Saturday, May 3, 2014

What Might Cars Cost If We Had a Free Market? ... Eric Peters

What Might Cars Cost If We Had a Free Market?

It’s a common gripe that new cars cost too much – and, they do.92Camrywindowsticker2
As of last year, the average transaction price paid for a new car exceeded $30,000 for the first time. Of course, it’s still very possible to buy a new car for less than $30,000. But even the least expensive new cars start around $15,000 – and that’s a lot of money for many people. Too much money for many people, in fact. There’s a reason for the extension of car loans from the once-typical three or four years to five – and even six. With seven surely on the horizon (though this is self-limiting because of depreciation; people will find themselves “upside down” on their car loan. But that’s another article).

The reason car loans are as long as they are is to mask the true cost – the unaffordability – of new cars, measured in terms of the average person’s ability to pay for them. If you earn the (roughly) $54,000 or so annually that the average person – the average family – earns, finding $400 a month to pay for a five-year loan on a bread-and-butter family car such as a Toyota Camry  purchased for $24k (which would – just barely – get you into a base trim Camry with very few options) is simply not feasible. So, the payments are pushed out to six years – and that brings the monthly nut down to about $330.

Still, it’s a lot of debt to assume – and for most people, debt is all-but-unavoidable because they don’t have the cash to buy outright. Financing – debt – is inevitable.empty pockets pic
But why have cars become so expensive?

Logically, they ought to be getting less expensive all the time – because of manufacturing efficiencies, because the basic technology has been sorted out years ago, and many other reasons besides.

In some respects, they are less expensive – in that it’s now routine for cars to come standard with features and equipment that in the past were available only in a few high-end cars. Fuel injection is a good example. If you rewind the historical clock to 1980, fuel injection was exotic technology; virtually all mass-market cars still had carburetors. Same goes for other technical great leaps forward like overdrive (and CVT and dual-clutch) automatic transmissions, as well as the near-ubiquity these days of amenities such as climate control air conditioning, excellent factory audio systems – even heated seats.

But, while such features have become more mass market, the cars themselves are – demonstrably – much more expensive than they might otherwise be.
Because of the myriad mandates the government has imposed.

Whether these mandates are “good things” isn’t the issue. The issue – for purposes of our discussion – is the cost of these mandates.

It’s hard to nail down the exact tab, especially as regards the mandates that effectively dictate fundamental design (here I refer to impact standards, fuel efficiency and emissions requirements). But the cost of add-on mandates can be identified with some degree of accuracy, based on government/industry statements as well as extrapolated from the known cost of parts/repair. Let’s take a look at some of these – and get a handle on the price of the “features” we’re all being forced to buy:
 * Back-up cameras -back-up 1
The most recent add-on mandate (see here for more) will add at least $140 to the purchase price of your next new car – by the government’s own estimate. This estimate does not factor in repair/replacement costs, nor the likely increase in insurance costs (generally) as a result of increased repair costs following accidents. Let’s call it $500 in total/lifetime costs – which is almost certainly under-estimating it.

* ABS/Traction control -
We can estimate the add-on costs because these now-standard (by mandate) features were once optional. I dug up a window sticker for a 1990 Toyota Camry (pictured above; also see here). ABS was optional that year. And the option added $1,300 to the car’s MSRP. Here’s another article – also from 1990 – discussing the cost of then-optional ABS. The writer confirms the range $900-$1,000 or thereabouts.

Now, it’s true that in 1990 ABS (and traction control, which works using the ABS) were relatively new technologies and, as such, their cost was higher then – in the same way that the first microwaves and laptops were more expensive than they are now. But even if we cut the cost of ABS/traction control by a third to account for amortization of the R&D, the lowered cost of components – and so forth – we’re still looking at another $300-$500 per car. And, again, we’re low-balling in order to put the most favorable (to the control freaks who mandate all this stuff) spin on everything.ABS pic
Down-the-road costs should also be acknowledged. An ABS system includes additional parts such as wheel speed sensors, the ABS pump and of course the computer brain to run it all. While it is not guaranteed that every owner of every ABS-equipped car will have to pay to replace the car’s ABS pump (several hundred bucks, typically) or wheel speed sensors or its computer, the possibility is both there and not remote. Indeed, it becomes increasingly likely that some ABS (or traction control) related component will fail as the years go by and the mileage accumulates. And the bill for repairs will be sent to you – not the bureaucrat or pol who forced you to buy ABS in the first place.
 * Air bags -air bags picture
This is the Big One. Not merely because the airbags themselves cost a lot (though they do cost a lot) but also because of the sheer number of them in the typical modern car and because of the ruinous repair costs they impose if they deploy.

