By Dave Herman
Some of my students are questioning the logic of working. Why should they work when the cost of going to work can equal their monthly paychecks when you consider the cost of gas, insurance, repairs and the car it itself. Still, I tell them they must persevere as it is hard work and ethic that will take them through these rough economic times.
So the question this month: why is everything so expensive? I don't have an answer for everything, but I can give you a starting point beginning with why cars are so expensive.
All budgets work the same, whether it is personal, business, or country; it is all basic economics. What is economics? The word continues to evolve, mostly for political reasons to support a particular agenda, but in the words of Thomas Sowell, economics "is the study of the use of scarce resources that can be used in different ways."
When you are determining your budget, you are deciding between your necessities (what you need to live on), and your wants (what you can afford without creating a shortage in your resources). Resource in this case is your income, savings, your money, no matter where it lies. Life is a trade-off between your money, your needs, and your wants. You need to eat to survive, so your budget might be $80 per month if you choose to eat rice and beans. But you decide if it is worth having less money in order to eat out.
You might decide to eat junk food, thinking it is less expensive, but in the long run
it will deplete your energy (resource) and money (doctor or dentist bills). Again, you have traded off your health, your money, or both (resources) for pleasure. Your choice.
Companies work the same way. So let's take the automobile. The basic car,
body, engine, chassis (with their respective subsystems) is all that is necessary
to get you from point A to point B. That is what car companies used to sell in
the early years. As time went on they found the public was willing to trade
some of their money - resource - for more power and more luxury. If you had the
money, you could choose the engine size, horsepower, automatic or standard, power windows, power steering, air conditioning, to name only a few. You could even choose from a multitude of interior colors (not just tan, gray or black) and exterior color combinations. There were probably fewer models of cars but hundreds of options for the consumer and his budget. Out of concern for their customers, car companies made seat belts an option in 1955. Customers had the choice to decide resource - money - for safety, or not.
As the automobile evolved so did safety groups, environmental groups, individuals, and insurance companies. Out of concern for public safety, these groups lobbied Congress, the legislative branch of government, to create regulations and standards on the automotive industry. The Federal Motor Vehicle Safety Standards and Regulations was created in 1967 in response to these requests. This sounds like a wonderful idea to some, but to others the added cost of all the safety and environmental mandates made the car more expensive, thus leaving many unable to afford or purchase a new car. The economic trade-off here was the government's choosing its idea of safety (see http://www.nhtsa.gov/cars/rules/import/fmvss/index.html and https://www.federalregister.gov ), clean air and gas mileage in exchange for the public's freedom to choose. This resulted in the loss of the car buyer's choice of options and affordability. Further, it removed ingenuity of the automakers as they were now restricted to think within the confines of government specifications.
So the question of why cars are so expensive can be answered first by government regulation. Today, cars are basically the same because they are regulated to be that way. Left to their own private enterprise, car companies would build to suit numerous markets: luxury, high horsepower, gas mileage conscious, low budget stripped, ultra safe. Within the various models would be a multitude of options to give the customer trade-offs to suit his budget and his desires. This would be a win for both the company and the customer.
The other reason cars are so expensive, in the American market, is the demands from the union on the automakers. In 2005, American auto workers were making $70 an hour (taking into account all their benefits) in comparison to the nonunion foreign auto manufacturers whose employees were making $50. In 2008, the U.S. automakers were broke and many investors in GM lost their savings. The bailout cost U.S. citizens billions and still today the 26 percent stock holdings of U.S. citizens via the government in GM is at a loss of nearly $14 billion. What is being exchanged in this case is the buying power of the dollar; in other words, $1 today is equal to 14 cents compared to when cars had options and customers had choices (1965).
Before his retirement, Dave Herman ran one of the largest independent German service centers in Northern Virginia. He has built, raced and taught racing to Porsche/BMW drivers. He lives in Shenandoah County, where he has opened a driving school. Email your comments and questions about anything automotive to firstname.lastname@example.org.