Are consumers willing to pay a higher cost for more fuel-efficient vehicles? During today's OnPoint, Mark Cooper, head researcher at the Consumer Federation of America, discusses his organization's research on the consumer impacts of the Obama administration's fuel economy standards. He also responds to the National Automobile Dealers Association's call to slow the rollout of these standards.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Mark Cooper, head researcher at the Consumer Federation of America. Mark, nice to have you on the show.
Mark Cooper: Thanks for having me.
Monica Trauzzi: Mark, the debate over the market viability of the Obama administration's fuel economy standards continues and CFA has done extensive research on the consumer impacts of the rule. What does your research show about consumer's willingness to purchase more fuel-efficient vehicles if they come with a higher price tag?
Mark Cooper: Well, the interesting thing, you talk about a debate, it's not really a debate. The consumers agree, labor agrees, the automakers agree, environmentalists agree, the public agrees, everyone agrees that this is good for consumers, the industry, the nation. The only ones who disagree are the dealers and they just don't seem to get it. If you look at the issue of the impact of increasing fuel economy, and we've done a little piece where we asked the question will there be sticker shock? And the answer is that there are at least 10 good reasons why there won't be sticker shock. And every one of those good reasons why there won't be sticker shock is a really good reason that people support the standards. And, you know, obviously, I'm going to try and get all my 10 in, but the first one and the most important one from the point of view of the Consumer Federation is that it lowers the cost of driving. 2011, on average, 2010 for some income groups, was the first time that the cost of gasoline became the biggest component of the total cost of driving ever.
Monica Trauzzi: But how quickly will a consumer see a return on their investments?
Mark Cooper: So, frankly, we've looked at the math of that and so the point is that the dealers don't realize that. They only think about the cost of the vehicle. But the cost of gasoline consumption is now the single most important component. And we have already seen that in the marketplace. Consumers, higher fuel economy cars are flying out of the showrooms. So, we do a simple consumer pocketbook calculation. The economists here in Washington hate this calculation, but it's the way I think the average consumer should look at it. We asked the question if I buy an auto with a five-year loan, which is a long time, but that's what people do. We counsel them to do less, but they do five years, that's the average. Asked the question, how much more will the loan payment be because you bought more technology, a higher-quality car and compare that to how much lower will your gasoline expenditures be? And in the first month, the fuel savings, the expenditure on gasoline are bigger than the increase in the loan payment. These vehicles are cash flow positive in the first moment. You can do it as a payback period for someone who pays cash, very few people do, pays off in three years. That's quick enough for consumers to see it as a good investment.
Monica Trauzzi: I want to address directly what the auto dealers are saying. We had Andy Koblenz of the Auto Dealers Association on the show last week and he said what the CFA study doesn't show is that so many people won't be able to qualify for the loans, that as the price of the vehicle goes up, the lenders won't lend money. Can you respond directly to that assertion?
Mark Cooper: Well, so the math I've showed you, shown you, is the end of the program. It's 2025, it's 15 years away or 12 years away or 13 years away, and so it's important to realize that this is a gradual increase in the cost of vehicles. It's a gradual increase in the cost of vehicles by improving their quality and today efficiency is quality job one in the auto industry. The industry has been raising the quality of automobiles for decades, right? And so the increase, the gradual increase over the next 15 years is much smaller than the increase that they have imposed in the last 15 years. So if increase in quality were a bad idea they wouldn't have been doing it on their own. This is non-mandated, this is voluntary. The first answer is this is a normal part of the process. It's spread out over 15 years. Second of all, there are now more and more banks who, when they look at an auto loan or a home loan for that matter, they actually understand that the operating costs are really important. And so if I'm right, and I think I'm right, that we've lowered the cost of driving, those banks will be more ready to lend to people who are getting more fuel-efficient vehicles because the total cost is lower.
Monica Trauzzi: But what about the 7 million people that they talk about?
Mark Cooper: OK, the 7 million people is a completely different question. What they've done is they've said, look, if I make this calculation about how much the auto loan payment goes up and I don't make a calculation about how much the gasoline expenditure goes down, I can say that there are some people who, because of the increase in the auto loan would not have the income necessary to qualify for the loan. The problem with that calculation is that this is a small marginal increase in the cost of the loan. The only people who might be affected by that calculation are very low income people. These people are not in the new car market anyway. They buy used cars and so the back-of-the-envelope calculation they did is a theoretically correct calculation. It has no application to reality. The irony is that if you think about the vehicles that that population segment buys, they buy used vehicles. Now, if I'm right and the value of new vehicles is improved because of the fuel efficiency, we will accelerate the turnover of the vehicle fleet. There will be more used cars available, supply will go out and price will go down. So, you can argue that it will have exactly the opposite effect because of the used car effect, but in no circumstance is that 7 million number right. Because the vast majority of those people were never in the new car market.
Monica Trauzzi: So, what's your take then on why the auto dealers are opposed to the standards being implemented so quickly?
Mark Cooper: Well, it's not so, the point is that ...
Monica Trauzzi: Well, they say it's quickly.
Mark Cooper: It's not so quickly. The point is that here's a program over 15 years, the first time we've ever had a long-term program in this sector, and the industry was designed that way to give the industry time to refresh, renew their vehicles and incorporate it. It's product neutral. It's no more where we push people to small cars because we have different levels of efficiency for each car, it's technology neutral. Gasoline engines can stay in the marketplace. So, here's a program that was really well designed to reflect what the marketplace needs. Why are the dealers opposing it? It could be ideological knee-jerk reaction against any regulation, although the automakers have gotten over that. It might be some payback for what went on during the bankruptcy, a political response. But in any case, it hurts them. It hurts them because everybody else in the country understands this is a bipartisan deal. Let's be clear, George Bush got this started, a Republican Congress passed the legislation that moved the standards forward and Obama came along and accelerated it and gave it this long-term vision. Everybody else understands this is good for the people, the nation, these guys don't get it.
Monica Trauzzi: All right, we're going to end it there on that note. Thank you for coming on the show.
Mark Cooper: Thank you.
Monica Trauzzi: Nice to see you. And thanks for watching. We'll see you back here tomorrow.
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