by Tyler Cowen
on October 31, 2011 at 1:48 pm
in Uncategorized |
1. Luigi Zingales on the decline of meritocracy.
2. Blog on cocktail party economics.
3. Merkel calls for a minimum wage, and how the German post office is restructuring, and Italy is not multiple equilibria.
4. How the really desperate buy their automobiles, excellent story.
5. Hackers vs. Mexican drug cartel, who will win?
“Nevertheless, the [Horatio Alger] stories were close enough to the truth that they became bestsellers, while America became known as a land of opportunity—a place whose capitalist system benefited the hardworking and the virtuous. In a word, it was a meritocracy.”
“However, it is not always the hard work and clean living that rescue the boy from his situation, but rather a wealthy older gentleman, who admires the boy as a result of some extraordinary act of bravery or honesty that the boy has performed. For example, the boy might rescue a child from an overturned carriage or find and return the man’s stolen watch. Often the older man takes the boy into his home as a ward or companion and helps him find a better job (sometimes replacing a less honest or industrious boy).”
Libertarianism in a nutshell. “Merit” means making the oligarchs happy.
That is the exact opposite of the truth.
*cough* investment in human capital *cough*
Because oligarchs don’t like seeing children killed in carriage accidents? Value courage? Good for the oligarchs.
The used car story opens with a woman making $27k who puts $3k down on a car and agrees to make interest payments totaling over $18,000. My first thought is, the story says the car was purchased in 2009, a 2007 vehicle was pretty new. Could she have considered a $3000 car paid for in cash or a $6000 car instead?
She wanted the newer, more expensive car. The dealership sold it to her, betting that at the terms they offered they could afford to take the risk. It wasn’t a crazy risk, she paid for a year and a half before defaulting.
Rather than bashing the margins of these dealers, presumably calculated based on sales price (which they do not realize when customers don’t pay), recognize the risk embedded in the decision to sell to this woman. She was paying 20% interest because there was a high likelihood she wouldn’t pay. And she DIDN’T!
It doesn’t much matter if a dealer sells the same car over and over, or sells a car and buys different inventory to replace it, either. The vehicle may have a higher or lower cost basis, but in any case the dealer would certainly prefer the customer continue to pay as-agreed. It’s simply a known risk that a meaningfully large portion of customers will not.
The article criticizes the ‘market power’ of used car dealerships. I do not think that phrase means what the piece’s authors think it means. When the piece notes that there are 33,000 car lots carrying their own contracts.
With 33,000 such lots, can you find horror stories? Sure, a contract which listed an incorrect and too-low interest rate relative to the actual payments. I’ll leave it to the courts rather than the news story to determine whether there was fraud, but it’s hardly surprising that one such story can be found.
I love how this is the fault of evil businessmen and not customers: “Some dealers purposely structure deals with a high likelihood of default, assigning payments that exceed what the borrower can pay, consumer attorneys say.”
I should say, I grew up with family in this business. And this statement makes no sense. Because much of the time the cash for payments would not be coming from the purchaser but from family and friends. (Much of the time the purchaser wasn’t the driver in any case, but rather just someone who had a drivers license as required by state law to sell the vehicle.)
You do feel bad for people who cannot afford nice new-ish cars. But the answer is less expensive used cars, it’s tradeoffs within the household budget to afford those, and it’s growth-oriented policies. Not beating up on the car lots which cater to the demands of their customers, specific instances of actual fraud notwithstanding.
What would happen if interest rates were capped, pricing was limited to a certain percentage above or below Kelley Blue Book value? These customers would be unable to make the choice to buy these cars. They wouldn’t just get the same cars for less. Because so many with their profile simply do not pay.
“I grew up with family in this business”
Huh. I never would have guessed.
Not to mention the dramatic repossession required her to bring the car back voluntarily. Unethical perhaps, but hardly overpowering.
That still smells like fraud to me.
The real estate bubble and the student debt bubble are teaching me that giving people more options is not always a good thing. If this woman couldn’t borrow money, she would have gotten an older car. You can get lots of decent cars for around 6K. They will have comfort-level issues but generally not significantly more safety-level issues or suddenly-unable-to-drive issues.
