The August 2009 Consumer Price Index – the main indication of inflation – has a surprise. It’s one that may mean no raises next year if you receive social security, invest in TIPS or if your income is somehow tied to the CPI. The Bureau of Labor Statistics (BLS) apparently decided those Cash for Clunkers checks decreased the price of new vehicles. With an estimated 700,000 cars bought under the program, that’s a lot of money not being counted as what Americans spent on cars.
Look on the first page of this 100-page PDF, scan down towards the bottom of the page and you’ll see an entry for “New vehicles.” There you’ll see that, compared to August 2008, new vehicles cost only one-half of one percent more. Compared to July 2009, the price actually went down 1.5%.
If you were shopping for a new car last month, you probably didn’t find the price of new cars lower than July or last August. Yes, you may have paid less because of that $4,500 check from the government, but does that mean the sales price was less? Well, that’s apparently what the BLS, the folks responsible for keeping track of the Consumer Price Index concluded. John Crudele wrote about this in the New York Post. He says, “the folks at the US Bureau of Labor Statistics confirmed to me that the subsidy received by those 800,000 [?] car buyers will be handled in the CPI next week as if the price of a car fell by $4,500.”
Another writer suggests, “In the latest CPI calculation, the ‘Cash for Clunkers’ discount counts as a decrease in the price of a car! Suppose a car cost $15000 before, but now costs $10500 including the ‘Cash for Clunkers’ credit. The ‘new car’ component of CPI therefore decreases by 30%.”
The problem with this sleight of hand is that it masks true increases in prices, i.e. inflation. That may be good for a government that wants to pretend that spending trillions of dollars doesn’t have an inflationary impact. It’s not particularly good for you and me.
What’s next? Do we disregard all that money being spent on public works? How about that $8,000 first-time home buyer tax credit? Are housing prices going down (even more)? As housing prices start going up in some parts of the country, are they really not going up? If the government starts paying (more) for healthcare, is it disregarded? Is it only money that comes out of your pocket (and mine) that counts?
When the Cash for Clunkers program was announced, I told friends that they could forget negotiating for a new car. The advice used to be that you negotiate the price of the new car and then, separately, you negotiate the value of your used car. If you don’t separate the two, the dealer would let you ‘win’ the negotiation on the new car by low balling the value of your used car. Cash for Clunkers took away that ability to separate the two. It would be interesting to see the sales price to sticker price ratio of new cars sold in the months before Cash for Clunkers and that same ratio when a car was sold under the Cash for Clunkers program.
Final Thoughts
What do you think? When the government puts money into the pot so you can buy a car, a house or a widget, should that check, discount or rebate be treated as part of the true cost of the item? Does leaving it out artificially reduce inflationary pressures? Is this just a way for the government to print money without (at least ostensibly) creating inflation?
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Walt,
OF COURSE the part paid by the government should be included in the calculation of the true cost of an item. It’s part of what the seller receives. While it is true that government incentives may drive up the price of an item since sellers and buyers alike may fell less a need to negotiate, that in an of itself shows the folly of government programs. When costs and risks are spread over large groups individuals do not act in the best interest of those groups, driving up the costs and inefficiencies for everyone. Personal responsibility and personal accountability drive effectiveness and efficiency. That is why so many social programs do not really work and cost much more than the same programs done at the individual or local level.
The question is really if you add back the $4500 into the price of the car, would anyone have purchased them? For many of the Cash for Clunkers purchases, the answer is no. That is the reason we saw a large increase in demand. A car selling at $15k that sold for $10,500 would either not have been sold, or sold for an unknown price less than $15k. So why should we count $15k as the price?
The great fear of inflation has so far not appeared despite arguments from the many that we will see it. For the most part, everything that you buy is cheaper this year than it was last year or the year before it, with only a few exceptions (some food for example). If you see a drop in the CPI it’s not because the government is hiding it, it’s because it doesn’t exist at the moment.
http://www.nytimes.com/2009/05/29/opinion/29krugman.html?_r=4