no third solution

Blogging about liberty, anarchy, economics and politics

Chrysler Kills the Auto Lease

July 29th, 2008

Leasing was the slightly more benevolent  version of “planned obsolescence,” which almost ruined the industry in the 1970s.

Throughout the last 20 years or so, it has become increasingly hard for the average person to finance the purchase of a car over a reasonable period of time (less than 3 years) without a significant initial cash outlay. About a quarter of the national market leases cars instead of buying them, because even though they might never have the joy of owning a car free of encumbrance, they’ll also never have the Russian-roullette-like joy of replacing rotors, spark-plug wires, batteries or transmissions. They were content with a more-or-less perpetual payment, in return for always having a new car that was under warranty.

This is why I thought it was a rumor, when I heard that Chrysler (and probably to be followed by others) will discontinue leasing as a financing option starting tomorrow.

Then, an e-mail hit my in-box from Chrysler.

We are contacting you to let you know that recent press announcements about Chrysler and Chrysler Financial no longer offering leasing do not change our commitment to you. We’ll continue to provide our lease customers a superior vehicle ownership and finance experience.

The e-mail directs the reader to a website, predictably dripping with spin:

Effective August 1, Chrysler Financial will discontinue offering new lease products in the United States and is shifting its resources to offer customers new enhanced installment loans. This announcement is based on broader industry and economic trends that have made leasing less favorable for our customers.

Less favorable for your customers?

If leasing were truly less favorable, and financing more favorable, from the customers’ points of view, you wouldn’t have your back to the wall issuing damage-control counter-press-releases at 11pm on a Tuesday.

No, the broader economic trends have made leasing less favorable for the automakers’ financing arms; determined to “make it up in volume,” they have flooded the market with heavily incentivized leases over the past few years. As all those leases expire, the used car lots are flooded with gently used, 2- and 3-year old vehicles with relatively low mileage. The glut of supply over demand caused prices on used cars to decline. And if you haven’t figured it out by now, used cars are a near-substitute for new cars. Sur-fucking-prise: the relative abundance of used cars has put tremendous downward pressure on automakers struggling to sell new cars.

Really? Their economic model couldn’t account for this?

They should have been charging more for leases, in order to accurately account for the depreciation (which is what a lease is designed to do). Of course, that would’ve resulted in moving fewer vehicles off the lot. But their economic model failed to predict that as they dumped millions of cars on the market, the buy-back price of those vehicles two or three years hence whould drop, significantly. To be fair, there are other factors at play here, like the rising cost of gas, a recession, stagnating wages and high unemployment, but I’m not sure how any of these contribute to the favorability of putting 10% down on a rapidly depreciating asset, just to be saddled with $500 monthly payments for the next 3 years.

The market is oversupplied enough to permit relatively destructive competition in the lease market, there’s little reason to believe that traditional financing will not be similarly affected. There are simply too many cars, and too much productive capacity (not to mention, not enough disposable incomes) to tolerate the prices emblazoned on window stickers at car lots across the country.

This was a no-brainer, which should have only become more apparent as the perfect financial SNAFU came to a head over the past 24 months:

Manufacturers have been flooding the market with deeply-discounted trucks, or promo-rates on leases with little or nothing down. When those leases all begin to expire at about the same time, there will be a glut of used trucks in relatively good condition on the market, this glut should tend to force prices downward.

No matter which way you spin it, the prices charged for new vehicles are going to have to fall, and unless the automakers can figure out how to make that work to their advantage (it’s not like they have a captive market in Auto-Financing – every bank and credit union issues new-car loans), killing the lease option isn’t going to be enough to stop the bleeding.

The Packaged Ice Monopoly

July 1st, 2008

Three companies in packaged ice (i.e., the sort you pick up at a convenience store or gas station on your way to a barbecue or beach party) are facing conspiracy and collusion charges (permalink ice.pdf) under Sherman. Now, wherever I go packaged ice is somewhere between $1 and $2 a bag. That seems pretty reasonable to me, but let’s examine:

“The ice companies behaved as you would expect market allocators to behave: They basically charged whatever they wanted for ice because there was no competition,” said Kendall Zylstra, a suburban Philadelphia lawyer who filed the first suit in Detroit on behalf of suburban Philadelphia gas retailers that sell ice.

Zylstra would have us believe that packaged ice sells for $100 a bag.

I know a bit about anti-trust regulation, and a bit about economics, and a bit about cartels. This is the all-important consideration: cartels are inherently unstable, because the incentive exists for each member to reneg on the illicit agreement.

In all fairness, I know practically nothing about the wholesale market for ice, but consider the actual problem here. There is an alleged monopoly on the production and transportation of ice.