And – even if they don’t deploy.

Let’s start with the cost of the bags themselves. And the number of bags we’re dealing with.

Very few  cars built within the past five years have fewer than four air bags – and six or more is very quickly becoming common. Some new cars have eight or more air bags. There are frontal impact, side/door impact, knee and roof air bags.

Let’s assume for the sake of discussion that each air bag and its related components adds $100 to the bottom line price of a new car. Minimally, then, the air bags add $400 to the price of a car equipped with just four air bags. Which, again, is very few new cars. Most 2014 cars have at least six air bags.

So, $600.

And $100 per air bag is probably under-estimating the cost by several hundred percent. Consider that the cost to replace just the driver and passenger side air bags is typically in the range of $1,500-$2,000.

That’s for two.

Remember: Almost all new cars have at least four – and most have six.

Now, it’s true that replacement costs – and factory-installed costs – are different kinds of costs. But the replacement costs are just as real. Which you’ll discover, if you get into an accident in an air bag-equipped car. Especially if it’s an older car. If the average retail value of the vehicle is much less than $10,000 it is extremely likely the vehicle – even if otherwise repairable – will be “totaled” by the insurance company solely because the cost to replace the air bags can and frequently does push the fix-it estimate to within 50 percent of the vehicle’s pre-accident value. At which point, most insurance adjusters will junk the car rather than authorize repairs.

Even if you never wreck – and the bags never deploy – you still pay. Because your insurance premium – everyone’s insurance premium – is based on the cost to repair (or to throw away) the air bag-equipped car in the event of an accident.

But let’s be conservative and call it another $600 “up front” for a car with six air bags – and again, we’re likely low-balling it by orders of magnitude. irs

All right. Let’s add ‘em up:

Back-up cameras: $500.

ABS/traction control: $1,000.

Air bags (six): $600

That’s a very conservatively figured $2,100 in Additional Sticker Shock. And this rough math does not include the unseen – the harder to nail down – costs imposed by such things as bumper impact, rollover/roof crush/side impact standards, the huge costs of complying with the federal government’s ever-increasing fuel economy standards (the cars save you money on fuel, but cost more to buy) and its ever-more-draconian (for ever-diminishing-returns) tailpipe emissions standards. These things probably add – again, very conservatively estimated – 20 percent to the typical new car’s sticker price.

If we assume a new car with a sticker price of say $20,000 (and this would be a modestly priced/entry-level car these days), 20 percent would be about $4,000 – plus the $2,100 for the add-ons (ABS/TCS, back-up cameras, air bags, etc.) .

So, $6,100 of the $20,000 car’s MSRP is the cost of the mandates to you .

Put another way, if these mandates didn’t exist – if the car companies were free to build cars the way you, the customer, wanted them built – it would mean that $20,000 car might only list for $14,000. And there would almost certainly be “basic transportation” new cars available for $8,000 or less.

Such cars are, in fact, available in other parts of the world. (See here, here, here and here, for some examples.)

Parts of the world where the government hasn’t yet interposed itself between the customer and the car company – dictating to the car company how cars shall be made . . . and to customers, what they shall buy.


Eric Peters is a longtime car/bikes/Libertarian-minded journalist. His book, “Road Hogs,” came out June 2011.

Peters has been writing a weekly column about cars for almost 20 years now. He is the author of “Automotive Atrocities” and “Road Hogs” (MBI). He lives in rural SW Virginia with his wife and a polyglot crew of animals.

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