Gov. Chris Christie's Administration just effectively banned Tesla Motors from selling cars directly to consumers in New Jersey. Here's why his move is a quintessential example of how cronyism and lobbying are corrupting the free market and destroying innovation, growth and jobs across the country.
If policy-makers are serious about robust economic growth that will lead to millions of new jobs - better jobs (higher paying and higher skilled) than those lost in the recession - then we need to evaluate how our laws discourage innovation and set simple rules of the road that apply to everyone equally. And then - and this is the critical part - we need to get out of the way.
Policy makers need to implement laws and regulations that foster "creative destruction" (the idea popularized by Joseph Schumpeter). When entrepreneurs enter markets, that is the disruptive force driving economic growth even as it destroys the value of established companies. For new and more efficient market models to survive and for competition to be robust, companies that don't innovate must die. This is what a truly free market enables.
Across the country, in every state, government-imposed monopolies restrict auto manufacturers from selling directly to consumers. The car selling market is one of the most significantly regulated markets in the country, which greatly stifles competition, innovation and hurts the consumer. These laws affect disruptive new market participants like Tesla Motors and online selling of cars directly to the consumer. This week, New Jersey joined the illustrious list of Virginia, Maryland, Texas and Arizona in completely banning Tesla from selling cars to consumers.
Today 57 million Americans live in states where Tesla cannot legally sell cars.
Why would a state ban Tesla sales?
Texas prevents Tesla from providing test drives, discussing price points, or even directing buyers to Tesla's website. Employees are allowed to talk to buyers about electric cars in general but can provide no information on how to purchase one. In Texas, Tesla is only allowed to have car "galleries" where consumers can look at the vehicles. Other states are copying the Texas model, not avoiding it as the New Jersey regulations are very similar.
New Jersey has now turned Tesla Motors into Tesla Motors Gallery.
Dealership imposed restrictions across the country deny Tesla Motors the ability to easily sell their cars in other jurisdictions, but it also affects the thousands who would be employed in Tesla stores and building the vehicles and components, and the thousands of potential Tesla buyers who would like to be able to buy the Model S, Roadster and 2014 launch vehicle: the Model X. It deters a potential new Tesla-like competitor who may consider developing their own new unique vehicle or market model.
The rules restricting direct sale of cars are silly. Why would you worry about the rampant and pervasive threat of new car manufacturers selling cars directly to consumers? In the name of consumer protection, the highest rated car manufacture, as rated by Consumer Reports, Tesla Motors, is legally banned from selling cars to consumers. Regulators trust your local car dealer to protect the consumer, even though car dealer ratings are the only group rated lower than members of Congress.
Bigger than Tesla:
Fixing this problem is bigger than just Tesla. It is about the next Tesla and it is about keeping innovation right here in America. It's about enabling a free market for the 2 trillion dollar auto market, and it's about opening the floodgates for the autonomous vehicle revolution with an estimate of 5.6 trillion in global savings.
The last successful American Car company was Chrysler, founded in 1925. There have been dozens of failure start-ups in this space, including Yucker, DeLorean, electric car startups Fisker and Coda. Prohibiting manufacturers from selling vehicles directly to consumers forces manufacturers to develop a car and invest millions of start-up capital in production capacity without knowing if any dealership will carry their planned vehicles. The dealers may have an interest in favor of the status quo, as they may be less likely to carry a car unless there is already strong market demand for that car. Thus these regulations create a chicken-and-egg problem. And if the dealer agrees to carry the car, manufacturers would still be relying upon the dealer to choose to promote and sell the car.
State bans on Tesla sales have affected and angered many Americans. Over 131,000 Americans have signed a White House petition to allow Tesla to sell directly to consumers - a petition to which the White House is eight months late in responding. Even the Justice Department's Antitrust Economic Analysis Group's has published their economic findings that, "as a matter of economics, arguments for state bans...are not persuasive."
Republicans, as supporters of the free market, should be taking advantage of this groundswell and calling the White House out on not responding to their own website's petition. Instead, in Texas, Arizona and now New Jersey, Republicans have become complicit in this cronyism.
These nonsense regulations protect the dealers' monopoly rents on the market, ultimately creating a higher barrier to entry for new car manufacturers in the US and a "tax" upon the final price of the 14 million cars that Americans buy every year. According to a 1986 study by the Federal Trade Commission, they concluded that these laws increase prices by about 6% and cost $6.9 billion in 2014 dollars. But according to a 1982 study from economist Richard Smith, these regulations may be costing $22 billion in 2014 dollars. He estimated the cost of this regulation per car as 9.3%, an extremely significant mark-up. Incredibly, it's likely that those studies underestimated the impact of potential new market models as enabled by the internet.
Further, these laws not only prop up the existing structure, but they also make it nearly impossible for car manufactures to remove franchises that they don't want to represent their brand. But even worse, not only do state laws require middlemen to sell cars, but the laws have effectively removed the possibility of direct online buying of cars and innovation which could create dynamic competition and savings for the consumer.
Online Direct Car Selling:
Entrepreneur Scott Painter founded Carsdirect.com in 1998 to sell cars directly to consumers, as a national "virtual" dealership. Such an online direct to consumer dealership could hold great utility for consumers who still wonder why they can't buy a car online as easily as they can buy just about anything on Amazon. Painter explains that because of state-regulations, in order to sell cars directly to consumers across the country (as a website), they would have to own car dealerships in every state and for each brand. With 40 car brands and 50 states, they needed 2,000 car dealerships to be set up across the country and abide by 50 state laws. After raising millions of dollars for their venture, once it was clear that this was the only way for the company to proceed, they ultimately changed their market model and removed the ability to sell directly to consumers.
After Carsdirect.com was impeded from selling directly to consumers, its founder and CEO Scott Painter next tried to create his own car manufacturing company, like Tesla, called "Built-to-order." The firm designed a car using a GM powertrain and planned to build it with components from established suppliers. They were trying to imitate the "Dell model" by holding inventory of customizable parts which would be assembled and delivered after the customer ordered them. As leading expert Fiona Scott Morton argues, the potential economic benefits are significant here "drastic reductions in the cost of retailing; reductions in the cost of holding inventory; elimination of the need for discounts...increased revenues from customization...and lower capital costs due to being paid prior to incurring the expenses of building the car. Painter estimates the total savings from these sources was approximately 30 percent."
New Era of Innovation:
If states remove these government-imposed monopolies, Tesla and buying cars directly online may be merely the beginning of a new era of innovation in the automobile sector, where new and innovative companies will offer new concepts of vehicles for the 21st century, consumers can more easily buy and compare vehicles and save money through dynamic competition. This is particularly important as we are entering an era of entirely new autonomous vehicle concepts. As the Justice Department's Antitrust Economic Analysis Group's recently published, "Just as Dell has altered its distribution model in the personal computer industry to better meet evolving consumer preferences, car customers would benefit from elimination of state bans on auto manufacturers' making direct sales to consumers."
The United States was the world leader in the automobile market of the 20th century. Companies like Tesla, and the competition their new car models brings to Ford, General Motors and Chrysler, must be part of a second renaissance of the United States leading the autonomous automobile market of the future.
Derek Khanna was listed in the Forbes 30 Under 30 for Law and Policy for 2014. He is a Yale Law Fellow, columnist and policy expert. He wrote the House Republican Study Committee Memo on reforming copyright law and spearheaded the campaign on cellphone unlocking. Follow him on Twitter.