In passing the new financial regulation law, Congressional Democrats and the White House were able to surf a wave of populist fury that threatened to drown politicians who appeared to be too chummy with all those nice folks who brought you the financial collapse. But auto dealers, whose lending practices can on occasion make loan sharks blush and whose abuses of credit-challenged soldiers roused the anger of the Pentagon, got away virtually untouched.
The explanation, offered by James Surowiecki in the New Yorker, is right on the mark: In the American political system, a highly focused, well-funded lobby with tight connections in every House district is almost unbeatable when it chooses to play rough. And since this particular political game is over, we won’t rehash arguments about whether the proposed curbs on their behavior would have made sense. But their surprising (to some) escape from federal oversight does offer a nice excuse to remind readers that auto dealers aren’t always against regulation. Indeed, it is hard to think of an industry that depends so heavily on government protection from the cruel realities of the free market for their daily bread, not to mention their vacation homes in Florida.
The protection in question is auto dealer franchising laws, which vary a bit from state to state, but are generally the very model of what government ought not to do. Starting in the 1930s, car dealers organized to get Congress to, in effect, set minimum standards of treatment in their franchise agreements. As Jessica Higashiyama, who recently received her JD from UC San Francisco’s Hastings Law School, recounts, Congress was happy to oblige, but the federal courts were less receptive to the idea that Detroit had duties to franchisees beyond those spelled out in the contracts that both parties had voluntarily signed. So the dealers turned to state legislatures and managed to get some remarkable deals from many of them.
Pretty much all the auto franchise laws give dealers immense bargaining power in obtaining compensation if a car maker chooses to stop selling a model line (think Pontiac) or to stop selling cars entirely though a particular dealer. Indeed, GM and Chrysler had to back away from tough dealer-streamlining plans in bankruptcy because the process was too expensive. Some states make it illegal to sell cars at lower prices to high-volume dealers than to low-volume franchisees. Some prohibit car companies from selling directly to the public (say, via the Internet) because it would adversely affect the competitive position of the dealers. And a number are even considering laws requiring the automakers to compensate dealers for warranty repairs at the dealers’ bloated retail repair rates.
Is there ever a good economic case to be made for government intervention in a franchise relationship beyond the protections afforded by contract, fraud and antitrust laws? Consider it a challenge, dear readers, to think of one. What we are pretty sure of, though, is that car dealers’ friends in state legislatures won’t be waiting around for the law-and-economics types to debate the matter.