Elon Musk and his electric car company Tesla have a problem. Starting April 1, they will no longer be able to sell their luxury vehicles directly to consumers in New Jersey, thanks to an old law that requires automakers to sell through car dealerships. This is bad for Tesla, since New Jersey is the company’s fourth largest market, and this is bad for customers there, since now they won’t be able to purchase the cars in state. It’s also a perfect example of how a particularly bad kind of regulation can (and does) inflict damage on the economy, every day and all over the country.
The situation in New Jersey is a bit complex. A law already on the books requires that car sales take place through dealers. But the law didn’t say clearly who could be a dealer—an ambiguity Tesla used to justify direct sales. The trade group representing traditional dealers, the New Jersey Coalition of Automotive Retailers, lobbied state authorities to “clarify” the rule. The Coalition got its wish. On March 11, the New Jersey Motor Vehicle Commission decreed that applicants for opening dealerships must be “franchisees.” Tesla, as the automaker, is not a franchisee. It’s the franchisor. And that means it must stop selling cars directly to people who want to buy them.
Tesla has lashed out at Governor Chris Christie and his administration, saying they are simply trying to help and protect in-state dealers. Christie, for his part, has said he has no problem with Tesla selling cars directly to consumers in New Jersey, but that right now, has no choice, but to enforce the law. Tesla is also trying to get the New Jersey legislation to change the law—which seems to be the one surefire way that Tesla could regain the ability to sell cars directly.
Whether or not the company succeeds, the story offers a case study in how poorly designed, but politically strong regulations can stifle growth. Tesla is a growing firm that offers green vehicles, albeit at a price. The firm does not think dealers will fairly market its vehicles to potential customers. And it thinks dealers will insist upon taking cuts, as middle men. That’s bound to drive up the car’s price or reduce what the company makes on every sale. One New Jersey car dealer said exactly that to The Verge:
"This Musk guy, he wants all the profits for himself," says Tom Dougherty a car salesman at the BMW dealership in Princeton, New Jersey. "They wanted to go direct, which means no sales force. That’s cutting out a lot of people. No way that’s gonna fly."
This Musk guy! How dare he try to cut me and all the other dealers out from the sale. We deserve our fair share for….
Try to fill in the end of that sentence. You can’t. Car dealers don’t offer any economic value if the consumer and producer can transact directly. Some automakers might choose to outsource their sales department, for any number of valid reasons, but others—like Tesla—may think they can do better on their own. When they can, both the producers and consumers benefit—and the economy as a whole is more efficient.
Economists have a word for the way the New Jersey car dealers are acting—and, apparently, how New Jersey officials are accommodating them. It’s called “rent-seeking.” Rent-seeking happens when a company or person attempts to benefit from a transaction without providing any economic value. A well-known example is hairdressers, who must attend hours of classes and spend thousands of dollars on training before they receive a license to practice in the state. That’s an artificial barrier to entry that the state has erected to protect incumbent hairdressers. The same goes for laws that severely restrict “scope of practice” for nurse practitioners and other health professionals—in effect, preventing them from providing some routine care that, according to most studies, they can provide as well if not better than physicians typically do.
Economists hate these laws. And conservatives, in particular, make a big deal out of them, because they tend to be most suspicious and skeptical of regulation. But behind almost every example of rent-seeking is a lobbying organization powerful enough to sustain it—whether it’s the Professional Beauty Association or the American Medical Association. And as car buyers in New Jersey are about to discover, these groups wield a lot of power.
Danny Vinik is a staff writer at The New Republic.