Jean Chatzky has writen an article explaining how to ge the best financing on your auto-loan. She discusses how to avoid or reduce the markup car dealers will tack on to your auto-loan base rate. Markups average about 3 percentage points extra per consumer. Despite the fact that consumers have the option to shop around, secure a loan in advance, and bargain, this apparently isn’t enough for the demagogues on Capital Hill -- we need to regulate away these evil profit margins.
Illinois Attorney General Lisa Madigan is pushing legislation that would force auto-dealers to “disclose how much they charge consumers above the ‘buy rate’ the dealer pays to obtain a loan.” In other words, they would be forced to disclose their profit margins to the customer. Stephen Brobeck, executive director of the Consumer federation, naively predicts that the disclosure law will significantly reduce markups and “can’t imagine that anyone would accept a loan if they were told the interest rate was being market up.”
Likewise, no-one would ever buy a Soda Can from a vending machine for $1.25 if they knew that they could get a much better price at Wegmans. Maybe vending machines should have to disclose their profit margins too. Likewise with Burger King. These evil profiteers should have to disclose their profit margins, because who would eat at Burger King if they knew they could make a bigger and better hamburger for a lower dollar-price? Except people do buy soda from vending machines and they do eat at Burger King.
So, what’s going on here? The answer is obvious to anyone who remembers leisure is a good and that time is the ultimate scarce good. People who decide to simply walk into an auto-dealer shop without securing a auto-loan first have obviously demonstrated their preference to do other things with their time than shop around for the best auto-loan. Brobeck asserts that “the markus have continued simply because of a lack of awareness.” Similarly, I suppose, people continue to buy from vending machines because no-one knows that better prices can be obtained from the supermarket. Individuals who obtain their loans from auto-dealers one-stop-shopping have decided that it’s not worth it to them to do the research to figure out what the best rate they can get is, or because they don’t want to bother with the trouble of doing all of that themselves.
As Jerry Cizek, president of the Chicago Automobile Trade Association, aptly points out, “A dealer is entitled to a profit, and I don’t know of any other business in which a profit margin has to be disclosed” [to the consumer]. Auto-dealers provide a valuable service to the consumer, and to act as if they aren’t entitled to a profit is childish whining. An important thing to consider is that competition in the free market serves to drive down both the prices of cars and the markup on loans. Profit margins are what attract entrepreneurs. In Conservative Investors Sleep Well, Philip Fisher wrote:
“In today’s highly fluid and competitive business world, obtaining well-above-average profit margins or a high return on assets is so desireable that, whenever a company accomplishes this goal for any significant period of time, it is bound to be faced with a host of poential competitors. If the potential competitors actually enter the field, they will cut into markets the established company now has. Normally, when potential competition becomes actual competition the ensuing struggle for sales results in anything from a minor to major reduction in the high profit margin that had therefore existed. High profit margins may be compared to an open jar of honey owned by the prospering company. The honey will inevitably attract a swarm of hungry insects bent on devouring it. In the busness world there are but two ways a company can protect the contents of its honey jar from being consumed by the insects of competition. One is by monopoly, which is usually illegal, although, if the monopoly is due to patent protection, it may not be. In any event, monopolies are likely to end quite suddenly and do not commend themselves as vehicles for the safest type of investing. The other way for the honey-jar company to keep the insects out is to operate so much more efficiently than others that there is no incentive for present or potential competition to tkae action that will upset the existing situation.”
Knowingly or not, Philip Fisher agreed with Murray Rothbard, that monopoly prices (thus monopoly profit margins) cannot exist unless there is State-intervention. The only way profit-magins can be maintained is by operating efficiently, lowering prices so as to attract customers, and improving the quality of service.
Despite the fact that customers normally get the lowest rates possible, despite the fact that the average markup is only 1.5%, despite the fact that there is opportunity for consumers to comparison-shop, Statists want to regulate away profit. CA consumer advocates propose that dealer finance profits be limited to $150 to $200 per loan, just enough to cover the cost of obtaining the loan. Why stop there? Why not limit proits to $20 per loan? Or $2 per loan? $0.2 per loan? Hell, why not just illegalize profits all-together -- that’ll teach these evil car-dealers who dare to make a profit! Essentially, what they want to do is criminalize profit-margins.
What this proposed legislation really is is a subsidy from consumers who are more cost-conscious and willing/able to do research to get the better deal, to consumers who are more time- and effort-conscious. Auto-dealers still have to earn a living. There are, thus, two possible outcomes to this legislation. Either auto-dealers will make their profits elsewhere, charing various fees, or we will experience the shortages of supply seen whenever you try to force suppliers to sell a good below the price at which they would otherwise sell the good. At best, he proposed regulation would add the costs and bureauocracy that all regulations creates. At worst, it would do that and cause a shortage of auto-dealers. When consumers have trouble finding an auto-dealer, they’ll know who to blame.
Finally, we arrive at the race-baiting demagoguery. Madigan’s memo asserts that, “[w]hile this practice can affect all consumers, it has a disproportionate impact on African-American and Latino car buyers”. When logic fails, it’s time to bring out the good old race-card. The implication here is that car-dealers are obviously racist and that this is discrimination. There are a couple of problems with this absurd argument. First, consumers, including Blacks and Latinos, can follow Chatzky’s suggestions to get the best deal. Second, being a property owner should give one the inherent right to discriminate on whatever basis one wants. Third, it obviously does not follow from the fact that Blacks and Latinos are disproportionately affected by markups that car-dealers must be discriminating against Blacks and Latinos. If we found that tall people were disproportionately affected by markups, would we assume they were being discriminated against?
