently owned or operated dealerships to distribute its vehicles."

Hopefully both legislatures will resist any temptation to alter their statutes in this way.  As previously explained on this blog, free societies respect the rights of entrepreneurs to distribute products as they see fit, so long as the method chosen does not impose inefficient harms on third parties.    Like some other manufacturers, Tesla has chosen to rely upon complete vertical integration, a practice that can reduce the transaction costs that sometimes result from reliance upon independent dealers. While such dealers can provide valuable services, some consumers choose to forgo such services and purchase directly from the manufacturer.  Proponents of legislation imposing blanket bans on such vertical integration by automobile manufacturers have offered no plausible account of how integration by modestly-sized firms such as Tesla can produce economic harm. (See here, discussing and refuting arguments in favor of such a ban.)  Thus, some commentators have properly concluded that statutes banning Tesla's self-distribution "reduce competition in [the state's] automobile market for the benefit of its auto dealers and to the detriment of its consumers."  As a result, they conclude, such statutes amount to "protectionism for auto dealers, pure and simple." Such protectionism, of course, also raises barriers to entry for firms such as Telsa, who apparently believe that self-distribution is less costly than reliance upon independent dealers.  A state anxious to maximize the liberty and welfare of its citizens will reject such coercive protectionism.

New Jersey v. Economic Liberty

Praised Vertical Integration; Won Nobel Prize 

Thinks It Knows Better

A free society allows its citizens to engage in voluntary commercial exchange, so long as such exchange does not impose economic harm on unconsenting third parties.    Unfortunately the State of New Jersey takes a different view.  Last month the Garden State's Motor Vehicle Commission announced that Tesla Motors may only sell its cars in New Jersey via franchised automobile dealers.  (See this story in the New Jersey Star-Ledger describing the new rule).  The rule effectively bans Tesla's strategy of forward vertical integration.  Pursuant to this strategy, the firm operates two company-owned show rooms in the state, thereby "eliminating the middleman" and taking direct responsibility for explaining the virtues, limitations and prices of its products   Such vertical integration is a widespread practice, to say the very least. 

For the first several decades of the 20th Century, economists were hostile to most vertical integration, preferring the more fragmented market structure endorsed by New Jersey.  Indeed, as previously explained on this blog,

"[Early in the 20th Century] economists identified two, and only two, possible reasons for complete vertical integration. First, such integration could create technological efficiencies and thus reduce production costs. Second, integration could foreclose rivals from important sources of inputs, thereby creating or fortifying the integrating party's market power.  Thus, when economists, or, for that matter, antitrust courts or enforcement agencies, could not identify any efficiency purposes for such integration, they naturally inferred that the conduct was anticompetitive."

However, as Ronald Coase (pictured above) explained long ago, such vertical integration can produce other, non-technological benefits as well.  In particular, such integration can eliminate the costs of relying upon more decentralized markets, that is, "transacting," to conduct economic activity.  Such "transaction costs" can take many forms, including the risk that one's trading partner will engage in opportunistic behavior.  Indeed, Tesla recently asserted that franchised automobile dealers have a vested interest in promoting the sales of gasoline-powered automobiles over electric powered vehicles like Tesla's, with the result that reliance upon a system of franchised retailers will result in under-promotion of Teslas.

To be sure, franchised dealers can provide valuable services to consumers both before and after the purchase of a new or used automobile.   It is thus no surprise that many consumers prefer to purchase automobiles from such dealers instead of from other individuals or from Tesla.  However, such services are not free.  Instead, dealers quite properly pass along the costs of such services to consumers by marking up the price of the vehicle sold.   Apparently Tesla and some consumers believe that these additional services are not worth the additional price, leading both to embrace a different method of distribution.

As previously explained on this blog when discussing a (failed) effort in North Carolina to impose similar limits, free societies respect the rights of entrepreneurs and consumers to make such choices absent any apparent harm to third parties.  Moreover, given Telsa' tiny share of the automobile market there is no plausible risk that such integration is an anticompetitive tactic designed to gain or maintain market power.  It thus makes sense to interpret Tesla's innovative approach to marketing as an effort to minimize the cost distribution, a result that would enhance Tesla's welfare and the welfare of the consumers it serves.    Tesla's appraisal of the relative costs and benefits of relying upon its own show rooms instead of independent dealers may turn out to be incorrect, but free societies leave such decisions to firms and consumers, without coercive paternalistic intervention by state legislatures.  (See also this excellent discussion by Daniel Crane, on the Truth on the Market Blog last summer, that makes some similar points.)

Nonetheless, some continue to claim that such interference with basic economic freedoms serves legitimate purposes.  For instance, a recent story in CNN Money cites unnamed "advocates of the law" saying it aims "to encourage price competition and ensure customers have access to warranty and recall services."    Last week, 70 economists and law professors, including this blogger, signed a letter condemning the ban on Tesla's direct distribution.  The letter expressly considers the various rationales that proponents of the legislation have proffered and concludes, quite properly, that:

"We have not heard a single argument for a direct distribution ban that makes any sense.  To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies."

