Tuesday, May 28, 2013

Cars, Cartels, and Growth

Barriers to entry yield abnormal profits, promote economic decay

Let me lay it out up front: I'm not attacking car dealers. But Tesla Motors, really?

OK, I'll back up a bit. If you read this blog or Gibson4Congress2012 you know that I do my best not to demonize any one person or organization. But I don't feel so restrained when groups – be they elected bodies or trade organizations – act alone or in concert to garner favor, skew free markets, decrease competition, inflate producer profits, and artificially raise consumer prices.

In April, electric car manufacturer Tesla Motors petitioned Virginia's Department of Motor Vehicles to open and operate its own dealership in Tysons Corner. However Virginia law prohibits manufacturers from selling cars directly to consumers unless no other dealer is available. The Virginia Automobile Dealers Association objected to Tesla's request. And even though a DMV hearing officer had twice recommended approving the request, the head of DMV rejected Tesla's proposal.

So a trade group with entrenched interested persuaded the legislature and a state agency into siding with them rather than consumers. Washington Post columnist Neil Irwin commented, "It’s understandable that [dealers' specious] rationales would appeal to politicians, but they are deeply contrary to the idea of free markets." Remember: this is not some rogue bureaucrat acting independently but our elected officials legislating favors for special interests and against consumers.

According to BusinessDictionary.comabnormal profits are "atypically large proceeds made by an individual or company from commercial activity. An abnormal profit exceeds the normal opportunity for profit derived from labor costs and capital and considered normal profit. Abnormal profit in a business consists of monopoly and oligopoly profits."

As I wrote in a previous post, economist Mancur Olson described how special interest groups form over time, organize lobbies, and seek government favor to protect their interests, skew markets, and discourage innovation and productivity. The favored groups reap benefits with little public resistance. As time goes by, the number of favored groups grows until the costs of favoritism mount and the nation falls into economic decline.

We're rightly concerned that government spend our tax dollars effectively and efficiently. Tax regulations aren't always transparent and equitable. But little-known regulations create monopolies, restrict competition, and are more insidious: they pick our pockets and we don't even know it.