They don’t have $6,000. They don’t have savings accounts. They don’t have checking accounts. Every penny that comes in goes out, plus some extra.
This wasn’t a 17 year old kid. She was 35. How paternal can we be as a society?
Word up. And the do-gooders won’t even consider the unintended consequences of intervention in this market.
The behavior described in the story is objectionable precisely because the libertarian fantasy world in which everyone is a rational, intelligent and wise consumer capable of looking out for his own interest is not the one in which we live. The dealerships described in the story take advantage of the imprudent, ignorant and foolish for profit. Some may rely on outright deception, while others simply rely on the moral and intellectual weaknesses of their customers. Most probably use a little bit of both.
Of course, you can blame the consumer for being an idiot. The consumer is, after all, an idiot. But this rather unfair. The consumer was born an idiot and will always be an idiot. He did not choose his fate. The entrepreneur, on the other hand, decided to go into a line of business where taking advantage of people’s weaknesses is the singularly profitable activity. It seems fair to blame him more than anyone else.
Most of those customers are making a very rational decision. They know they have bad credit, they know they need a car and they know how much they need to pay. The Times article cherry-picks a few incidents.
That’s why I propose a button, written in ink you can only see with special glasses, and we only give the glasses to the altruistic people.
The entrepreneur, on the other hand, decided to go into a line of business where taking advantage of people’s weaknesses is the singularly profitable activity. It seems fair to blame him more than anyone else.
And how do you tell the idiots apart from the non-idiots deserving of your protection and my tax dollars oh wise one? And what if we disagree in our determination of who is awarded with idiot status?
That $3,000 down payment should have been enough or nearly so to get a decent enough used car… perhaps a lot of cheap used cars are now gone due to the Cash for Clunkers program?
Used car prices have been climbing for a while, after cash for clunkers (thank you US taxpayers for getting so many cars for the working poor off the street!) AND because increasing numbers of used cars in America at auction are being shipped overseas (thanks to a dollar not being worth what it used to and because many cars sold in America have “luxury” features and command high prices overseas). See Steve Lang’s posts on thetruthaboutcars.com
Also, with the advent of eBay and Craigslist, it is much easier for private sellers to see how much others are charging, so private sellers are now much better informed about prices and consequently charging more like dealers.
I had no money last January and really needed a car and was lucky to find a fairly decent ride under $1500. Sold it in August for $1000 to a young man in my neighborhood who called me within hours of me putting a sign in the window. He said he had been looking for more than 2 months but hadn’t seen anything under $2000. He was desperate for a car to get to work and just didn’t have much money.
Tough times, tough times.
In the first twenty years I bought cars, other than one new car, I never bought a car that wasn’t at least 7 years old, when I had more money I bought a better 7-8 year old car, a passat versus a mercury Topaz, and I usually got upwards of 70k+ miles on them.
And the couple who bought a mercedes, what the heck were they thinking.
It’s crooked, but I don’t really think the loan terms should be illegal. You shut that down and there will be no way to buy a car at all for the truly desperate. The fact is that they are just preying on people with really defective judgement, but how is this different from a bank who offers terrible credit card rates, but just calculates that the customer will make payments?
You do feel bad for people who cannot afford nice new-ish cars.
No I don’t. When I was 27 I was driving a car worth about $2000. No air conditioning? I had to fix rusty panels? I had to do mechanical repairs myself? It was dreadfully unfashionable? So what?
Put up with it until you can afford something nice.
If only we could get a handful of Democrats elected to national office…
$3,000 is plenty to pay for a car- I never bought a car for more than $3000 before cash-for-clunkers. Heck, you could buy 6 cars for $3,000 and just sell it for scrap whenever one broke down. Used car prices have skyrocketed recently, but even so $3000 is more than enough. Very baffling why you would instead pay $8,000 for a $4,000 car with 20% interest.
Because one is stupid. As most of these customers are. Vive la difference!
Because they don’t have any savings.
Because they’re feckless….
