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BENJAMIN POWELL: Affording Tesla the freedom to fail

May 1, 2014

New Jersey recently joined Texas, Arizona, Maryland and Virginia in banning direct auto sales to consumers. That touched off an uproar on the left and right, and many consumers remain confused. They can be grateful for one clear statement of what the ban is really about.
“If you allow someone to come into the market with no overhead, that’s an unfair advantage,” says Deborah Dorman, president of the Eastern New York Coalition of Auto Dealers. She represents traditional automakers who use a dealer network to distribute their cars.
They don’t like competition and want the government to forcibly prevent companies from selling directly to consumers in order to protect old and potentially inefficient distribution networks from being displaced. Such bans impede consumers from finding the best deal through the market’s discovery process.
Some on the left claim that the ban unfairly targets manufacturers of electric cars. It primarily involves Tesla, but consumers should shed no tears for that company because Tesla is a welfare queen.
The company received a $465 million loan from the Department of Energy to support the development of its Model S, which retails for more than $70,000. The Japanese government subsidized Panasonic to develop the lithium-ion batteries that power Tesla cars. Tesla sells California zero-emissions credits to other companies for revenue.
Of course, there is also the $7,500 federal tax break for each purchase of a Tesla electric car. That wasn’t enough for Tesla, though, and the company is now seeking subsidies from the Chinese government.
Some might claim that these loans, policies and tax incentives aren’t subsidies at all. Rather, they are payments for reducing global warming. Consumers should remain cool to such nonsense.
Anything short of a worldwide policy addressing global warming will accomplish relatively little in changing carbon-dioxide emissions. To the extent that more widespread use of electric cars in the United States lessens our demand for oil, it depresses the price of oil compared to what it would have been, and simply leads to greater oil consumption in other parts of the world.
In the United States, the quest for green energy has become a racket. It’s a classic case in which bootleggers join with the Baptists and hijack public policy. Ultimately, well-meaning bootleggers join environmentalists and end up enriching crony capitalists.
Tesla and other electric-car manufacturers are not the only crony capitalists in the auto industry. A few years back, the federal government bailed out General Motors, also known as Government Motors, to the tune of more than $50 billion. The real problem here is government intervention in the auto industry.
New York and Ohio are in the process of following New Jersey and others states in implementing restrictions on direct auto sales. They should hold off on such bans. Tesla and all other companies should be free to distribute their automobiles however they see fit.
In a free market, consumers would ultimately pass judgment on which methods are best through buying and abstaining from buying. The real lesson is that government should neither arbitrarily penalize nor subsidize either “green” or traditional auto companies.
If the government left the auto industry alone, market prices would dictate which technologies should go into the production of automobiles and how those cars should be delivered to consumers. Inefficient technologies and distribution systems would eventually get weeded out. Some companies would win and some would lose, but all consumers would be better off.

Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been Assistant Professor of Economics at San Jose State University, Associate Professor of Economics at Suffolk University, a Fellow with the Mercatus Center's Global Prosperity Initiative, and a Visiting Research Fellow with the American Institute for Economic Research.

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