Market Power

Cash for Clunkers was a Clunker

No surprise here:

A key rationale for fiscal stimulus is to boost consumption when aggregate demand is perceived to be inefficiently low. We examine the ability of the government to increase consumption by evaluating the impact of the 2009 “Cash for Clunkers” program on short and medium run auto purchases. Our empirical strategy exploits variation across U.S. cities in ex-ante exposure to the program as measured by the number of “clunkers” in the city as of the summer of 2008. We find that the program induced the purchase of an additional 360,000 cars in July and August of 2009. However, almost all of the additional purchases under the program were pulled forward from the very near future; the effect of the program on auto purchases is almost completely reversed by as early as March 2010 – only seven months after the program ended. The effect of the program on auto purchases was significantly more short-lived than previously suggested. We also find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program. 

That's from a new working paper at the NBER by Atif Mian and Amir Sufi.

Although it hasn't made the headlines like cash for clunkers did, there is a program giving tax incentives to homeowners who put more energy-efficient heating and air conditioning units in their homes.  My wife and I took advantage of the credits and replaced our nearly 20 year-old units.  We were going to replace them anyways, but we installed the units a bit earlier than expected.  Once the tax credits expire, the heating and air conditioning market will clunk like the automobile market did after cash for clunkers expired.

More Evidence that Demand Curves Slope Downward

As if we needed more evidence that price and quantity demanded are inversely related, here comes Toyota with incentives to get buyers back in its cars.

On March 1, Toyota announced zero percent financing, subsidized leases and free maintenance for two years, and the early results appear to be extremely favorable. Automotive News reports that analysts are seeing big-time gains for the Japanese automaker, with evidence that sales are up 50 percent so far for the month. A 50 percent sales increase for the month would more than wipe out Toyota's depressing January and February, but analysts like Edmund's Jessica Caldwell reportedly feel sales will level out to a predicted 30 percent rise by March 31. "Incentives work best in the early going, but they start to peter out as the month goes along."

My Maxima is 10 years old.  It still runs well, but it's getting up there in age and miles. 

HT Glenn Reynolds

Rhetoric vs. Automakers: Then and Now

The punishment Toyota is taking over the acceleration problem in some of its models is surely unusual in tone and in volume.  I say it's unusual because Toyota had become one of the world's most trusted brands, a trust that seems to have evaporated.  Toyota has gone from a more-or-less revered corporation to the trash heap of capitalist swine of "criminal" intent seemingly overnight.

The tone and volume of the punishment is likely an offshoot of the US government's ownership of both General Motors and Chrysler.  Now that the Feds have an ownership stake in GM and Chrysler, it will use its available resources to lash out at threatening competitors for the companies' own gain.  It's what business owners do.

But going back to the tone and volume of the punishment, Tom Blumer has an excellent column describing how people once went after American automakers with all the abandon people are now going after Toyota.  An excerpt:

Yes, to name just a few examples, Ford Pintos had serious problems with exploding gas tanks. Yes, GM equipped some of its vehicles with transmissions that turned out to be suitable only for the flattest of terrains, and a few of its cars and trucks would pop into drive while idling. Yet as much as the tort bar would like to convince pliable juries that big companies, except for their unwillingness to spend a little money, can achieve perfection with every product that comes off the assembly line, it just isn’t so.

The legal and media narratives in many of the lawsuits that arose from these and other matters almost inevitably morphed from “the company made a serious mistake and should pay for it” to “this evil company and its evil executives were perfectly okay with seeing people continue to die, so they need to be sent a message and empty their coffers as punishment.” Meanwhile, at least until the late 1990s, trial lawyers tended to leave foreign makers alone, at least partially because U.S. CEOs supposedly imbued with excessive capitalist greed made better targets for sympathetic jury verdicts than supposedly less corrupt and more accommodating foreigners.

