Car Wars: The empire strikes again

When government nationalizes companies, stuff gets weird.

First, we’ve got the government making decisions – perhaps rash decisions – about dealership closings in the wake of the GM and Chrysler nationalizations. Second, as Mark Hemingway reports, such decisions are being made for political reasons rather than purely economic ones. All this prompts a couple of questions: Why is the government making these kinds of business decisions? Why is anyone surprised that such decisions are being made based on politics?

But that’s not all. We can ask deeper questions about the very existence of car dealerships. For example: why do we mandate and license car dealerships at all? A lot of people don’t realize that car dealerships are an artifact of bad government policy. And we may not need them.

Consider this explanation, which I wrote for TCS Daily:

Regulatory barriers to buying a car online are a textbook example of “rent-seeking” — when an interest group hollers, stomps and lobbies the state until politicians cave. Car companies that might offer cars at a lower price — with a better shopping experience — are blocked from doing so.

So we don’t know exactly what the market would look like if the market for auto sales became free. But so what? We don’t worry how the Web would provide search engines or online shopping. And yet magically it happens. Still, when you suggest doing away with dealership licensing, people say things like:

“If all of a sudden people are buying cars online, what will happen to people like my mother? Dealerships will go away. She won't know how to buy online and she won't be able to trust the product unless she meets a salesperson.”

The answer is, “if people really demand shopping for cars offline, dealerships have little to fear since they actually provide that service.” As I explain:

What dealers know full well is that entrepreneurs will find all sorts of ways to make the services dealerships offer redundant — which will benefit you and me. Consider the question of how people will test drive cars in an Internet purchasing environment. We can imagine automakers offering smaller test-drive centers. And we can also imagine delivery and logistics networks for cars so that people can pick up their cars quickly once they buy them — or have them delivered to their driveways.

There is all sorts of tortuous legal logic that justifies this sort of dealership protectionism:

The Supreme Court has held that, under the so-called “dormant” Commerce Clause, a state is prohibited from discriminating against interstate commerce by passing laws that treat in-state businesses more favorably than out-of-state businesses. Such treatment is permitted, however, if a state can convince the Court that the law advances a “legitimate state interest.”

John Delacourt, a legal expert on interstate trade issues, explains the logic as follows:

Where the businesses receiving disparate treatment are identical but for their geographic location (for example, a Virginia winery and a New York or Michigan winery), this [appeal to 'state interest'] generally is not possible. However, where there are real and demonstrable differences between the two businesses (for example, an automobile manufacturer and an automobile dealer), a discriminatory law may survive a Commerce Clause challenge. Indeed, in the 1978 case of Exxon v. Governor of Maryland, the Supreme Court expressly held that curbing the disproportionate market power of manufacturers vis-à-vis franchised dealers constitutes a legitimate state interest.

So is dealer protectionism a legitimate “state interest”? What about the interests of consumers? You may not think consumers are harmed by state-licensing of auto dealerships, but you’d be wrong. Consider that you could save as much as $2,500 the next time you bought a car–that is, if you could buy it straight from a dealership. You might purchase it online or otherwise direct from the manufacturer.

It’s bad enough that we have a government created system of middlemen lot lizards stripping resources from the purchase of every car. Now we’ve got the government owning significant stakes in U.S. auto companies and making political decisions about the life or death of this or that dealership. Truly bizarre. The market is certainly not free.

For those who believe in the power of government to correct so-called “market failures,” consider the messes government has made when you look deeply enough. The car business – from design to driving – is distorted by meddling by Leviathan. And it looks like things are only getting worse.

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