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 marginalrevolution.com, 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.
READER COMMENTS
Tom West
May 20 2009 at 5:37pm
cars to be smaller, less powerful, less safe, and more expensive
I don’t get it. If essentially they’re designing cars to make them more like fuel-efficient subcompacts, why would the price go up?
The car manufacturers will only achieve their goals by making cars lighter (i.e. smaller, less powerful, less safe) which should decrease prices.
And quite frankly, why would they redesign the subcompacts at all?
Jody
May 20 2009 at 5:48pm
why would they redesign the subcompacts at all?
Because people don’t like the “features” of subcompacts. Ergo, the customers will want safety, power, space and so on that they’re accustomed to. But the only way that the manufactuerers will be able to do that AND achieve the CAFE standards is throwing money at the design / manufacturing problem which will in turn be passed on to the consumers (at least those who still demand the prior safety, power, space and so on levels).
Kevin
May 20 2009 at 6:40pm
I was thinking this just today. Specifically, I was thinking I need to buy a Toyota Tacoma while I still can.
another bob
May 20 2009 at 6:48pm
which is perfect for the current auto industry zombies.
more sales now. then, as sales start to contract “due to over regulation”, Congress will relax, postpone, recalculate, whatever.
perhaps you noticed the auto zombie reps standing behind O’HeOfLittleChange.
Dr. T
May 20 2009 at 7:00pm
why would they redesign the subcompacts at all?
Because there isn’t a single gas-only subcompact in the country that can get the mandated 42 mpg, and the 42 mpg is the fleet average. They will need cars that get over 50 mpg so they can still sell a few large cars or (gasp!) minivans.
If this change is implemented, the vast majority of new vehicles sold will be SUVs and pickup trucks (the big ones with extended cabs that seat 4 or 5). These vehicles rarely achieve 20 mpg, and they are exempt from the CAFE standards. With such high demand, SUV and truck prices will skyrocket. (I wish there were a company that only made SUVs: I’d buy stock immediately.)
aaron
May 21 2009 at 8:37am
I’m thinking my next vehicle will be a truck. I think it’s silly to have vehicle just for commuting and am tired of needing to depend on others when ever I want to buy or move something. Of course, I will probably buy used, provided I can get the cash together to avoid expensive financing.
happyjuggler0
May 21 2009 at 6:53pm
David Henderson,
Nice insight.
My only thought til now was that I am soooooo mad that my hard earned dollars are being thrown away on GM, Chrysler and Fiat that I, under no circumstances whatsoever, will ever buy or rent a GM, Chrysler or Fiat car again.
I was already a tentative quasi-loyal Toyota buyer after seeing my parents burned by Detroit again and again over the decades. Now I suspect I will only be able to rent cars that are made by Ford. Foreign car makers seem to be smart enough not to sell at a discount to the likes of Enterprise rent-a-car.
But now I am definitely going to keep an eye on the CAFE clock and buy my next car before it is too late. And then probably never sell it, running it into the ground with hopefully crappy emissions. Can you tell I am feeling bitter right now? If Obama doesn’t like it he can stop stealing my hard earned dollars and stop giving it to the whores (e.g. the UAW, Al Gores “green” companies, etc.) who (legally, presumably anyway) bribed him.
Steve Sailer
May 22 2009 at 12:59am
Who’s no running for re-election in 2016?
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