  • Ice is frozen water.
  • Water is everywhere.
  • Refrigerants are everywhere.
  • Transit companies with refrigerated trucks are everywhere.

If, in-fact, there was “no competition”, it’s not primarily because three companies conspired and colluded to keep prices high.

If it’s not possible to compete with one of three oligopolistic companies, it’s not because the actual market forces for the production, packaging, and transportation of ice are atypical and require some specific degree of business acumen, and a penchant for bearing greater-than-normal risk. What’s infintely more likely is that legislation and regulation are prohibitive, and new entrants have a difficult time establishing themselves.

Manufacturing Broken Windows, One Tank at a Time

June 19th, 2008

A peculiar sort of tragedy of the commons is the not in my backyard argument, used to forestall or prevent certain “undesirable” developments (like airports, Wal-Marts, nuclear reactors, or oil derricks). On the one hand, the tragedy of commons asserts that when property rights are not clearly defined, the property in question will be over-utilized, depleted, destroyed, etc. The NIMBY argument is kind of the opposite: when property rights are not clearly defined, NIMBY properties won’t be utilized, used, or developed at all, instead they sit idle.

It’s queer that the NIMBY argument is used against noisy, pollutive or other undesirable plants, but not generally applied to military development. For example, a lot of people really hate war, but they don’t get up-in-arms about the Tank Plant down the street that’s churning out the latest in mass-murder technology (permalinked PDF):

General Dynamics, which has operations also in Sterling Heights and other parts of the country, is working on a $2-billion contract to help develop combat systems being built over the next five years.

The goal: Make everything more agile, more lethal and less reliant on manpower by 2015, when the Army’s 14-part Future Combat Systems is to be integrated.

“It’s a new way of fighting,” said Paul Mehney, associate director of communications for the program.

To review:

America’s chief export is war — and practically all of the countries that “hate us” are running a massive trade deficit in that department. — America’s Chief Export, 10-23-2007

The new weapon will allegedly be able to fire shells up to eight miles away. Boasts Mehney, “We’re going to be able to hit what we can’t see.”

Yeah, nothing like tossing volley after fucking volley of depleted uranium eight miles into the distance. If military accountability with regards to “collateral damage” and haphazard murders is at an all time low (and it probably is), prepare for it reach new depths of indecency.

But nobody cares. Nobody ever says “Not in my backyard!” to a military base or a tank plant. They generally don’t hate it when General Dynamics or Lockheed Martin begins development of new superweapons in their backyards. Probably because they thing that GD or LM are creating jobs. In actuality, these developments make us all worse off.

Behold the fallacy of the broken window.

A tank plant simply can’t be measured in terms of the employment it provides, because it is a net-negative value proposition.  A tank plant must be measured in the terms of death and destruction it produces, and is the sort of thing that nobody, anywhere, ever, should be happy about.

General Dynamics, of course, employs a certain number of people here in Sterling Heights, or at the Warren tank plant (is that still around?) But these companies are effectively paid for with money that everyone else has earned, but which has been stolen from them through taxes. In the absence of confiscatory taxation, people would be spending their money on something else, and those employed in the war-making industries would be doing something other than wasting scarce and valuable resources on the production of goods the only purpose of which is to cause death and destruction, brown people in far away lands wouldn’t have to worry about depleted uranium shells screaming through their front windows in the middle of the night, they wouldn’t hate us, and we’d have more stuff and leisure and time to enjoy. Money not directed towards the production of mass-murder would instead be directed to some productive endeavor, and we’d be better off, as a result.

Everything that’s used in the creation of weaponry has other uses, as well: the engineers could be designing cars or refrigerators, the laborers could be welding bicycles together instead of rivets on armor, the metal components and raw materials could be used to make a million-and-one other things. And the only way to divert these resources towards the production of tanks instead of cars or refrigerators is by paying more for them than they’re otherwise worth. Everything the government procures is necessarily, and by definition, overpaid for!

See, it’s just not as simple as “the people employed by GD would simply be employed somewhere else, with no net effect.” It can’t be this simple, because what General Dynamics creates has a cost in measured in terms of real resources, and eventually is designed to destroy real resources. The actual cost of an Abrams tank is the sum of the resources used in its creation and maintenace, plus the resources and lives it destroys during its useful life, plus the opportunity costs associated therewith. 

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Nobody sees the death and destruction. The simply see that the glazier is employed, and they smile. Forget about the fucking glazier. Imagine a world where windows don’t break, or better yet, a world where there are no windows.

no third solution

Blogging about liberty, anarchy, economics and politics