But going after the Big Three, or at least two of them, isn’t what it used to be. During the last half of the decade, the financial viability of each was often in serious question. Now that the government has effective control of GM and Chrysler, any trial lawyer trying to go after either now knows that he or she will be facing a defendant backed by potentially unlimited resources and with lots of potential dirty tricks up its sleeve — tricks that it didn’t hesitate to use during the two companies’ respective encounters with bankruptcy.

Read the whole thing, as they say.  HT Glenn Reynolds who calls it "an orchestrated campaign against Toyota in overdrive."

Big Three Automakers' Cars Continue to Lag in Resale Value

A smart businessperson will tell you the route to financial catastrophe is to produce low-quality products at inflated costs.  The blogosphere is dotted with posts detailing the high labor costs of the Big 3 automakers (see this Mark Perry post in which he details the excessive pay of Detroit autoworkers relative to those of Toytota).  And yesterday's Wall Street Journal had this article detailing one facet of their cars:  their low resale value relative to their competitors.

Kelley Blue Book, a well-known vehicle appraiser, plans to announce Wednesday its annual ranking of the top 10 brands for projected resale value -- and not a single one will be American. Kelley, which ran its calculations before the big car makers began pushing for government financial help, defines resale value as the amount of a vehicle's sticker price that is retained after five years of ownership. The typical Chrysler car, for example, is expected to retain just 24.2% of its original cost. By comparison, the top-rated Honda brand's vehicles are expected on average to retain 44.5% of their value.

The U.S. industry's poor showing bodes poorly for its ability to win back consumers to American brands after years of slipping market share. Resale value, also known as residual value, is a factor consumers consider closely when buying or leasing a new car. Because monthly lease payments cover the difference between a vehicle's sticker price and its expected value at the end of the lease, cars that hold their value better have lower lease payments.

The first letter to the editor here is instructive about how the policies of automakers and the work rules obtained by their union has led to the crisis they now face.

David Yermack makes a solid, albeit academic, argument against furnishing Detroit with funds with which to continue its foolish ways ("Essay: Just Say No to Detroit," Weekend Journal, Nov. 15). However, as a guy who has made his living selling Fords for over 30 years, I disagree with his conclusion.

We're all loath to reward bad behavior, and Detroit has a long history of it, including making lots of money and doing dumb things with it: bringing out products nobody wants and then paying customers inordinate amounts of rebate money until they buy them; and building vehicles far in excess of current demand simply because it's cheaper to incentivize the vehicles' sales than idle a plant. That behavior alone results in a cheapening and erosion of brand and resale value, two very serious consequences that we deal with on a daily basis as dealers.

This perverse behavior is a result of letting the manufacturing tail wag the marketing dog. Toyota, Honda and other foreign competitors appreciate that the tail-dog analogy needs to be the other way around. They build what people want to buy, regardless of whether it's convenient or cheap to do so. The arcane, uncompetitive and stifling work rules that have evolved in the organized plants that Ford, Chrysler and GM operate have caused that disconnect. They need incredibly long production runs of any product for it to be profitable. Their costs to produce are so high and so fixed that most "new" vehicles are almost always variants of old ones. Nimble they are not, nor can they be, under those conditions.

Mr. Yermack is correct that we taxpayers are throwing money away by rewarding this bad behavior. But were the government to do what generations of auto executives have not and find a way to bring the unionized production of vehicles into a competitive position with nonunion plants in the U.S., then the bad behavior would abruptly end, and literally millions of jobs would be saved, including mine and those of my 100 employees.

Jim Graham
Rancho Santa Margarita, Calif.

If the Big 3 are to become competitive, they must provide better value for their customers by providing a quality product at a competitive price.  A bailout would do no good because it doesn't improve the incentive to be competitive.  In fact, it may diminish it by sending a signal that future bailouts will be forthcoming.

In addition, the government can tear down restrictions on foreign auto trade, such as reducing tariffs and eliminating quotas, to encourage more competition in the US market for automobiles.  If the Big 3 can't compete, then they need to fail and they, and their "resources" need to move to alternative industries.  Bailing them out and shielding them from foreign competition simply encourages the same behavior that got them in trouble in the first place.