I should add that banning Tesla's preferred method of distribution may also protect other manufacturers of automobiles, by forcing Tesla to employ a more expensive and less effective method of distribution and thus discouraging procompetitive entry into the New Jersey market.  If so,  the ban may produce even more harm than initially supposed. 

Hopefully New Jersey will rethink  this unjustified interference with basic economic liberty.

In Praise of (Fettered) Capitalism, AKA Freedom

Opposes Unregulated Capitalism

 Ditto

Language in the first Apostolic Exhortation of Pope Francis, "Evangelii Gaudium," ("The Joy of the Gospel"),  has fueled the never-ending debate about the relative merits of alternative economic systems.  In particular, commentators on various parts of the political spectrum have critiqued or praised the Holy Father's supposed condemnation of "unfettered capitalism."   From the Right, Walter Williams has taken issue with the Pope's supposed claim that "unfettered capitalism" is "a new tyranny."   From the Left, John Nichols of the Nation has praised this supposed claim, asserting that the Pontiff has given an articulate voice to the Occupy Wall Street movement, which the Pope did not mention.  Numerous other commentators have also weighed in about the Pope's supposed comments.  (See here, here and here for examples).  One pundit even declared that "Liberation Theology is Back."   None of these pundits, so far as I am aware, has actually defined "capitalism" or "unfettered capitalism."

Ironically, as others have pointed out, the document does not include the word "unfettered" or "capitalism."  Instead, the Exhortation refers to the "absolute autonomy of the marketplace," which it blames for a widening income gap between rich and poor.  (See Evangelii Gaudium, 2.I.56 and 4.II.202).  Nonetheless, the term "unfettered capitalism" has taken on a life of its own and will likely play a significant role in our public discourse.  It therefore makes sense to develop a working definition of the phrase so as to facilitate a useful public discussion of the merits and demerits of "unfettered capitalism" and various alternative economic systems.  As will be seen, most proponents of free markets support some "fetters" on such freedom, fetters that help channel individual initiative in socially useful directions.  Thus, instead of deciding between a world with "fetters" or "no fetters," societies that wish to advance economic justice must choose among various possible fetters, some of which help create wealth and opportunity and some of which destroy both.

But first, it should be noted that the term "capitalism" is itself a misnomer that often adds little to public discourse.  (Perhaps this explains why the Holy Father, pictured above in a photo taken by the official Brazilian press agency (see here), does not employ the term.)  As Frank Knight once explained, the free market is the natural result of society's recognition of private property, including each individual's ownership of his or her own labor.  Such ownership, Knight said is "a synonym for individual freedom," freedom that includes the right to exchange such property with a willing buyer.  See Frank H. Knight, Risk, Uncertainty and Profit, at 56-57 (1921).  Thus, what pundits call "capitalism" is often just a synonym for "freedom" or "liberty."  This is not always true, however.  In some cases systems that pundits call "capitalism" entail significant intrusions on liberty and property inconsistent with any plausible conception of freedom or liberty, as seen below.

With this caveat in mind,  here are several possible definitions of "capitalism," fettered and unfettered.

1.  Capitalism as State of Nature.  Under this model, there is no State.  Each individual is entirely free to acquire as much property as he or she can, whether by manual labor, trade, invention, or theft from others.    Having acquired such property, an individual can only retain it if he or she can ward off others who seek to acquire it by force. 

2.  Capitalism as the Common Law Baseline: Under this model, individuals reject the State of Nature and form a State so as to enhance the security of their persons and property.  The State, in turn, employs coercion (jail time, criminal fines and monetary damages) to deter and prevent individuals from harming others or invading others' property.  The State may also allow individuals to employ reasonable private force to defend their persons and property from invasion by others.   Such a society may entail less liberty in some sense than the State of Nature, as individuals are not "free" to injure others or steal others' property and suffer state-backed coercion if they do.  However, individuals may still prefer such a society to the State of Nature, because what liberty and property they do possess can be more secure and result in more prosperity, assuming, of course, that the State respects the Rule of Law and avoids arbitrary and selective enforcement of this baseline.   

3.  Capitalism as Wealth Maximization:  Under this model, the State employs coercion to enforce the common law baseline described in Model 2, above.  The State also employs coercion when necessary to overcome market failures that may arise because transaction costs prevent a wealth-maximizing allocation of resources.  Examples include contract law, which reduces the cost of transacting and thus facilitates wealth creation, corporate law, which facilitates the creation of large scale enterprises,  patent law, which ensures that individuals who invest in innovation can reap the rewards of doing so, and antitrust law, which prevents market actors from exercising market power that is not necessary to achieve efficiencies.  Such regulations steer individual conduct and initiative in wealth-creating directions.  This model also justifies expenditures on public goods such as national defense and education, because private actors will not be able to capture the benefits of investments in such goods and thus will under invest in their production.  This model also justifies state expenditures on public works such as highways and harbors, projects that private enterprises may not undertake because transaction costs make it difficult to employ the private market to amass property from numerous individual owners.   Finally, this model would empower the State to conduct macroeconomic stabilization policy, e.g., raising taxes and/or reducing public spending to slow an overheating economy and cutting taxes and/or increasing spending to stimulate a slow one. 

