Going Car Shopping With Your Economist Parent
Is the old, heavy clunker strategy still the right call?
Happy 2025 (which is not only a square, but also a Harshad number and also the sum of the first 45 odd numbers)! I know you come here for insights on energy economics, but we are big nerds at heart over here. So we have a new driver in the house. This is terrifying. We live in the burbs, nowhere near a bus stop and the neighborhood has neither sidewalks, bike paths, nor streetlights. But lots of bad drivers in big SUVs. So kiddo “needs” a car. Rarely hath there been a challenge I have enjoyed more. Or spent more time on blogs for.
So here is the premise. As a neo classical econ dad, I am supposed to choose a car that maximizes household utility (“happiness”) while at the same time satisfying our budget constraint. So what does that mean? Household happiness includes my kid’s perceived “coolness factor” of the vehicle, whether it has enough room for him and his sports stuff, trash, and whether the stereo is up to snuff. But it also includes safety considerations my spouse and I have for our baby! I basically would like him to drive a tank. Just kidding. But we would like him to be as safe as possible. And this is the first part where it got interesting for me.
What does “safe” mean?
Conversations with basically all other parents resulted in some version of “I am putting my kid in an oldish very large heavy vehicle”, so if (s)he gets in an accident, you want them to be surrounded by as much steel as possible. This is certainly reasonable. As Michal Anderson and I have written about, if you are in a heavier vehicle, you are less likely to die or get seriously injured. This would suggest that the common wisdom is right. But I am super annoying. This line of reasoning assumes an accident. What if we could decrease the probability of being in an accident? My new car has all kinds of technology that makes it light up like a Christmas tree if it senses danger. It anticipates collisions, looks out for pedestrians and their dogs. If it thinks I did not see a car stopped on the highway in front of me, it tightens the seatbelts and slams on the brakes for me. It is momentarily terrifying when that happens, but prevents me from injury and possibly significant costs in terms of higher insurance premiums and repairs! The issue is that this technology is not in older cars. It is relatively recent. Hence the “get the kid an old, heavy clunker” argument may not be right – currently (until all cars on the road basically have this tech).
What does “can afford mean”?
Many of us are familiar with what it costs to have a car. You have to put gallons/kwh in it. You have to service it. You need to get tires. You need to insure it. Then you need to decide whether you are going to buy the thing or lease it. Generally speaking – new cars are more expensive than used cars along all dimensions. They cost more to buy, they cost more to insure, they often have pesky tire requirements (expensive runflat tires) and your maintenance at the dealership is costly. But they smell delicious. Leasing can be more expensive per ownership mile than buying, but that also depends on how long you intend on driving a car. Relationship status with future car: “It’s complicated”. At team Auffhammer we are very lucky. We are a two-income household and can afford to consider getting a new car for our kid, which I of course fully realize is not true for the majority of households. And we have an annoying dad, who has a big spreadsheet to help us figure out the right decision for the kid.
What should we buy?
As you know, I like EVs a lot for the fun, the signaling of my environmental virtues and the fact that I hate going to gas stations. Reasonable EVs are better for the Environment. Full stop. (That 1020 horsepower Tesla Plaid may not be better than a Honda Civic, but is probably better than a Porsche Carrera GT3). Private households often do not take into account the consequences for others of their own choices. We buy cars that are too heavy, powerful and fuel inefficient. This is rational. Which is why the government steps in. With subsidies for EVs.
Where did we land?
We scrapped the Hawaiian vacations and decided to put the money towards leasing a new, most highly safety rated by IIHS EV. Low power, good stereo and all the safety bells and whistles. Why lease Max, are you insane? When confronted with trying to acquire an EV, I was told that we did not qualify for a tax credit because of our household income. But the salesperson suggested that we might consider leasing a car, which would allow us to roll the $7500 credit into the lease payments. Heck yeah! Hammertime! Lease signed, no tax forms to be filled out and off the lot we went! My family wanted to focus on how great Chappell Roan sounds in the new speakers, but I said “good luck babe” and annoyed the living daylights out of them with my theorizing about what this loophole would mean in terms of a variety of concepts only an economist would think of. I ended my diatribe with “Someone should write a paper about this”.
Of course, my office neighbor Joe Shapiro recently released a new coauthored working paper, that answered my simple questions and then some. They extensively discuss the “Leasing Loophole” of the IRA, which allows EVs leased through a commercial entity to qualify for a separate $7,500 credit, even if they don’t meet the final assembly, battery content, or buyer income requirements. This itty bitty thingamajig language makes economists go “huh”? If you are on the fence about buying or leasing, this should push folks into leasing cars pretty strongly! It me! They unsurprisingly find that the IRA EV credits mostly benefited consumers through price reductions but led to a significant shift from purchasing to leasing due to domestic content restrictions on tax credits. This leasing loophole reduced domestic welfare benefits and sparked international trade tensions.
So in closing, we are leasing the EV until he graduates from high school and then we will have him buy one of those subsidized E-Bikes Andy talked about, when he goes to college in a real town with bike paths. It will be an election year when that happens, which I am sure will again have a heavy focus on energy.
