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Death Comes for the Regulated

How long can dinosaur industries stave off the inevitable?

Apr 21, 2014, Vol. 19, No. 30 • By IRWIN M. STELZER
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"The dinosaurs surviving the crunch” was how Stephen Sondheim described women living an outdated lifestyle and grimly aware that “everybody dies.” If Sondheim had the slightest interest in the less exalted subject of economics, he would apply that descriptive to a host of companies and industries trying to beat the hooded man with a scythe, aided by their regulators.

gary locke

gary locke

The most recent example comes to us courtesy of New Jersey’s automobile dealers—with an assist from their regulators and Governor Chris Christie—who have decided to follow the lead of Texas, Maryland, and Virginia and declare that Tesla, the maker of electric cars, has violated state law by attempting to sell its cars through its own network of stores rather than through franchised dealers. The New Jersey Coalition of Automotive Retailers (NJCAR), feeling threatened by a firm that sells fewer cars in a year than General Motors sells in a day, contends that the regulations do nothing more than bring Tesla into line with other manufacturers to create a level playing field, the sort on which beleaguered competitors prefer to compete so long as the referee/regulator is on their team. For “level playing field” read status quo. 

If Tesla is allowed to eliminate the middleman, Ford, General Motors, and other manufacturers will follow suit, whines NJCAR. Yes, the consumer would save money, but if Governor Christie allowed this new and possibly more efficient method of distribution to take hold in New Jersey, he would surely lose lots of dealer votes and their financial support. So Christie, no stranger to issues in the transportation sector, told Tesla it can keep its stores as galleries but not discuss price or take orders. Any orders would have to be placed in stores in other states (Texas does not allow any such referrals), which would of course reap the sales taxes associated with the sales. Other states are under pressure from dealer organizations to follow New Jersey’s lead, or at minimum New York’s, where the governor and the legislature have cut a deal to allow Tesla to keep its five stores—but no more.

Tesla does not come to this fight with cleanly scrubbed hands. Elon Musk, its founder, principal shareholder, and CEO, and an important contributor to Obama campaigns and the Democratic party, is not exactly a paragon of free-market virtue. He has received handsome subsidies from the Obama administration both for Tesla and for his SolarCity solar-panel operation, in which Al Gore is involved. (In the world of high-tech, Musk is so highly regarded that Larry Page, cofounder of Google, says he would rather leave his billions to Musk, who can change the world, than to charity.) The Tesla founder decided to sell his much-subsidized, high-priced cars (base model $69,900) from Tesla’s own stores because the product needs detailed explaining by skilled sales people, and because cutting out the middleman seems to Tesla’s managers and shareholders the efficient thing to do. That plan is now under threat.

Then there is the taxi industry. With the exception of the chauffeur-driven elite, the limousine l iberals who favor but rarely use public transportation, and the very poor for whom taxis are unaffordable or unwilling to enter their neighborhoods, most Americans rely at times on the taxicabs that cruise city streets in search of fares. To say that in cities such as New York and Washington, D.C., the service leaves something to be desired, is to put it mildly. I served as head of a commission set up by Mayor Ed Koch to reform taxi service in New York, and lost the reform fight to the clout of the fleet owners and drivers who had paid small fortunes for the medallions, the permits to share in the monopoly profits from regulators’ refusal to increase the supply of taxis for decades during which demand soared. Regulators saw it as their role to preserve the monopoly profits, and high fares, that would support the prices paid by owners of the precious, scarce medallions (just as regulators for a long time thought it important to limit access to the floor of the New York Stock Exchange to preserve the value of floor traders’ seats).

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