    It should be noted that the distributional consequences of Model 3 will depend upon how the State raises the revenue to pay for various public goods and public works, for instance.  The State could simply divide the cost of such expenditures equally among all of its adult citizens, in which case the distributional consequences could be neutral, depending upon how the State distributes its expenditures.  If, however, the States relies upon a sales tax or an income tax, for instance, Model 3 will redistribute income from rich to poor.  (An individual who pays the State 10 percent of a $100 million income will pay for a much larger share of the State's expenditures than one who pays 10 percent of a $10,000 income.  Unless the State spends 10,000 times more on public goods for the former individual than the latter, reliance on this "flat tax" to fund the State will redistribute income to individuals of modest means.  In the same way, so long as wealthy citizens spend more on consumption than those who are poor, the wealthy will pay more taxes under a sales tax regime, thereby resulting in possible redistribution.)

4.  Capitalism as Utility or Welfare Maximization.  Under this model, the State enforces the common law baseline and also employs coercion when necessary to overcome market failure, as in Model 3 above.  Operating within such a framework, individuals may, alone or in association with others, create great wealth.  Under Model 4, the State also relies upon coercive taxation to redistribute a portion of such wealth from well-to-do individuals to those who are less well off.   While the taxation necessary to accomplish such redistribution will reduce incentives to create wealth in the first place, the result might be an increase in overall welfare, i.e., society's total utility, assuming there is a diminishing marginal utility of wealth.    For instance, redistributing $100,000 from the annual income of a wealthy individual to ten poor persons could increase society's overall utility, if one assumes that these persons collectively derive more utility from that $100,000 than the wealthy individual would forgo because of the redistribution.   Model 4 is truly a "Welfare State," insofar as the State employs its legal and regulatory machinery with one goal --- enhancing society's overall welfare --- in mind.

5.  Corporatism Confused With Capitalism.  Under this system, the State enforces the common law baseline, employs coercion to overcome market failure and spends resources on public goods.  The State may also  engage in redistributive taxation in an effort to increase society's total welfare.  In addition, however, the State also structures taxes, subsidies and regulations so as to encourage particular industries and/or firms within such industries.  Often such rules might favor large, capital-intensive firms over smaller, labor intensive firms, thereby raising barriers to entry and fortifying the market power of incumbents.  See generally Oliver E. Williamson, Wage Rates as Barriers to Entry: The Pennington Case in Perspective, 82 Q. J. Econ. 85, 91-98 (1968) (explaining how imposition of minimum wages industry-wide can disadvantage smaller, labor-intensive firms).   The State may even reserve to itself the authority to approve entry into particular markets, consulting marketplace incumbents before allowing such entry.  The requirement that new entrants into the hospital market obtain a so-called "certificate of need" is one such example, discussed previously on this blog.      The State may also adopt rules, including exemptions from antitrust laws, that encourage the formation and operation of labor cartels known as unions, cartels that seek to obtain a portion of any market power that their employers possess.  Such cartels can rarely thrive, however, unless the State also prevents free entry into the industries subject to such labor cartels.  See generally Michael L. Wachter, Labor Unions, A Corporatist Institution in a Competitive World, 155 U. Penn. L. Rev. 581, 601-604 (2007) (describing NIRA’s support for collective bargaining).   Indeed, once society recognizes as legitimate legislation that bestows economic benefits on some at the expense of others, consciously picking economic winners and losers, economic actors will rationally invest scarce resources attempting to influence political decision makers to enact more and more such legislation.  Such "rent seeking," of course, diverts valuable economic resources away from productive economic activities that would otherwise increase society's overall wealth.   As previously explained on this blog, James Madison claimed that societies that consistently allow such legislation are akin to the State of Nature, given that both such societies allow the strong to united to oppress the weak.

* * * * *

The United States is perhaps best described as a mix of Models 4 and 5, with some Socialism thrown in "to boot."  For instance, the Constitution, at least as interpreted by the Courts and the political branches, empowers states and the national government to restrain economic liberty for the sole purpose of enriching some industries or groups of individuals at the expense of others.  (But see here for a discussion of a recent decision in the United States Court of Appeals for the Fifth Circuit rejecting such rent seeking as a valid basis for interfering with economic liberty.)     Certificate of need laws and unions are quintessential examples.  Ditto for the regulation of taxi cab markets, of all things.  In addition, states and the national government sometimes own the means of production themselves, the very definition of Socialism.  For instance, all states own and operate one or more colleges or universities, ownership that is not necessary to ensure an appropriate investment in education.  (States could, instead, simply provide their college-aged citizens with vouchers, as explained here with respect to primary and secondary schools.)  Moreover, the national government once owned General Motors, after an ill-advised bailout of two automobile manufacturers whose products have failed in the marketplace.         At the same time, governments do not always exercise their power to restrain economic liberty or own the means of production, partly because of a political culture that values competition, and partly because competitive federalism deters individual states from adopting policies that drive capital and productive citizens to migrate to other states.

