The Downside of Federalism

Professor Bainbridge comments on a dimension of the auto industry problem that usually gets overlooked. While people rail about union contracts, bad management, and constricted creativity,  another top problem is:

An antiquated distribution system cemented into place by state franchise laws that insulate dealers from any real changes. GM needs a radically new distribution system involving fewer dealers, just in time inventory practices, and considerably greater use of on-line sales. State franchise laws protecting dealers, BTW, are a big part of the reason GM can’t shed brands. Killing a brand simply gets too complicated when you’ve got hundreds of dealers protected by 50 different sets of laws. In a bankruptcy reorganization, it will be much easier to kill a brand despite dealer opposition.

There is a lot of high-falutin’ theory about states as “laboratories of democracy,” but it is also true that states can be captured by special interests more easily than the nation, especially when benefits of the fix can be captured by in-staters and the costs dished off onto others.

The tort system suffers from this, where certain states specialize in granting outrageous awards that must be paid by out-state customers.

Similar issues arouse in Wyeth v. Levine, which raises the threat of a single state imposing a law that establishes a nation-wide standard of practice that contravenes the decision of the FDA.