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The Costs of Rent Seeking and Crony Capitalism — Tesla edition

The Costs of Rent Seeking and Crony Capitalism — Tesla edition published on 1 Comment on The Costs of Rent Seeking and Crony Capitalism — Tesla edition

Last week I posted at Truth On The Market about an attempt by some Missouri legislators and the Missouri Auto Dealers Association to sneak by language in an unrelated bill to effectively ban Tesla Motors from selling their cars directly to Missouri consumers. Never mind that Tesla already invested in a service facility in St. Louis and claims to have plans for one in Kansas City, creating at least a couple dozen jobs or so. Using the standard Missouri legislature economic multiplier, and that’s got to be worth at least another 1,000 jobs created! (just kidding)

In my post, I wrote that the auto dealers’ ploy “is classic rent-seeking regulation at its finest”. A reporter from asked me what I meant by rent-seeking. There are various definitions, but it all boils down to seeking or taking advantage of political privilege or regulatory favoritism to generate extra profits (typically at the expense of disadvantaged competitors or consumers). In this case, it’s seeking regulations that would eliminate competition from automakers selling directly to consumers, thereby forcing the automakers to use independent dealers who could then take their cut from the sale of the vehicle…and, in all likelihood, increase the cost of new cars (and therefore, used cars as well) to consumers.

But the costs of rent-seeking go beyond just the increased cost to consumers due to reduced competition. It has a much more pernicious effect. When policy makers (legislators or bureaucrats) dole out rent-creating laws and regulations, it creates even more demand from other companies or industries that want their own political perks, tax breaks, subsidies, and other such regulatory favoritism. In other words, it creates a whole culture of crony capitalism–where policy makers sell and businesses buy laws and regulations that tilt the capitalist playing field to benefit the favorites, rather than letting market forces sort out the most efficient, most productive, and most desired by consumers.

As political humorist P.J. O’Rourke quipped, “When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.”

Regarding Tesla, my colleague from the MU Law School and fellow TOTM blogger, Thom Lambert, and I published an op-ed in the Kansas City Star this week calling out the Republican-dominated Missouri legislature to live up to their claims to support innovation and entrepreneurship in the state and to put a stop to the rent-seeking crony capitalism. Check it out.

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