Of these five models, only Models 1 and 2 can be characterized as "unfettered capitalism."  Model 3 empowers the State to impose any number of harm-reducing regulations ("fetters") and to "tax and spend" so as to produce various public goods, including education.    Moreover, Model 4 expressly empowers the State to employ additional coercion to redistribute wealth from some individuals to others.   Model 5 empowers the State to favor some industries or firms over others, favoritism that necessarily restricts the liberty of those firms and individuals not favored.  Model 5 also empowers the State to compel firms to recognize and bargain with labor cartels also known as unions. 

Very few individuals advocate Models 1 or 2 as organizing principles for an economic system.   Instead, most individuals, including most who support "limited government" or some synonym thereof, embrace Model 3 or even Model 4.  For instance, most prefer a world in which the State imposes the "fetters" necessary to protect individuals from others' harmful exercise of property rights and vice versa.  Most also prefer a world in which the State expends the resources necessary to produce public goods, using coercive taxation to raise the necessary revenue.  As noted above, States that rely upon a flat income tax, for instance, to fund such goods will redistribute income from the wealthy to the less well-to-do.  Finally, many proponents of limited government also endorse expenditures to provide the poor with basic services, education and even enough income to lift such individuals out of poverty and into the middle class.  For instance, Milton Friedman (pictured above at a White House ceremony), always a proponent of limited government, advocated both a negative income tax and school vouchers, both of which redistribute income from some to others.   See e.g. Milton Friedman, Capitalism and Freedom, 191-94 (1962) (advocating the negative income tax) id. at 85-100 (discussing proper government role in education).  See also this discussion of the negative income tax between Milton Friedman and William F. Buckley. 

In short, most members of society, whether they be Progressive, Conservative or even Libertarian, agree that Capitalism or individual freedom should be fettered in some way.  The much harder question is how many and what sort of fetters the State should impose.  It should also be clear that "not all fetters are created equal."  Some coercive regulations clearly enhance society's welfare, while others plainly reduce it.  Moreover, we must never lose sight of the fact that robust free markets produce the very wealth that many wish to redistribute to the less fortunate.  A society of "haves" and "have nots" may well be more just than a society in which everyone is (equally) destitute, particularly if the State uses its powers of taxation to redistribute some income from rich to poor.  As previously explained on this blog, individuals who create massive fortunes for themselves often do so by simultaneously enhancing the welfare of countless others, even before the State imposes redistributive taxes.   Finally, the existence of significant poverty in a nation such as the United States that allows some economic freedom does not thereby justify any and all additional restrictions purportedly designed to reduce poverty.  Instead, such poverty may be the predictable result of fetters already in place, the removal of which may actually increase wealth, opportunity and employment.  Labor cartels, minimum wages and state-protected monopolies are obvious examples of such wealth-destroying fetters that reduce opportunity and increase poverty.

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.

Fifth Circuit Protects Liberty and Consumers from Crony Capitalism

Struck a Blow for Economic Liberty

Sustained Crony Capitalism

Earlier today the U.S. Court of Appeal for the Fifth Circuit struck a blow for economic liberty, efficiency and consumer welfare.  In St. Joseph Abbey v. Louisiana State Board of Embalmers and Funeral Directors, No. 11-30756 (March 20, 2013), the Fifth Circuit invalidated rules promulgated by the Louisiana State Board of Embalmers granting funeral homes the exclusive right to sell caskets and thus excluding St. Joseph Abbey and other so-called third party vendors from selling caskets at reasonable prices.  Among other things, the court found that the Abbey produced and sold two models of casket: "monastic" and "traditional," for $1500 and $2000 respectively, prices significantly lower than those charged by the state's funeral homes.

The Fifth Circuit held that Louisiana's regulations coercively excluding various producers from the market abridged St. Joseph Abbey's economic liberty without due process of law, thus contravening the 14th Amendment to the U.S. Constitution.  Writing for the court, Judge Patrick Higginbotham, pictured above, rejected Louisiana's remarkable claim that a bare desire to enrich the state's funeral homes at the expense of grieving families was, without more, a valid "rational basis" that would support such exclusionary legislation.  Simply put, the court said, "naked economic preferences are impermissible [bases for legislation] to the extent they harm consumers." 

