Saturday, November 22, 2008

Consumers Have Benefited From Car Competition

One of the most under-appreciated, unreported and unrecognized facts about the automobile industry is captured in the chart above (click to enlarge), showing the Consumer Price Index (CPI) for All Items from the BLS (data), vs. the CPI for New Cars (data) from 1998-2008 (both set to equal 100 in January of 1998).

Notice that since 1998, consumer prices have increased by 34%, an annual rate of 2.7% for consumer prices on average. However, new car prices have FALLEN by about 4% over the last 11 years, meaning that new cars are much more affordable today than in 1998. If new car prices had increased at the same rate as the average product in the CPI (adjusted for quality), new car prices today would be 38% higher than they are today! Keep in mind that wages and income have increased at a rate equal to, or higher than, the CPI, meaning that cars are about 38% MORE AFFORDABLE today (adjusted for quality), relative to income and average prices, THAN IN 1998!

Despite the financial troubles for the UAW and the Big Three, American consumers have benefited tremendously from the intense foreign competition in the auto industry. Except for electronic goods, what other consumer products are actually cheaper today than in 1998? Not too many.

Bottom Line: Competition in the auto industry (or any industry) breeds competence, to the great benefit of the U.S. consumer in the form of lower prices and higher quality. Without the significant discipline of foreign competition, we'd probably be paying a lot more for new cars today, with significantly fewer improvements in quality.

6 Comments:

At 11/22/2008 12:10 PM, Anonymous Anonymous said...

"Competition in the auto industry (or any industry) breeds competence, to the great benefit of the U.S. consumer in the form of lower prices and higher quality. Without the significant discipline of foreign competition, we'd probably be paying a lot more for new cars today, with significantly fewer improvements in quality."

The only reason the US has benefited is due to the dollar being the worlds reserve currency. Under Rubens strong dollar policy along with manipulation of interest rates by Greenspan, American Jobs were outsource for cheap slave labor around the world. Those countries in turn bought our debt and recycled their dollars right back into us to defend their currency pegs. Basically they lent us the money to buy their products.Vendor financing of sorts. They also lent us enough money to hang ourselves.

 
At 11/22/2008 11:08 PM, Anonymous qt said...

Anon,

Even the foreign makers have U.S. content albeit not as high as Detroit. It would be difficult to argue that Germany & Japan offer cut rate labour to BMW, Toyota & Honda.

Aren't we also looking at increases in productivity and automation lowering labour inputs and these savings being passed on to consumers?

One remarkable example of technological innovation, is the development of software which can be used to design and precision cut prototypes.

 
At 11/23/2008 9:24 AM, Anonymous Anonymous said...

Have you taken adjustments used by the BLS into account in this comparison.

 
At 11/23/2008 4:19 PM, Blogger @sethstorm said...

The issue is that the current situation will breed a certain lack of choice.


meaning that cars are about 38% MORE AFFORDABLE today(adjusted for quality), relative to income and average prices
Well, that (still) presumes that there is no effect on the types of cars offered at a specific price level. Try getting anything with more than a compact form factor, a poky I-4 and an interior full of cheaply made electronics for $20000 as new. The only way that will be done is to create an exception.


Aren't we also looking at increases in productivity and automation lowering labour inputs and these savings being passed on to consumers?

If there was, there would be a way for them to stuff something such as a slightly more powerful I6/V6 for the dollar in a Civic and keep it under $20000. Never mind that the transplants could also think about a V6/V8 powered vehicle for well under $30000 tops. Finally, they could do so while attending to fuel-efficiency after performance.

 
At 11/24/2008 10:57 PM, Anonymous James said...

I blame KIA... and all of you hagglers. I like to take in a blank check(signed with my name in blue or black ink) and ask... no, DEMAND the salesman to write any number he thought would be suitable for my shiny new Hummer 3. I wish I could quote correctly, but are we not getting worse miles per gallon today than we did some 30 years ago? Nevermind the lead paint and leaded gasoline...

 
At 11/25/2008 4:15 PM, Anonymous Anonymous said...

Lets look at another industry...how about a similar chart with cost of tuition per credit hour over the same period from certain Michigan universities. Too bad universities can't hold the line and figure out how to gain efficiencies in their use of government subsidies and and tuition dollars! Probably need a whole new scale for that chart.

 

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