Ted Craig: “They don’t have $6,000. They don’t have savings accounts. They don’t have checking accounts. Every penny that comes in goes out, plus some extra.” & “Because they don’t have any savings.”
What happened to basic reading comprehension? From the article:
“She put $3,000 down and drove off in a 2007 Ford Fusion”.
So yes she had $3,000, obviously.
JW, what happened to basic math? $3,000 is half of $6,000. It doesn’t say when she bought the car, so there’s a good chance that money came from her tax refund.
Clearly she had $3,000. Your implication seems to have been that she had no source of money and thus no choice, but clearly she did have money. Had she bought a $3,000 car this wouldn’t have been a story.
Your hypothetical tax refund is beside the point. The only way to get a large tax refund is by excessive withholding on taxes throughout the year. This is, in effect, a savings plan, regardless of it’s financial merits. The basic statement that people making $27K per year “don’t have any savings” is unproven and probably wrong.
Man, that’s dumb. I said no savings account. Now you’re trying to save tax withholdings are savings. The average tax refund is about $3,000.
I don’t think it’s particularly smart to assume without any evidence that the $3,000 she had must be a tax refund.
It’s an educated guess based on the fact that tax season is for buy-here, pay-here dealers what Christmas is for general retailers and her down payment happens to match the average tax refund. So yes, it’s smart.
There are all sorts of people in the world who buy such cars.
My sister-in-law doesn’t care what the price is, nor what the interest rate is, she’s a drug addict and she’ll drive the car for a few months before it gets repoed. She used to make good money, until this latest arrest. It will be decades before my brother (the rest of the family jokes about how he has WELCOME tattooed on his forehead) gets her bad deeds off his credit report.
My ex’s parents would routinely fall for sweet talking from some “good old boy” from the home country. They would get angry at me for explaining what the actual cost of the car was, and what the actual APR was. It got to the point where I was forbidden from discussing it or even coming with them to check out the car (I was in the car business back then).
I think the author of the meritocracy article drastically underestimates pre-1800’s social mobility. I think the conventional wisdom on social mobility needs some drastic revisions.
4. is not excellent. It’s very slanted. It never addresses the main reason these people buy cars – they need them!
The author also fails to understand the concept of cash flow.
I would argue that markets tend to be much more egalitarian than a purely meritocratic society would be. Looking around at different vocations, it occurs to me that the ones with the most inequality are the ones which can be best measured, and hence, more meritocratically compensated – sales being the most obvious.
I wonder, to the extent that there is more inequality now, if it is partly the result of new technology that allows for more meritocracy in some fields, either through new forms of measurement, or through new organizational forms.
If I am correct, then this seems to introduce a philosophical problem. Considering redistributive policies in defiance of meritocracy is much different than considering redistributive policies in defense of meritocracy.
That used car article is excellent! I want to be in that business! Those dealers must be pissed that the media is revealing their juicy margins.
They also have an extraordinarily high failure rate. Remember, those cars don’t magically appear on the lot. You’re selling thousands of dollars worth of vehicles for hundreds of dollars down and a promise people with a history of not paying their bills will pay you back. The capital risk is enormous.
Where there are high margins, competition is not far away. The difficult part of this business is not dealing with deadbeat customers. The industry has refined its collection techniques to a science. No, the hard part is generating enough sales to cover your inventory and fixed costs. A sucker may be born (or immigrate) every minute, but that is not nearly enough to make profitable every used car lot in the thousands of ramshackle neighborhoods across the country.
By suckers, I assume you mean people who need cars and are bad credit risks.
No, I mean people who make 20 grand a year and agree to buy an old Mercedes for twice its market price on terms that give them even odds of losing the car in 18 months. It may be difficult to admit it, but there are people out there who are not very intelligent and who can be easily taken advantage of. They are not uninformed because they prefer to read Henry James in what little spare time they have; it is literally not possible for them to calculate their payments based on a given principal amount and interest rate. They desires and preferences are base and easily manipulated. These people will be easy prey for salesman who rely on pressure, trickery and appeals to ethnic solidarity to convince people to buy things they shouldn’t. There are millions of these people, and they are becoming ever more numerous.