After rejecting Louisiana's bid for the authority to destroy economic liberty for the sake of enriching incumbent producers, the court went on to reject two other purported bases for the regulation.  First, the court rejected Louisiana's claim that the regulations helped ensure that grieving consumers made a wise selection of caskets in light of what the court called "complexities that arise from burial conditions in any given area."  According to the court, Louisiana law already required funeral directors to provide their clients with such advice, in return for a mandatory "basic services fee."  Hence, requiring consumers also to purchase their caskets from such funeral homes could not enhance the quality of advice consumers might receive.  Second, the court rejected the state's claim that such coercive exclusion protected public health and safety.  As the court pointed out, Louisiana law does not require burial in a casket in the first place, regulate the construction or design of caskets or require funeral directors to have any "special expertise in caskets."   Thus, there was simply no plausible connection between the ban on the sale of caskets by independent sellers like the Abbey and public health or safety.   If anything, it seems, the flimsy and patently pretextual nature of Louisiana's asserted rationales helped confirm that the rule were the product of industry capture of the regulatory process.  Or, as the court put it, the regulation entailed "the taking of wealth and handing it to others . . . [for the] protection of rule makers." 

The decision is remarkable for at least two reasons. First, as already noted, Louisiana openly and notoriously asserted the right coercively to abridge the Abbey's economic liberty for the sole purpose of enriching funeral directors at the expense of grieving consumers. Apparently Crony Capitalism is alive and well in Louisiana. Second, the Fifth Circuit expressly rejected this contention, holding that the Due Process Clause itself imposes certain restrictions on legislative goals in addition to those restrictions contained in the Bill of Rights and other constitutional provisions.  In so doing the court implicitly rejected language to the contrary in Ferguson v. Skupra, 372 U.S. 726, 728-31 (1963).  In Skupra, the Justices sustained a ban on debt adjustment by non-lawyers, without identifying any rational basis for the coercive infringement on occupational liberty.  (As the Fifth Circuit noted, however, subsequent  Economic Due Process decisions have, in fact, identified rational bases when rejecting challenges to similar legislation.  See New Orleans v. Dukes, 427 U.S. 297 (1976).)

More fundamentally and equally remarkable, today's decision seems in tension with the poorly-reasoned Slaughterhouse Cases, 83 U.S. 36 (1872).  Slaughterhouse, some will recall, involved a challenge to a previous example of Louisiana Crony Capitalism, namely, the state's grant of a monopoly over the slaughterhouse business in the parishes of Orleans, Jefferson, and St. Bernard, totaling over 1100 square miles.  In an opinion by Justice Miller, also pictured above, the Court rejected claims that this coercive imposition of a monopoly contravened the Due Process Clause, Equal Protection Clause or Privileges and Immunities Clause, holding that the monopoly grant fell within the police power.  This holding does not withstand even minimal scrutiny, given that generally applicable regulations could have satisfied any valid health or safety interest.  Simply put, the statute challenged in Slaughterhouse simply enriched some at the expense of others and would not have survived the Fifth Circuit's more realistic analysis.

No doubt some will criticize the Fifth Circuit for purported "judicial activism" along the lines of Lochner v. New York, 198 U.S. 45 (1905).  Both Lochner and its progeny, of course, protected occupational liberty and liberty of contract from abridgments, including minimum wages, maximum hours, state price fixing and the like, that fell outside the police power, that is, did not combat externalities or other market failure.  See also Charles Wolff Packing Company v. Kansas Court of Industrial Relations, 262 U.S. 522, 535-42 (1923) (voiding state's regulation of the wages of meat packers in a highly competitive market) (Taft, C.J.) (unanimous).  In so doing, the Court invalidated numerous measures that, for instance, imposed disproportionate costs on small firms, advantaging large firms. Moreover, as previously explained on this blog, federal interference with the sort of liberty of contract that Lochner protected both deepened and lengthened the Great Depression, thereby creating unnecessary economic misery. In any event, the Fifth Circuit convincingly disclaimed any reliance upon Lochner and its progeny, which scrutinized both the means and ends of legislation more carefully than did the Fifth Circuit today.  Perhaps the Fifth Circuit's decision is the first step down the road toward revitalizing Lochner and greater protection for economic liberty.  If so, that road will be long indeed.

Chevy Volt Sighting!

Some hunt Sasquatch, others search for the Loch Ness Monster, while still others seek proof of alien visitations.  This blogger hunts the elusive Chevy Volt.  The hunt finally bore fruit late last month, when this blogger captured a single photo of a Volt (see above), at an undisclosed location in the Mid-Atlantic.  (I hesitate to provide more detail, so as not to violate the privacy of the owner.  For all I know this was the only Volt in the city in question.)

As previously explained on this blog, President Obama invoked the hope that General Motors would make greener automobiles such as the Volt as one argument for his ill-advised bail out of General Motors, which has now cost the American taxpayer about $25 Billion.  It would be hard to argue that the taxpayer has gotten its money's worth.  The Volt costs a "mere" $39,145, more than a spiffy BMW 3-Series Coupe.  It's thus no surprise that General Motors has suspended production of the Volt or that some dealerships are selling fewer than 1 (one) Volt per month, despite the generous tax subsidies that Volt purchasers, who enjoy average household incomes of $170,000, receive.  Nor is it any surprise that the sales of the Ford Fusion swamp those of the Volt. 

