Tesla and the Texas Tea Party

How lawmakers championing states' rights and small businesses came to endorse government-sanctioned cartels

Today’s Tea Party is at the height of its influence and power. Its representation in Congress has never been greater. It has become a powerful force in many states, including the big enchilada of Texas. Its belief in limited government and economic freedom has clearly tapped into a powerful strain in Americans’ view of how society should be run.

And yet, once in office, many lawmakers backed by the Tea Party have proven remarkably willing to maintain and even expand government interference in the operation of free markets. Protecting state governments from federal overreach becomes an excuse for state overreach. Pro-business sympathies become an excuse for anti-competitive policies and crony capitalism. The reasons for this pattern go beyond the habitual tendency of former dissidents to discover the value of political power once they have it; they lie in the American system of government.

The Tea Party and its conservative allies have a big and bold agenda: gun rights, fiscal sanity, rolling back federal power, championing traditional marriage, and of course opposing Obamacare and climate-change policies. But these items are largely tangential to the daily business of government, which is mostly the dreary work of catering to special interests and their lobbyists.

If there is one thing Tea Party supporters hate more than government, it’s government by special interests. Alas, the lawmakers borne aloft by the Tea Party wave are now drowning in a sea of lobbyists. Most of those lawmakers didn’t know there were as many lobbyists in the whole world as they’ve talked to since their inauguration.  

Elected officials of a progressive bent can certainly commiserate. Take the case of Tesla, the luxury California electric sports-car maker. In many states, Tesla faces barriers to entry in the form of state dealership franchise laws that prohibit direct sales to consumers by car manufacturers. Tesla has hired armies of lobbyists to open up these laws.  

From the typical legislator’s point of view, there are three major interest groups involved here—the dealers, the major car makers (who sell only through dealers), and Tesla.

The dealers have an overwhelming interest in maintaining the barriers created by the franchise laws. Not only do all car sales have to go through them, but in some states, existing car dealers can block potential competitors from setting up shop in their vicinity simply by formally objecting to their license applications. That creates something akin to a government-sponsored price-fixing cartel among dealers, with consumers unwittingly paying a substantial premium above market prices in order to pad corporate profits. The dealers have assembled a fearsome phalanx of lobbyists to maintain this system.

Major car manufacturers, like GM and Toyota, are more ambivalent about the franchise laws. They would probably sell mostly through dealers even without such laws, because experience has taught them to concentrate on their core business and leave the peripheral stuff to others. Besides, the car dealers’ padded profits partially flow through to them, so they don’t mind the dealers’ cartels as long as the cartels establish a level playing field on which the different manufacturers can compete.

Tesla hopes to sell perhaps 2,000 cars a year in Texas, at least initially—far too small a volume to make it profitable to sell through locally franchised dealers. It would like to sell directly to consumers, so theoretically, it would like to see a repeal of the franchise laws and the advent of open competition, as in the hyper-competitive personal computer market.

The pure free-market position would be to repeal the Texas franchise law altogether. But lawmakers who proposed that would bring down upon their heads the combined weight of the dealers’ and major manufacturers’ lobbies, and gain only the support of a green-energy firm from California. So Tesla’s army of lobbyists is asking not for a free market in car sales, but rather only for a tailor-made exception so that it—and for the moment only it—can get around the franchise laws and sell directly to consumers.

That is hardly a compelling case for free-market reforms, and Tesla is hardly a compelling advocate for free-market reforms to start with. Its business model wouldn’t work at all without government subsidies that amount to as much as $30,000 per vehicle sold in some states. Much of that subsidy comes through zero-emissions credits in states like California, where the prices of even the cheapest gasoline-powered cars that low-income consumers depend on are inflated in order to reduce the price of Tesla’s luxury vehicles.

There is actually a fourth major interest group with a stake in this debate. But most lobbyists and elected officials forget to mention it, because it is the one interest group with almost no lobbyists: the general public.

