Housing policy lessons from the microchip shortage
Curtailing supply is bad; rising used car prices are not a wealth-building strategy
American automakers sold approximately 14.9 million cars in 2021, a 2.5% uptick from the pandemic-disrupted year of 2020 but still below the pre-pandemic rate of 16 million per year. The reason for the curtailed sales is not a lack of customer demand, but the stubborn shortfall of automotive microchips that emerged at the beginning of the pandemic when factory owners wrongly anticipated a prolonged slump in demand.
With demand for cars high but supply low, the price of new cars has been surging.
And the surge is noteworthy not just because of its magnitude, but also because pre-pandemic, this basically never happened. Car manufacturing is a competitive, technology-driven industry that featured rising productivity and flat prices. Then came the chip crunch, and prices soared.
But as a longtime housing guy, what’s even more interesting to me is that the price of used cars and trucks has also surged in the face of the new car supply crunch.
In the housing context, left-NIMBYs often deride the idea that adding supply of new upscale housing will impact the affordability of older units as “trickle-down economics.” Yet here is the auto industry giving us a live-fire experiment in what happens to the price of used durable goods when you curtail new production of the same kind of goods. And I think it’s really just overwhelmingly clear that if we were able to boost car production in response to the rising prices, this would in fact spill over into the used car market. Affluent people prefer new cars to used cars. But when the price of new cars goes up, some people drop out of the market for new cars and buy used ones instead. That bids up the price and makes even the cheapest cars hard to afford.
Many housing assertions are clearly false when you look at cars
You can learn interesting things about the housing market by looking at this car situation, primarily because there’s so much consensus about cars.
There’s a kind of roaring debate about to what extent inflation is driven by supply-chain issues versus a general surge in demand. I am mostly on Team Demand. But there’s really no debate that the increase in car prices is specifically about automakers’ reduced output in the face of a shortfall in the availability of chips.
And there’s lots of other stuff people don’t argue about. Nobody denies that the increased price of used cars is related to the reduced production of new ones. Nobody says that you can walk around any city and see tons of vacant cars and that must be the real problem — even though it is true that at any given time, there are tons of vacant cars. Nobody blames billionaire car-hoarders for the shortage of cars even though it is true that there really are rich car collectors who own far more vehicles than they actually drive. Nobody blames “speculators” even though it’s true that there are middlemen who make a living buying and selling used cars. And most of all, nobody blames the rapacious greed of the world’s car companies even though auto executives do enjoy the current high margins.
Precisely because automakers are greedy, they would increase profits by making and selling more cars if they could. Indeed, Tesla, which has managed to use superior software to circumvent chip supply issues, has been doing great.
Instead of dumb sloganeering, we are having a pretty reasonable policy debate. Some people look at the large social and economic costs of this shortfall and say we should spend money building more resilience into the chip supply chain. On the other side, The Economist says that would be a waste of money and we should let the market sort it out, even though they also say that’s going to take a while.
And I think the key is that we all have a living memory of what a functional car market looks like — the supply disruption is new enough that we can all see clearly that it’s the root cause of these problems. We were around in 2019 when car prices had been flat for a long time. We were around when the pandemic struck and output ceased in anticipation of a deep recession. And we were around when, months later, automakers realized demand was still robust but they’d already allowed the chip supply to head elsewhere. So we can see vividly that the reduced output of car factories is causing lots of problems — and we’re not talking ourselves into the idea that it’s secretly good that used car prices are soaring.
Scarcity is a terrible wealth-building strategy
Now one way of looking at the current car situation is that America’s car owners have seen the value of our assets rise enormously. My family’s 2014 Prius is kind of beat up, but it works fine. And these days we could resell it for a lot more money than we could have in the past — so we’re rich.
And this is actually a pretty typical American situation. Car prices are a reasonably large component of the Consumer Price Index because cars are so expensive.
But in the typical year, only a relatively small minority of Americans buy a car. So for most of us, the car inflation of 2021 has not actually reduced our spending power. Instead, the asset value of the cars we own has risen — we’ve become wealthier. And indeed my household with two adults, one child, and one car has fewer cars per capita than the typical American household. So lots of people have seen soaring car wealth. Yay?
I think we all have the (correct) intuition that this is a dumb way to look at it. A society of heavy car-users becomes richer when cars become more plentiful or when they improve in quality. Equivalently, a huge increase in the quality of non-car forms of locomotion would raise living standards by narrowing the range of cases in which cars are needed. But car scarcity is bad. If vandals break 1% of America’s vehicle stock tonight, that will make people worse off. Now it’s true that those whose cars survive the Car Purge might find some financial upside. But fundamentally, the gains to you from your neighbor’s car being destroyed are minor compared to the losses to your neighbor. And by the same token, the crunch in car supply has made things very difficult for people in need of a vehicle while offering only trivial upsides to car owners.
In the housing case, however, we tend to act not only as if particular individuals can win the lottery through rising home prices but as if society can build wealth through scarcity-induced increases in real estate prices. Now of course a normal person says a rise in the value of my old car doesn’t help because if I sold it I’d have to buy a new one. But that is also true of homes. If you die, then your kids can realize the value of your house by selling it. But if you’re alive, you still need a place to live. If anything, this is less true of cars. A healthy minority of car owners live in places like D.C., Boston, or Chicago where you could get by carless if you saw sufficient financial upside in doing so.
Historically we have not thought of getting a car loan as a wealth-building investment strategy because we expect the value of cars to decline over time. But if car scarcity never ameliorates, we could imagine a whole discourse emerging about the need to help first-time car-buyers qualify for loans in order to get on the ladder of building automotive wealth. We could expand the mandate of Fannie Mae and Freddie Mac to ensure a steady supply of car loans on attractive terms. And we could have people convincing themselves that car scarcity is not only the natural state of the world but also somehow desirable.
Abundance is good
For now, fortunately, we have more sane intuitions about the car market.
When I read a headline about automakers slashing production targets or delaying their forecasts of when they’ll be able to ramp up production, I think that’s bad news. It’s bad news because scarcity of cars induces hardship in people’s lives. It’s bad news because it leads to bad inflation headlines that negatively impact our politics. It’s bad news because even though my current car is fine, it might break, and then I’d be in bad shape. It’s bad news because we’d like to see a transition to electric vehicles happen, which would mean turning over the existing auto fleet unusually quickly rather than unusually slowly.
I don’t really think I need to belabor the point because on the car front, it’s obvious. If we discovered a secret Taiwanese warehouse tomorrow with two years’ supply of automotive microchips tomorrow, that would be great news for the world.
It wouldn’t single-handedly solve global inflation problems, but it would help. More to the point, over and above any impact on inflation, it would entail an increase in real output and living standards. And unearthing a huge cache of unused homes in in-demand areas would have the same effect. Of course, we are very unlikely to find such a cache. But unlike in the case of cars, we haven’t been stricken by bad luck that’s reduced the supply of homes. We have instead deliberately underbuilt them by adopting a planning paradigm that gives extremely heavy weight to the views of people who happen to live near a particular parcel of land and essentially no weight to the views of anyone else.