As previously explained on this blog, the national government is ill-equipped to pick among competing uses for scarce capital, a function that free societies properly reserve to the market, so long as background rules, including taxes on inefficient externalities,  ensure that market prices reflect the actual costs and benefits of economic activity.  Moreover, once the government takes on the task of picking winners and loser, citizens will naturally invest scarce capital, time and energy in trying to convince the government to allocate capital to them instead of other citizens.    As Luigi Zingales put it more recently, describing the views of Congressman Paul Ryan (with which Zingales apparently agrees):  "Ryan opposes these subsidies, not only because they waste taxpayers’ money, but (more importantly) because they create perverse incentives: they encourage businesses to lobby Washington for preferential treatment rather than to compete in the global marketplace."   After all, the government will never have access to nearly enough capital to satisfy all the various demands for bailouts, subsidies and what-have-you.  For instance, the same year that the national government bailed out General Motors, 400,000 other businesses failed as well, apparently without receiving any bailouts.  The GM/Volt boondoggle is "exhibit A" in the case against empowering the national government to pick winners and losers.

One suspects that, within a few years, the Chevy Volt will be as rare as Sasquatch.

Would Clint Eastwood Bail Out Super Bowl Losers, Too?

Bad Product = Low Sales

Did Not Receive A Half Time Bail Out

A Chrysler Super Bowl commerial featuring Clint Eastwood asserts that it is "halftime in America" and that firms like Italian-owned Chrysler are leading an industrial resurgence in the USA.  According to Eastwood:

"Detroit’s showing us it can be done. And, what’s true about them is true about all of us. This country can’t be knocked out with one punch. We get right back up again and when we do the world is going to hear the roar of our engines."

Oddly, Eastwood did not mention that American consumers delivered a knock-out blow to Chrysler, because of the poor products the company offered, like the Dodge Dakota pictured above.   Simply put, Americans preferred cars made by Ford, Toyota, Volkswagen and Honda, for instance.  (See this article in Forbes, which includes the Dakota and other Chrylser products among "the worst cars on the road.")  Then, American taxpayers bailed the company out, to the tune of $1.3 Billion, according to the Department of the Treasury.  (This does not include another $12 Billion in low-interest loans that the company received.)  During the same period, of course, 400,000 other businesses failed and received no such corporate welfare.  It's much easier to "get right back up again" after someone writes you a check for $1.6 Billion.

By contrast, when the New England Patriots underperformed last evening they lost.   There was no half time bailout for Tom Brady et al.  (Nominally, the Patriots were leading, but they were obviously struggling.)  That's the way competition is supposed to work in a free society.   Eastwood should know better.

Subsidy For Chevy Volt Keeps Growing

Boondoggles

As previously reported on this blog, President Obama justified the ill-advised bailout of General Motors and Chrysler by claiming that the debt-financed federal ownership of these two companies would encourage the production of "green" automobiles, like the electric-powered Chevrolet Volt pictured above. (Whether such cars really are that green is a separate question; as explained previously the manufacture of batteries for such vehicles exhibits a large carbon footprint.)

A recent study described here suggests that the bailout is just the tip of the subsidy iceburg.  The study emphasizes that state-ownership of General Motors did not, in fact, suffice to encourage production of cars like the Volt. Instead, in addition to the cost of the GM bail out itself ($14 Billion), various government agencies have showered GM with Volt-related subsidies that equal between $50,000 to $250,000 per car produced. (The exact figure will depend upon whether GM satisfies certain performance criteria attached to some of the subsidies.)  Even taking the more conservative estimate, i.e., $50,000 per car, the Volt, with a sticker price of $40,000, costs a total of $90,000 per car, compared to a mere $82,000 for the "Car designed by Homer Simpson," pictured above, featured in "Oh Brother Where Art Though," episode 15 of Season 2.  (The episode and the car Homer designed insightfully illustrated the consequences of ignoring scarcity when making important economic decisions.  The car flopped and the company making it failed.  Apparently the writers did not imagine a bailout.)   It seems unlikely that the benefits of the Chevy Volt justify these costs.

Should We Celebrate the Auto Bailouts?

$14 Billion FLOP

The President of the United States recently proclaimed the national "bailout" of Chrysler and General Motors a "success," despite the fact that the American Taxpayer will, by the President's own calculation, lose $14 Billion on the combined bailout. Among other things the President claims that the bailout saved a million jobs in the American auto industry and related industries by preventing the failure of the two firms. (For a transcript of the President's speech, go here.) The Washington Post has already announced that the President's speech was "one of the most misleading collections of assertions we have seen in a short presidential speech," and this blog does not find the President's argument convincing, for several reasons.