Milton Friedman captured the plight of the public interest: “Each of us … has more concern with our role as a producer of one product than we have as a consumer of 1,001 products.” The public interest is diffused across the supply chains for everything. Hence, free markets are “in the general interest, and in nobody’s special interest.” That is how the public interest becomes the treasury against which special interest benefits are charged.

When a federal or state program creates a cartel or monopoly for special interests, nobody knows how much the public is losing. The sugar program in the federal Farm Bill, for example, officially costs the taxpayer nothing. But by restricting production and elevating prices, the program forces Americans to pay billions per year above world market prices—not just when they buy sugar, but when they buy any food that contains sugar—in order to pad the profits of a small handful of well-connected sugar producers.

A century ago, many of these special-interest arrangements would have been illegal. The federal power to interfere with private commerce was severely limited, and could only reach transactions that actually crossed state lines. The states’ power to interfere with private commerce, meanwhile, was constrained by the Supreme Court’s interpretation of the Due Process Clause of the Fourteenth Amendment, which was then thought to guarantee the freedom of contract.

In the 1905 case of Lochner v. New York, the Court categorically prohibited state interference with the freedom of contract unless it could be justified on health-and-safety grounds. Lochner struck down a New York state law that limited the number of hours a baker could work to 10 per day. Unlike a state law the Court had previously upheld limiting the number of hours a miner could work in a mine, the New York bakery law could not be justified on health-and-safety grounds.

These severe limits on government power—both federal and state—made it difficult for the government to protect groups like farmers and urban laborers, the groups most severely affected by the Great Depression. Those groups became the pillars of Franklin D. Roosevelt’s political coalition. The New Deal addressed their concerns, offering controls on production and prices for farmers, and fair labor standards and union laws for urban workers.

The program required an expansion of the government’s power to regulate commerce at both the federal and state level. Otherwise free competition would reign, and a central purpose of the New Deal was to protect the vulnerable from the ravages of unfettered competition. The Supreme Court initially offered stiff resistance, but in 1937, after Roosevelt famously threatened to pack its bench with additional justices, it made an about-face. The Court proceeded to dramatically expand the federal government’s power to regulate purely intrastate transactions, while striking down Lochner’s health-and-safety standard for state laws, thereby simultaneously  expanding the states’ power to regulate the same transactions. As a result, federal and state regulation now substantially overlapped over the whole range of economic activity.

If, like the overwhelming majority of Americans, you favor a minimum wage and the 40-hour work week, you are probably happy with this turn of events. But once the Court allowed both federal and state governments to limit competition for reasons of “social justice” or “public necessity,” it inadvertently opened the door to the capture of economic regulation by special interests bent on using the new government powers for their own ends.

Lobbyists flooded every legislature in the land, and quickly learned to bring the government in on their monopolies and price-fixing conspiracies. The result, throughout the economy, was a proliferation of hidden subsidies not subject to the public scrutiny of the budget process, and in which the public often loses significantly more than the beneficiaries gain, because of the “dead-weight loss” inherent in monopoly- and cartel-pricing. The New Deal thus had an enormous unintended consequence that would likely have disheartened both FDR and his supporters: Though they were fervent opponents of corporate power, the reforms they introduced paved the way for corporations and special interests to capture the government.

The New Deal had other unintended consequences. The Supreme Court’s expansion of the federal commerce power after 1937 also expanded the reach of federal laws defined in terms of that power—including the federal antitrust laws, which make it illegal to monopolize or engage in price-fixing with one’s competitors. This created an unintentional conflict between federal antitrust laws and the states’ ability to cartelize markets for social purposes.   

The conflict came to a head in the 1943 case of Parker v. Brown. At issue was a California raisin-marketing program that limited the production and sale of raisins. The program was designed to sustain producers’ profits and impose the resulting costs on out-of-state consumers—a classic “export cartel” made possible by the fact that California produced 95 percent of the nation’s raisins. The Supreme Court reasoned that the antitrust laws were not intended to apply to state regulatory action, and indeed they were not. It ruled in favor of the California law, and thus was born the “Parker doctrine” of state regulatory immunity from antitrust enforcement.  

