Thursday, December 17, 2009

Local Plutocracy

--Posted by Neil H. Buchanan

In my FindLaw column this week, I return to my efforts to endear myself to America's automobile dealers. As part of their strategy to emerge from bankruptcy and respond to severely-reduced economic prospects, Detroit's automakers have announced that they will discontinue relationships with about 2,000 auto dealerships across the country. The U.S. House of Representatives included a provision in a bill passed last week that would require the automakers to go through arbitration if a local dealer appealed that decision, even if the decision to discontinue the business relationship fully comported with the contract between the manufacturer and the dealer. (The standard situations involve non-renewal of an expiring contract and invocation of contractual language allowing a party to end the agreement.)

I describe in the column why I think the business model that independent dealerships represent is flawed; but more importantly, I point out the crucial flaw in the usual defenses of the economic value that dealerships might provide. If dealerships really provided economic value, then they would not need to be protected by anti-competitive laws in every state that require cars to be sold through car dealers. The House's legislation, then, is just an add-on to a legal arrangement that has allowed this business model to continue unchecked for decades, even though consumers hate car dealers with a passion, and even though the manufacturers chafe under the rules.

The explanation that I offer is hardly rocket science. Political muscle is backed by money, and if all politics is local, then local money buys political results. Specifically, if one looks at the list of the richest people in cities and towns across the country, the list nearly everywhere includes the owners of car dealerships. Those local dealers then use the super-normal profits that the anti-competitive laws provide to buy politicians who will keep the gravy train running. Local politicians become national politicians, and we now see the results in bipartisan (bipartisan! in 2009!!) support for protective legislation for car dealers. Political Economy 101, a perfect example of the results of concentrated benefits and diffuse costs.

This situation led me to think about the nature of local bigwigs. In every town, there are other people (in addition to car dealers) who dominate chambers of commerce and who have serious influence on politics. These are not the CEO's of mega-corporations but rather the guys who buy local advertising time on TV and radio stations -- and who contribute to the campaigns of state legislators and Congresspeople. For much of the last century, this group very prominently included the owners of department stores. New York City had Gimbel's and Macy's, Boston had Filene's and Jordan Marsh, Philadelphia had Wanamakers and Strawbridges, D.C. had Garfinkel's and Woodward & Lothrop, among others. Even smaller towns had their own department stores, owned by local families. (Growing up in Toledo, Ohio, I thought that stores called LaSalle's and Lamson's were big deals.)

Almost all of those are gone now, bought up in many cases by Macy's. Of course, that consolidation did not happen because of a national strategy to kill local department stores but because of changes in the economics of retailing. Long before the internet, the business model represented by the department store had run its course. The emergence of Sears, Roebuck and Montgomery Ward represented an important breakthrough moment in American consumer capitalism, but the model simply no longer worked. The local department stores shrank and were sold at huge discounts (irony alert!), ending a chapter of commercial history.

If, however, local politicians are driven to enact protective legislation by local money, and if so much local money was in the hands of local department store magnates for such a long time, why did the department stores die? Couldn't the kind of legislation that protects car dealers have been crafted to protect local department stores? There was certainly plenty of money at stake.

The major difference between the two industries is that car dealers have a specific, small group of suppliers on which legislation can impose obligations, whereas department stores do not.
Legislation forcing, say, Sealy to continue to sell mattresses to the local department store, could have been passed in an effort to protect an uncompetitive business model from changes in the economic environment. Although such legislation is imaginable, the very genius of the department store model -- as a consolidator of many different types of stores into one -- meant that any such legislation would have had to cover a much broader range of suppliers, raising enormous difficulties in keeping up with new suppliers and enforcing the laws on hundreds of smaller ones.

Therefore, the large automakers did not reap the political protection that one might imagine would be available to companies employing hundreds of thousands of workers and dominating the highest echelons of global commerce. Big targets are easy to spot. Moreover, in the early days, there was simply a lot of money to go around, and the automakers could tolerate the sales requirements imposed by the states. Once the anti-competitive laws were in place, they became seemingly impossible to dismantle. (Certainly more difficult to dismantle than union contracts, which were simply torn up even though they were legally valid.)

Of course, even this explanation must have some limits. Once the fight is being waged over a smaller and more precarious market, things become fierce. With GM and Chrysler all but sleepwalking through the current fight, however, it is not obvious that even the wrenching changes in the automobile industry will be enough to bring about the changes in the law that would move local auto dealerships into the history section of business marketing textbooks.

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