Tesla Motors and the Folly of Government Intervention

Why the government can't create winners in the marketplace.

Anyone searching for a case study to explain what is wrong with capitalism in America today can stop looking. We have the perfect specimen: Tesla Motors. Federal and state programs have conferred huge advantages to help the electric-vehicle company sell its cars — which state laws then make almost impossible to sell.

Left to its own devices, Tesla one day might have epitomized everything good about market economics. In an industry whose fundamentals have changed little since the introduction of the Model T, the California-based company, led by the visionary Elon Musk, made a long-term bet that it could prevail through disruptive innovation and superior products (Motor Trend named its Model S the 2013 Car of the Year, and Consumer Reports raved about it). Instead, Tesla now epitomizes the folly of government intervention.

Start with all the special benefits Tesla receives — including a $465 million loan from the Energy Department, conferred in January of 2010. That is two-thirds more than Tesla initially raised from private investors, and more than double the $226 million the company raised from its initial public offering five months later, even though the loan surely encouraged investors to buy.

On top of the loan, add the $7,500 federal tax credit for purchasing electric vehicles. That amounts to a discount of more than 10 percent for the base Model S, whose purchase price is a hefty $70,000. Many states also offer their own incentives, including tax rebates, property tax reductions or exemptions, and sales tax exemptions worth thousands of dollars more. Some states also offer perks such as exemption from annual inspection requirements and use of HOV lanes.

And then there is California, a world unto itself. Not only has California given Tesla a $10 million grant, it has ordered car makers to sell an increasing number of electric vehicles; Gov. Jerry Brown insists that 1.5 million zero-emission vehicles ply the state's roads by 2025. ("Zero-emissions" is a grievous misnomer, since electric vehicles need charging, and all power plants produce emissions. In fact, electric vehicles in regions where coal makes up a large share of the generation capacity are more carbon-intensive than high-mpg cars with internal combustion engines.)

But there are two problems with setting quotas for electric vehicles. Most car makers don't manufacture them. And so far, most consumers don't want them — even with the large financial inducements. So California lets other car makers meet the rule by purchasing credits from EV makers, which for now means Nissan and Tesla.

In August, the left-wing Mother Jones magazine reported that Tesla's profits in the first and second quarters of 2013 — its first profits ever — would have been losses if not for the tens of millions it has collected through the credit-purchase program.

Still, some people who can afford to do so want to buy Teslas. Unfortunately, states across the country are doing their best to stop them.

In Virginia, for instance, you can visit the company's showroom in Tysons Corner to kick the Tesla tires. But until recently that was about all you could do. You couldn't take a Tesla for a test drive. The company reps couldn't even discuss pricing with you. And you absolutely, positively could not buy a Tesla then and there.

Those restrictions still exist in most other states: Forty-eight states forbid Tesla to sell cars directly to consumers, which is how the company likes to do business. (Tesla has a variety of reasons for that: Among them, the company charges a single flat price for its cars, but couldn't sustain such a policy if middlemen got involved.) And independent automobile dealers are fighting furiously to keep Tesla out of their backyards.

Texas' rules resemble Virginia's. In New York, lawmakers introduced legislation that would have shut down Tesla's three locations by forbidding the registration of any vehicle not purchased through a dealer. In North Carolina, the State Senate passed a bill to forbid vehicle sales except through a franchised dealer.

Both of those measures ultimately failed, but until a couple of days ago, when a lawsuit-averting deal was announced, Tesla had not been able to win an exemption from Virginia's rules. Some Virginia dealers wanted to keep it that way. "Tesla believes it should be allowed to sell cars without licensed dealers. This can't be," wrote Gerard Murphy in The Washington Post earlier this year. Murphy is president of the Washington Area New Auto Dealers Association, whose members include dealerships in Northern Virginia. "If Tesla won't have a dealer network, it doesn't belong in the automobile business."

The dealers contend they are simply trying to protect local jobs and the welfare of the consumer. But their motives are not solely altruistic. If Tesla succeeds in challenging the franchise model, other car makers might do the same — and then dealerships would be in for a world of hurt. They would still make money, but probably nowhere near as much as they do now.

That's rough on them — but it's no rougher than the transition other industries have endured in recent decades. And the rationales the dealers offer to justify government-enforced protection of their turf make no more sense than similar justifications would make in other industries. Imagine, for instance, if states insisted that bloggers and advertisers who want to reach the public could do so only through newspaper websites, in order to preserve local jobs and the fact-checking process. That's the sort of nonsense the dealers in other states are peddling now.

But then, there's very little good sense in the tale of Tesla — a company that government advances with special preferences one moment, and impedes with schemes for the protection of market incumbents the next. Tesla's cars might qualify as revolutionary. But its treatment at the hands of big government is as old as Appian Way.

This article originally appeared in the Richmond Times-Dispatch.