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Home Publications Blogs Beat the Press If People Don't Spend Money on Cars, They Will Spend it On Something Else

If People Don't Spend Money on Cars, They Will Spend it On Something Else

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Wednesday, 15 December 2010 16:21

The auto industry put out a study that apparently assumes that if people don't spend money on cars, they will not spend it on anything. This was in the context of evaluating the employment impact of proposals to substantially increase mileage standards.

The NYT uncritically reported the projections from this study, which found that a large increase in mileage standards could reduce the number of jobs nationwide by 1.3 million. The article did not include the views of any economists who would have pointed out the unrealistic nature of this assumption.

Comments (13)Add Comment
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written by Sean G, December 15, 2010 5:02
Not to mention that there would logically be additional spending due to the savings at the pump.

I'm also curious why they believe that increasing fuel efficiency is going to increase the cost of cars by 50%. Is this price increase adjusted for inflation, or is that part of the increase? I doubt there's a car for sale today that isn't considerably more expensive than a similar car in 1995.
Auto industry research group issues hilarious assertions in feeble stab at comedy.
written by diesel, December 15, 2010 6:06
"requiring automakers to meet fuel economy standards of 60 miles per gallon by 2025 would decrease sales because cars and trucks would become more expensive, and could eliminate up to 1.3 million jobs nationwide."

If this were true, then we would expect to see the same effect at work in Germany where fuel economy standards are currently much higher than in the U.S. Where's the unemployment? Also, small diesel-powered German sedans can achieve 50 mpg. No new expensive technology is necessary. No astronomic research and development costs need be incurred.

"Such a requirement...could actually increase emissions if many people avoid buying new vehicles and hold on to less efficient ones longer, the group, the Center for Automotive Research, said."

Maybe in the short run, but not over the long haul. Even the best of cars wears out at 200,000 miles.

"Advocates of the higher standards say they are necessary to reduce energy usage and dependency on foreign oil, but critics say they prevent automakers from developing new vehicles to suit consumers’ tastes."

What new vehicles? The basic forms of vehicles have been around for a century. Spend less time worrying about consumer's tastes, and more on tangible improvements in performance, reliability and economy--you know, like the German's, Japanese and Koreans do--and you might win back some lost allegiance.
Terrorist Supporters
written by JL, December 15, 2010 7:06
People who oppose the increase of the standards simply are bunch of terrorists supporters. They want our money continue to flow to the terrorist countries.

We are talking about national security here. It's more than economists, energy and environment.
Unrealistic Assumptions
written by NewsFromAnnArbor, December 15, 2010 8:32
The article estimates the average vehicle will only save $2693 over the life of the vehicle with gas at $3.50/gallon. That assumption assumes the average vehicle will only be driven about 92,000 miles over its lifetime. A more realistic assumption would be 150,000 miles for a total savings of around $4375.

The way to accomplish the average fuel economy of 60 mpg would be to put more all electric vehicles on the road. I believe manufacturers could ultimately produce all electric vehicles for less than the cost of gasoline vehicles. One way Government could help with all electric vehicles would be to buy batteries from manufactures and sell them at auction to car companies. When what the government pays for batteries equals what they are selling them for, the government can exit the business. Pay for the subsidy with taxes on gas and coal and natural gas.
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written by izzatzo, December 15, 2010 8:54
Wrong Mr Nanny. No matter how high the price of cars, people are not going to spend their money on something else.

Any economist knows that cars are Giffen Goods. A famous example of a Giffen Good was potatoes during the Irish famine, when potato prices rose so high, the income effect overcame the substitution effect and more potatoes were actually consumed at higher prices, reflecting an upward sloping demand curve.

Same applies to cars, especially during a deep recession. The quantity demanded for cars actually increases as price increases due to an upward sloping demand curve. As people lose their jobs and houses, they keep their cars no matter what.

As car prices increase, they actually buy more cars due to the corresponding reduction in real income that prevents them from buying anything else, in contrast to the usual substitution effect away from rising prices.

Higher mileage mandates will have the same effect as seat belts did years ago, driving up the cost of cars astronomically just as the industry claimed, but because cars were Giffen Goods, they just kept selling like hotcakes.

The car industry is deeply indebted to government regulations that give it an excuse to raise prices and sell more cars. The hue and cry about losing sales and jobs is just part of gaming the system. Individually they have to claim the sky is falling, but collectively they party with glee for more regulation.
Same old, same old
written by diesel, December 15, 2010 9:32
What's distressing about the article is that it's the same old refrain we've heard from Detroit at least since the sixties. Collective moaning from America's auto industry that they just can't measure up to the standards adhered to by the rest of the civilized world. By implication then, either the auto industry is uncivilized or incompetent.

