David R. Henderson  

Response to Thomas Boyle

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Commenter Thomas Boyle points out the following counterexample to Steve Horwitz's claim that the price of almost everything, in labor hours, has fallen:

In 1947, the airplane [the Piper Cub] sold for $2,400, or about $25,000 adjusted for inflation to today. In 2010, the modern equivalent, built in America, sold for approx. $120,000. The engine alone (a mass-manufactured component) now costs approx. $18,000 today.

The (depressingly few) sport pilots of today wonder how this happened - and what can be done to fix it...


Good and, I agree, depressing counterexample, Mr. Boyle.

As it turns out, we do have a pretty good idea about how this happened and what can be done to fix it. Here's what economist W. Kip Viscusi wrote about the issue in his opening paragraph of his article, "Liability," in The Concise Encyclopedia of Economics, edited by yours truly.

Until the 1980s, property and liability insurance was a small cost of doing business. But the substantial expansion in what legally constitutes liability has greatly increased the cost of liability insurance for personal injuries. The plight of the U.S. private aircraft industry illustrates the extent of these liability costs. Although accident rates for general aviation and for small aircraft declined steadily, liability costs for the industry soared, so that by the 1990s the U.S. private aircraft industry had all but ceased production. These substantial costs arose because accident victims or their survivors began to sue aircraft companies in 90 percent of all crashes, even though pilot error is responsible for 85 percent of all accidents. Only after Congress exempted planes older than eighteen years from liability by passing the General Aviation Revitalization Act of 1994 did the industry begin to increase production. Still, output is well below its level before the rise in liability costs. In 1978, 17,811 new U.S.-manufactured general aviation airplanes were shipped, but by 1994 this amount had plummeted to 928. Though shipments have since rebounded to 2,137 airplanes in 2003, that amount is still well below the peak production years.


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COMMENTS (17 to date)
Thomas Boyle writes:

David,

While I can understand that liability costs might be a consideration, I have not been able to find anyone who could quantify it. The modern Piper Cub lookalikes are manufactured by small concerns that may well be judgment proof. When I ask about liability insurance costs, I get blank looks, admittedly from salesmen.

Have you been able to quantify this? It seems like a liability insurance cost of $100,000 on a $25,000 product would call for some re-evaluation...

Steve Horwitz writes:

Adjusting for inflation is not the same as adjusting for the value of labor. Even so, the plane clearly does cost more today. Liability is surely part of the story, but I'd also hazard a guess that the "equivalent" plane today is much better built, has more and better equipment, and is much safer than the 1947 version.

Adjusting for quality is harder, but it's part of the story too. Whether that makes it "cheaper" per unit of quality today is even harder still to determine.

Eric Larson writes:

Thomas, it's nigh impossible to decompose the price increase like that. The point is that regulation drives up costs which are then passed on to the consumer. Small concerns are less efficient than their larger counterparts. The regulations have made the costs to the manufacturer so high that planes are now a boutique item.

David R. Henderson writes:

@Steve Horwitz,
You make a good distinction between inflation-adjusting and putting it in labor hours. I took the distinction as given, but it's probably good to remind people.
As for the quality of the airplane, my impression is that it has changed hardly at all.

Hasdrubal writes:

To expand on Eric Larson's point: It's not just liability insurance, the FAA introduces tremendous regulatory burden. Manufacturers probably not only have to extensively test each bolt and wire that goes into the design of an airplane, they probably have to document each individual bolt as the airplane gets assembled.

Add to that the shift in the supply curve caused by so many companies going out of business in the '80s and '90s. There are several factors feeding off each other to skyrocket prices in an industry like aviation. It could be a cautionary tale for would-be regulators and government interveners...

Colin K writes:

General aviation pilot and sometime aircraft owner here.

Prof. Henderson is correct to note that quality has not changed much. A Cessna 172 new off the line today is largely equivalent to one made in the early 60s, and in no way markedly superior to one made in the early 80s. The electronics are much better, yes, but these account for next to none of the cost differential. Compared to automobiles, used aircraft generally hold their values extremely well, though that is partly due to the extremely high cost of new ones.

My sense is that low volume is the chief culprit, as low production volume drives higher use of labor relative to capital. Cessna makes roughly 1,000 single-engine non-jet planes a year in Wichita, spread across three different models, which is on par with what many auto manufacturers do in a single day. I suspect that a picture of the assembly line in the early 60s would look much the same as one taken today.

More recently, the FAA adopted a new category for Light Sport Aircraft, with vastly reduced certification requirements for aircraft designed for weekend recreation, e.g. Cub-style aircraft. This has resulted in a lot more cheaper newer planes, though they are somewhat less capable (slower, fewer seats) so it is not clear if they are cheaper because they were less costly to certify/produce or because they are less airplane.