1. The President assumes that both Chrysler and General Motors, along with the jobs they support (between 100,000 and 150,000 American jobs), would have completely disappeared without the bailout. The President also assumes that hundreds of thousands of other jobs related to the automobile industry would have disappeared as well. Both assumptions are apparently incorrect. To be sure, both firms would have declared bankruptcy, but bankruptcy does not automatically lead to a firm's extinction. The whole point of bankruptcy is to facilitate the renegotiation of a debtor's obligations, in the hope that a streamlined firm will emerge from bankruptcy able to compete again in the marketplace. David Skeel, an expert on the laws of bankruptcy at the University of Pennsylvania Law School, contends in an Op-ed in Monday's Wall Street Journal, that "General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process." My colleague Nate Oman made a similar point in August, 2010 in an Op-ed in the Washington Times. Such restructuring, of course, might have led to a smaller company that focused more on more profitable brands and models that consumers actually wish to purchase, unlike the notorious Pontiac Axtec pictured above. But the company would have hardly disappeared. (Nor would such a company necessarily be any smaller than the bailed out version, as taxpayer subsidies do not increase the demand for GM vehicles.) Ditto for Chrysler which, as Skeel points out, owned the popular "Jeep" brand and is now controlled by Fiat. (Indeed, some readers will recall that Chrysler bought Jeep from then-floundering American Motors Corporation in 1987. AMC, in turn, had purchased Jeep from Kaiser Motors in 1970. AMC and Kaiser are long since extinct as corporations, but the Jeep brand, and the jobs associated with it, live on.) Any fair calculation of the number of GM and Chrysler jobs "saved" by the bailout would have to take into account the fact that, even without the bailout, both firms most likely would have survived. And, of course, if both firms had survived, then firms related to the automotive industry would have survived as well.

2. Even if both Chrysler and GM had failed completely, there is no reason to believe that all jobs supported by the two companies would have disappeared. The existence or not of GM and/or Chrylser does not alter the demand by American consumers for automobiles. Other companies with excess capacity, particularly Ford, could have ramped up production to meet that demand, hiring some of GM's and Chrysler's displaced workers as well as individuals who have never worked in the automobile industry before. (In fact, Ford announced earlier this week that it plans to increase its production by 50 percent over the next few years.) Ditto for American factories owned by Toyota, Honda, BMW, Volkswagen, Kia, Nissan and others. These firms, in turn, would have purchased parts and other inputs from firms that previously served GM and Chrysler. That, after all, is how free economies work --- firms that produce products like the Pontiac Aztec that consumers refuse to buy do not succeed, and firms that ARE producing succesful products thrive. (See here for "10 Cars That Damaged GM's Reputation" by Popular Mechanics). Thus, many of the jobs purportedly saved by the bailout would have survived, albeit at other firms.

3. The President's argument "proves too much," that is, would, if taken to its logical conclusion, justify policies that all or nearly all Americans would reject. Even in the best of economic times, thousands of businesses fail each year, taking countless jobs with them. In good times, however, business expansions and start-ups outpace failures, causing a net increase in employment. In poor economic times, of course, there are more failures and fewer start-ups and expansions to offset such failures, thereby resulting in the sort of large net job losses the economy experienced in this most recent recession. One might naturally ask why it was appropriate, during poor economic times, to expend $14 billion bailing out Chrysler and General Motors while at the same time refusing to bail out thousands of other businesses (and thus the businesses that supplied them) that failed during the same period. The answer, of course, is that any effort to bail out all such failing businesses, that is, to apply President Obama's logic across the board, would have bankrupted the nation. True enough. But then why choose to bail out Chrysler and GM, both of which most likely would have survived anyway? The fact that the bailout saved jobs in one particular sector, while other sectors were also failing, is not a good answer.

4. Finally, President Obama's argument ignores the concept of opportunity cost. As explained earlier on this blog, capital is scarce, and free societies rely upon free markets to allocate scarce capital between competing potential uses. Moreover, the capital has to come from somewhere, either higher taxes or borrowing in credit markets. There is no reason to believe that the national government is in a better position to determine the best use of scarce capital than private markets, where investors generally bear the long term costs and benefits of their investment decisions. Even if the expenditure of $14 Billion in scarce resources saved some jobs, there is no reason to believe that this particular allocation of capital was superior to that which private capital markets would have produced.

Expensive "Clean Energy" Jobs ....

Vice Planner-in-Chief?

Shortly after the State of the Union Address Vice President Biden visited a battery factory in Greenfield, Indiana owned by ENER 1, Inc., to tout the Obama Adminsitration's plan to encourage job creation via investments in "Clean Energy" as outlined in the President's State of the Union speech last evening. Biden's visit and speech was part of a larger communications strategy whereby, according to the White House:

"Members of the Cabinet will travel throughout the country to highlight the pillars of the president's remarks, visiting companies and schools that are already engaged in cutting-edge ways to innovate and accelerate economic growth[.]"

Let's hope that the particular project Biden is touting is not indicative of the Obama Administration's Economic Policy. Biden is visiting ENER 1 because it received a $ 118 million grant under the "Stimulus Package." According to a local news source, ENER 1 employs a grand total of 350 people. Hence, even if one assumes that the grant is responsible for each and every job at the company in the year the grant was received, the jobs in question cost $337,000 each that year. Such a method of "job creation," if applied across the board, would rapidly bankrupt the country.