What this really demonstrates--and in their own words--is that the fault with American manufacturing lies not with labor, but with management, sales, design or engineering.

I had the privilege of studying under one of the nation's automotive geniuses. He stated that GM (for example) had the talent and expertise to do virtually anything it wanted to do, but that that's not what ends up on the showroom floor. I believe him.

Now a spokesman for the auto industry tells us that they just can't hack it. Miserable,beaten cur. Get up off your knees and get to work.
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written by urban legend, December 16, 2010 1:05
Oh, damn, the American auto industry is going to do itself in again with its self-defeating assaults on tough mileage standards? That kind of thinking is what made it the conventional wisdom that "Japanese cars" are higher in quality and get better mileage, whether true (not really) or not. Is anyone in that industry capable of seeing the overarching message they send when the adopt such positions: "Our engineers just aren't good enough to design cars that meet tougher standards." Instead, they should publicly adopt a "bring it on" attitude, strongly and publicly embrace the public importance of the principle of using standards to push the performance envelope, and work with the regulators quietly to establish standards within the realm of feasibility. The constant negativity, however, sent a terrible message. Let's hope they have important strategic thinkers who can get management to avoid making those mistakes all over again.
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written by urban legend, December 16, 2010 1:08
Right on, diesel. Didn't see yours before I posted mine.
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written by zinc, December 16, 2010 6:15
IMO

Detroit has always made the most money selling cars by the pound. The incredibly low price of gasoline during the late 90's and early 00's encouraged the domestic industry to remain focused on selling large utility vehicles and cars, loaded with options. The low cost of fuel funded the marginally higher capital cost that accrued to the domestic manufacturers. When the business model "adjusted" with higher fuel costs and supporting awareness of the global biosphere, the domestic automobile companies were caught out in the cold with a gas guzzling product mix that became obsolete almost instantantly.

The fuel and resource efficient, small car product mix offered by the competition, manufactures in Japan, Germany, and South Korea, instantly became optimal. Since the 70's, foreign competitors were forced by intelligent regulation, fuel taxation, and limited access to resources to design and manufacture fleets of smaller, fuel efficient vehicles.

The Japanese conquest of the North American car market is not without it's dark side. Foreign manufacturers sell few, if any, vehicles in Japan, or Germany, for that matter. The local manufactures retain a core market without significant foreign competition. Foreign legislation and trade restrictions are significant factors in the lack of reciprocity in automobile manufacturing.

Domestically, foreign manufacturers established assembly and distribution plants in the former slave holding states. The trans-plants (cute) were attracted by the opportunity to establish a beach head for the assault on Detroit, using direct public financing of development and construction of the supporting public infrastructure, capital cost subsidies, tax holidays, and community college programs designed to train the work force at personal and public expense.

Detroit is wailing, "can't we just get back to selling high margin SUV's, please." Truly short sighted, bred by desperate panic. I think I'll go buy myself a new Tundra V-8 for Christmas
...
written by RL, December 16, 2010 9:38
Just wanted to express my appreciation for Izzatzo's consistently masterful satire here. It's probably only understood by people who make a habit of reading economic textbooks, but I suppose that's part of the reason why economic textbook-readers find it so funny.
yes GM can
written by frankenduf, December 16, 2010 1:43
yo deez- if u haven't, u should watch the documentary 'Who Killed the Electric Car'- it pretty much verifies ur surmise about GM's capabilities- of course the tragedy is the greed/corruption/incompetence of GM management
@zinc: huh?
written by random bavarian, December 17, 2010 1:47
When was the last time you visited Germany?
I happen to live here, and ~35% of cars are foreign-made.

http://www.kba.de/nn_191078/DE/Statistik/Fahrzeuge/Neuzulassungen/MarkenHersteller/2008__n__mark__herkunft.html
ditto @zinc: huh?
written by RobW, December 18, 2010 8:49
He's clearly not been to Japan either.

It's nothing like 35%, but Tokyo streets seem to have about as many non-Japanese cars as Detroit has non-American cars. Korean brands are popular for their low prices, and European brands are much more popular than American brands, probably because unlike their USA competitors both European and Korean manufacturers offer versions for sale in Japan with right-hand-drive.

(I'm a car nut who's spent quite a bit of time in Tokyo, actually noticing the cars on the street.)

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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