The net result of all these changes was economically incoherent in one important sense. Antitrust laws are rarely necessary in the case of purely private monopolies and cartels because, in an efficient market, it is difficult to enforce cartel arrangements or exclude new competitors. Cartels that charge prices much above competitive levels tend to lose market share and break down. But the cartel arrangements of government-sanctioned trade groups were legally enforceable, and government power could shield them from outside competition. By exempting state regulations from federal antitrust laws, the Court ensured that those laws would not apply precisely where they were most needed.

One consequence of this new system of government-by-special-interests has been a dizzying proliferation of occupational-licensing schemes. There’s an obvious health-and-safety justification for ensuring that drivers of automobiles are above a certain age and understand certain rules. There’s a rational health-and-safety justification for ensuring that those who offer to treat your bronchitis have some relevant training, even if people have every right to seek out faith-healers or acupuncturists instead.

But Texas requires 1,500 hours of cosmetics training for someone to be licensed to shampoo your hair. That’s as much as the flight-time required to pilot a commercial airliner. At some point, such licenses serve less to protect health and safety than to limit the number of workers entering an occupation, simply in order to drive up wages.

Some licenses serve to protect the public, but many serve only to injure the public. The New Deal left courts with no way to distinguish between the two.

In 2006, a North Carolina dentists’ licensing board issued a flurry of cease-and-desist letters against beauty parlors that had started to offer cosmetic teeth-whitening, insisting that such services could only be offered by licensed dentists. The Federal Trade Commission challenged the move on antitrust grounds. It took the position that without active government supervision, a state-created licensing board composed mostly of potential competitors could not require a license for a related service.

Earlier this year, in North Carolina v. FTC, the Supreme Court agreed with the federal government. But in a bewildering twist, the case scrambled the Court’s usual alignment. The four liberal justices—Ruth Bader Ginsburg, Elena Kagan, Stephen Breyer, and Sonia Sotomayor—voted with Chief Justice John Roberts and Anthony Kennedy to sustain the FTC’s position. Meanwhile, three conservatives—Antonin Scalia, Samuel Alito, and Clarence Thomas—dissented, siding with North Carolina against the FTC.

The three conservative dissenters championed states’ rights, insisting that state regulations are immune from antitrust enforcement. The majority agreed with the general principle that state commercial regulations are shielded from federal antitrust laws, but refused to recognize the Parker “state action immunity” doctrine, where market participants are afforded the unsupervised ability to exclude competitors. The latter, reasoned the Court, is not “state action” but merely a state-sanctioned restraint on competition by market participants.

By siding with the majority, the liberal justices in effect contravened one of the essential tenets of the New Deal—the ability of state governments to regulate competition for social purposes. Meanwhile, by endorsing state cartel-creation over free markets, the conservative justices appeared to reject the classic conservative belief in limited government and economic freedom. Federalism’s protection for state prerogatives was designed as a protection from government, not a protection for government. From a conservative point of view, it was absurd for the conservative dissenters to have taken the position that states’ rights justify protecting the states’ right to interfere with economic freedom.

Expect similarly strange positions to become a common sight in the state houses and governor’s mansions of the land in the months ahead. In the American scheme of government-by-special-interests, the instinctive conservative sympathy for states’ rights and business interests can be a dangerous trap, leading even the most ardent champions of limited government and economic freedom to embrace policies that violate both. Even now, lawmakers elected with Tea Party support are being waylaid by lobbyists armed with quaint mid-20th century economic nonsense about how “public convenience” justifies limits on competition for this or that special-interest group.  

“More tears are shed for answered prayers than for unanswered ones,” wrote St. Theresa of Avila. Now the Tea Party is discovering why. And seventy years after the New Deal, progressives are, too.