Check Under the Hood of the VW ‘Crisis’ - The American Spectator | USA News and Politics
Check Under the Hood of the VW ‘Crisis’
by

 “Law and Economics” is a school of legal study that says that the economics, namely costs and benefits, should be factored into decisions about legal matters. An easy example would be if there were a factory that emitted a lot of pollutants that stained furniture near the plant. One idea would be that the factory should install expensive scrubbers over its works. Law and economics would say that simply giving the neighbors powerful air conditioners with great filters might be cheaper and better for everyone.

Some have suggested that similar reasoning should be applied to other dollars and cents issues in society, especially extending into the world of investing.

The crisis at Volkswagen might be an example of where this kind of thought would be worthwhile.

As we all know, VW cheated on its tests about how much of various kinds of pollutants its engines emitted at various levels of speed. These phony test results were meant to show that VW in fact had much more economical diesel cars, with less pollution, than it did.

The revelations have been devastating to the U.S. stock market and in fact to stock markets all over the world.

But let’s look under the hood. Suppose the average VW car gets about 25 miles per gallon, city and highway combined. Suppose the average driver drives 15,000 miles per year. That means the driver uses about 600 gallons of gasoline per year. At a typical gas station far from my home in Malibu, that would cost about $2.50 per gallon, or about $1500 per year.

Now, suppose that because of the cheating revelation, we now know that the average VW only gets 20 miles per gallon. (That would be an immense change and it’s unlikely the difference is that large.) That would mean the driver would use about 750 gallons per year. That would cost about $1,750 per annum, or about $250 per year more.

If the average driver keeps his car for eight years, he or she spends about an extra $2,000 — mostly voluntarily now since the facts are out. Commentators are talking about VW paying a fine of $37,500 per car for its transgressions. That is insane when the real cost is roughly 5 percent of that sum.

Why doesn’t VW just write a check to VW buyers who might have been misled for the extra cost of the gasoline and let it go at that? We know why. Because that would not provide the fodder for trial lawyers (often wonderful people), editorialists, bureaucrats, and politicians, who want to play the “heartless corporation” card.

Let’s take it a bit down the road. The cost for litigation and fines and reimbursement might amount to a one time $6 billion or so, if the most draconian punishments are exacted from VW. As far as I can figure, that’s it. But the entire U.S. stock market has had a loss — supposedly attributable to upset at VW — of roughly 2 percent on the emissions-cheating news. That equates to a loss of about $500 billion. And VW itself has had a loss of roughly 1/4 of its total value, or about $16 billion, which bears no relation at all to any other magnitude in the matter.

Let’s inject some “finance and economics” good sense in here and ask why? Why should the market get hit for roughly 100 times the real loss to one company? Why should the long-term value of VW fall by a large multiple of a one-time charge?

Again, we know the answer: Because traders need some excuse to move markets, and this is not as bad as many. And, commentators and analysts on Wall Street need something juicy to talk about. But, again, the losses on The Street bear no relation to any real losses. They are just testament to the power of the EPA to frighten people, the power of traders to trade, and the endless need of talking heads for something to talk about.

Just by the way, Mr. Warren E. Buffett does not even have a modern day Quotron or a computer on his desk. That tells you something about the subject of prices and reality. And finance and economics.

Ben Stein
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Ben Stein is a writer, actor, economist, and lawyer living in Beverly Hills and Malibu. He writes “Ben Stein’s Diary” for every issue of The American Spectator.
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