An Application of Intertemporal Substitution

In its purest form, intertemporal substitution is substitution over time between two goods or services that are identical except for when they occur. So what I’m about to spell out isn’t the purest form.

At, Alex Tabarrok has highlighted the key findings of Keith Hennessey about President Obama’s radical shift towards higher fuel-economy standards. I have little to add to that that Hennessey, Jenkins, and others have not already said. But there is an obvious implication that they have not pointed out: the short-term boom it will create in auto sales.

Under the Obama proposal, which is not yet a fait accompli, the new standards would kick in fully in 2016. It is unclear how they would rise between now and 2016 but it must be the case that they would be much less stringent in 2010 than they would be at their peak in 2016. The standards will cause cars to be smaller, less powerful, less safe, and more expensive. So what will consumers, who have shown what they think of these cars, do? I predict that if anything like Obama’s standards get implemented, consumers will start buying powerful cars and trucks at a higher rate in the next few years. Watch for the coming auto boom. And then, of course, as the standards tighten, a major auto bust.