Moreover, even if the price tag of such jobs was lower, there is a more fundamental policy question to be engaged here. That is, should the National Government be choosing economic winners and losers, taxing some individuals and firms (or incurring debt to be paid back later) so as to subsidize those the government chooses to favor. Generally Free Societies rely upon decentralized market-based decision making to allocate scare factors of production, such as labor, capital and technology. If, as the Obama administration apparently believes, the production of particular batteries by a particular company is cost-justified, then presumably private investors will put their money at risk to support that production, having chosen such an investment over other opportunities, hoping to reap economic rewards in the process. And, in fact, ENER 1 has, according to CNBC, raised millions in private capital markets to support its enterprise, presumable because investors are optimistic about the company's success. There is no reason to believe that the National Government, which also has alternative uses for the capital it raises via taxation or borrowing, will do a better job choosing between competing uses (and there are ALWAYS competing uses) for that capital than private markets. Indeed, one suspects --- and Free Societies generally assume --- that private markets will do a better job deciding between different possible uses of scarce capital, thereby maximizing society's economic welfare for any given endowment of resources. If, say, the National Government wishes to encourage the production of alternatives to cars powered by fossil fuels, because such cars impose external harms in the form of pollution, it should, for instance, increase the tax on gasoline, or subsidize the purchase of automobiles --- and not just automobiles manufactured by a particular company. These steps would encourage consumers to demand automobiles that attain higher gas mileage, thereby encouraging private market actors to meet that demand in various ways, including more fuel-efficient gasoline-powered automobiles. The decentralized process of meeting this demand would presumably produce a more efficient allocation of labor and capital than a system under which the national government selects picks particular industries or even single companies to be the recipients of government largesse.

Finally, it should be noted that the sort of planning the Administration contemplates will do more than misallocate capital between various industries; the existence of such planning will also cause private firms to invest scarce resources in lobbying members of Congress and the Administration itself in an effort to obtain such subsidies. Unlike, say, an investment in plant and equipment, or research and development, such investments will produce no wealth. (By contrast, even a losing investment usually produces some output, even if that output is less than the magnitude of the investment.) Thus, the existence or possible existence of such programs will result in the diversion of scarce resources from productive to non-productive uses.

Missourians Reject an Individual Health Insurance Mandate Despite Corporate Speech!

Yesterday Missouri's citizens voted to reject the National Government's effort to require the state's citizens to purchase health insurance against their will. So-called Proposition C amends Missouri law to protect each citizen's right to pay health care providers directly for services rendered as well as the right to decline to purchase health insurance. Presumably Missouri voters had in mind their state model, inscribed on the state seal pictured above, i.e., "salus populi suprema lex esto" ("Let the welfare of the people be the supreme law.") The measure passed with 71 percent of the vote.

Of course, valid federal law preempts state law, including Proposition C, under the Federal Constitution's Supremacy Clause. But many argue that a coercive federal requirement to purchase health insurance exceeds the scope of Congress's limited and enumerated powers and is thus invalid. (For a summary of this argument, see the following Op-Ed in the Wall Street Journal by Randy Barnett, of Georgetown Law School.) Presumably many Missourians who voted for Proposition C did so because they believe Congress exceeded the powers the Constitution confers upon it, though some may simply agree with former Vermont Governor Howard Dean that the individual mandate is poor public policy.

Ordinarily, the "proper party" for challenging such a mandate would be an individual citizen facing a fine for not complying with the new law. (Note in this connection that the individual mandate does not even take effect until 2014.) That is to say, ordinarily a state cannot itself challenge a federal law, even one that burdens its citizens, simply because the law exceeds the scope of Congress's power. See Frothingham v. Mellon, 262 U.S. 447 (1923). However, by enshrining the right not to purchase health insurance in state law, Missouri, like several other states, has ensured that any effort to enforce the individual mandate will also preempt Missouri law. The prospect of such preemption thereby increases the chance that Missouri would itself have standing to challenge the individual mandate as a sovereign entity. Indeed, earlier this week, Judge Hudson of the Eastern District of Virginia ruled that Virginia has standing to challenge such an individual mandate, relying in part upon Virginia's Patient Protection and Affordable Care Act, which, like Proposition C, protects Virginia's from an individual mandate.

It should be noted that the Missouri Hospital Association, exercising their first amendment rights, apparently spent over $400,000 speaking in opposition to Proposition C, according to one organization that tracks these sorts of things. This is not surprising, for two different reasons. First, some citizens who choose not to purchase insurance may nonetheless require medical attention that hospitals receiving federal subsidies must provide under federal law. If the citizen cannot pay for that care, then hospitals will be left holding the bag. An individual mandate would thereby reduce the anticipated costs that hospitals must incur. Second, the premiums mandated by federal law, particularly those imposed on the young, may significantly exceed the prices justified by the expected cost of providing health care for those required to purchase insurance. If so, then the individual mandate will, other things being equal, increase overall spending on health care and thereby increase the profits earned by hospitals.

Strangely, progressive opponents of corporate political speech have not condemned the Missouri Hospital Associations efforts to drown out the speech of individual Missourians who oppose the national mandate, some of whom relied upon billboards strapped to pickup trucks to convey their support for Proposition C.