If those jerks would stop buying cars at above market prices the market prices would be lower for those of us who will make our payments.
“there are people out there who are not very intelligent and who can be easily taken advantage of.” Then we must pay schoolteachers more to remedy this situation.
By the way, if we’re going to throw around claims of stupidity, who is more stupid – a person who takes out a loan of $5,000, albeit with 20 percent interest, to pay for a car that they need, or somebody who takes out a $100,000 loan to pay for a degree they can’t use.
You can’t reduce an education down to a commodity such as a car.
There is more to getting a degree than getting a job. That this is difficult to isolate empirically doesn’t mean it ought to be ignored.
That being said, it would be interesting to observe more detailed analysis of how these car loan operations operate, and how they differ from more conventional lending institutions. My guess is the relationship between the structure of the contract and the kind of transaction is pretty similar, only that we observe differing realizations of it.
Further, I reject the idea that all customers are stupid and are getting conned, if that was the case, these car loan things would be out of business. Comparing with the average overcharging mechanic, for instance, the information asymmetry problem is vastly lower. Surely you can predict – roughly – whether you can afford a car or not. I mean, Kelly’s Blue Book exists for a reason.
Only a libertarian would believe that sleazy car dealerships would be out of business if they were, in fact, sleazy. Welcome to the real world where people are stupid and con men thrive.
Why would they be any different? In both cases, there are suitable alternatives that are less costly. In both cases, the salesman exploits the weaknesses of the consumer to convince him to overpay for a product that is not worth half what the salesman is charging. Same thing.
And I am saying that it isn’t the same thing – you ought to value education independent of what it “gives” you
I mean school is a great time not because it got you to college but because it is a great time
from your comment it seems like you look at education as a product, which is a terrible way to look at it
what is the alternative to getting educated, anyway?
Can’t we be mad at the stupid people just a little?
Holy moly are these sad stories the best the LAT could do? Because Ms. Lee’s down payment would have gotten her into a perfectly serviceable used car, albeit one a lot less pretty than a Fusion.
I’m no financial genius, but I was brought up to pay cash for cars, and set ones budget accordingly. I have the good fortune to be doing better than anyone in this story, and my car budget is way lower than any of these folks.
$3000 cars exist, they run, and the humble examples of same are functional and safe. They are not as nice as the cars these folks are buying, but I guess it depends on whether you’re more afraid of defaulting on your car payment or being seen in a $3000 car.
The stories of outright fraud are another, more dreadful tale, but I stil find these tales unimpressive.
1. “The fundamental role of an economic system, even an extremely primitive one, is to assign responsibility and reward.” Alas no. “In human societies, responsibility tends to take the form of employment, and the rewards are money and prestige.” No, no and no. This is not a libertarian viewpoint, not at all. And who cares about Horation Alger anyway? All he’s good for is as the basis for a straw-man argument against markets.
At the same time, only 19 percent of Americans thought that coming from a wealthy family was important for getting ahead
What the hell?
We are the 19%!
4) Two words: walkable cities
Tell that to the Minnesotans.
Well, we do have Skyways downtown, but getting there is not happy making. Ever wait 30 minutes for a connecting bus at 10 below (Fahrenheit) before windchill?
The hackers have already thrown in the towel.
The best thing about the used-car story is the Google ad prominently placed near the top of the page. Spot on:
Easy Car Loans
No Money Down. Same day Approvals. Apply Online – Fast, Free & Easy.
If you’re going to have regulations, it seems that regulations that call for clear disclosure are preferable. Proposal: Require prominent disclosure of the lifetime cost of a loan, just like they do with credit cards showing how much you’d pay if you only made the minimum payment. Many people are math illiterate – particularly with NPV calculations – but not nearly as many will make stupid decisions when the costs are clearly laid out.
“Any system that allocates rewards on the basis of merit inevitably gives higher compensation to the few, leaving the majority potentially envious.” This is an undefended assumption. It is a bad assumption. Meritocracy is a system for determining who is placed into positions of power/authority/leadership. It is not a system for determining how much those people are paid relative to the average worker.
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