Thomas Boyle writes:

@Steve Horwitz

The reason I chose the Piper Cub as an example was that it is a rare example of a manufactured product, sold today, that has changed hardly at all in 80 years. The new versions are better in having a more reliable, and in some cases more powerful engine (by 25% or so); in most other respects they are structurally and functionally remarkably unchanged. The engine has benefitted from enormous learning curve effects in the past 80 years, and yet today costs almost as much after inflation as the whole plane did in the 1940s. In other respects, the manufacturing process is almost identical to what it was in the 1940s, involving a lot of cutting, welding and stitching. I don't believe that the 1940s product benefitted much from high capital intensity; it was labor intensive.

As I think about it, another manufactured product that has changed little in the same length of time is a basic bicycle. The old rule of thumb always was that a bicycle cost 2 weeks' wages for a laborer; I just now priced a Schwinn bike at Target for $99, which would be well below that benchmark. However, the bike may have been more of a cottage industry product 80 years ago.

Thomas Boyle writes:

@Hasdrubal,

While the regulators have - almost literally - prevented the development of new sport aircraft (as well as any quality or safety improvement of existing designs) over the past several decades, the Light Sport Aircraft rule has changed the situation for the better, as Colin K notes.

The modern Piper Cub lookalikes to which I refer are mostly produced under this rule.

Ari T writes:

Did anyone bother adjusting the price for inflation, labour cost and quality? Adjusting for quality seems quite hard though.

If we had real falling price levels, รก la free banking, seeing the real price would be much easier.

There are a myriad of reasons for this.

1) Are any patents (which I consider rent-seeking) involved? They're pretty much of the most effective ways to keep the prices from falling to marginal cost.

2) And again who knows, maybe the raw materials have got expensive, albeit I doubt it.

3) You have to also take into account capital costs and marginal costs. In 1947, there might have been a lot of airplane manufacturing capital around (thanks to wars) and marginal cost of producing an extra plane might be a lot less than its today.

4) The best way to find this out would to try to get balance sheets from 1947 and compare it to today after adjusting for inflation. That might get you some nice insights too! If the producers of some goods or labor harvest massive profit margins something fishy might be going on. Maybe a market failure, but most likely some kind of government-sponsored rent-seeking.

Thomas Boyle writes:

Ari,

No offense, but did you bother to read the thread?

:-)

Eric Falkenstein writes:

My sons play baseball, and per protocol, he has gloves (not the baseball glove, but for 'stealing bases, I presume), his own bat, and special shoes. I played with my 'tennis shoes', which I wore everywhere but church, and used no fancy gloves, or bat.

Is that a quality increase, like my better car? I don't think so, because it's a game, and everyone has these. It's like Robert Frank's example of wasteful competition among elk antlers (it would be better if all had smaller antlers, but individually they are better off with larger antlers).

Unlike Frank, I don't think a consumption tax is wise to counter this for many reasons, but that's a separate point. But I don't think you can dismiss the point, that lots of what we decide is necessary over time isn't making us 'happier', either for zero-sum competition or growth in parasitic institutions, and these may be endogenous.

Thomas Boyle writes:

It occurs to me that it would be interesting to inflate the 1947 price of a Piper Cub using a labor cost inflator, rather than CPI, since the aircraft was then - and is now - labor-intensive to manufacture.

Does anyone have a handy labor cost index?

Thomas Boyle writes:

I found a labor rate inflator at

www.measuringworth.com

According to that, if we inflate the $2,400 price of the 1947 Piper Cub using the Production Worker Compensation index, it should cost $48,800 today.

This means that the cost of the little airplane, with no material changes in specification or quality, has more than doubled, in terms of hours someone would have to work in order to purchase it, since 1947.

As a sport pilot I do wish the Horwitz Principle applied here, but apparently it does not.

Jeremy, Alabama writes:

It is pretty well understood in general aviation that the "product" value of a new 172 is roughly $30k, and the rest is a combination of liability and the loss of economy of scale because of the huge cost of liability.

A basic Cessna 172 would sell 10x in volume at a $30k price point. It is not mechanically more complicated than an Airstream trailer with an engine. A $1k GPS system sells for $10k if it is aviation-rated.

Getting certification is grossly expensive and long. For instance, it would be possible to replace Skyhawk lighting with efficient LED lights. Lower power also means thinner wires with less weight. Home-built planes already use this innovation, but new Skyhawks don't, it is too hard.

Steve Horwitz is correct, absent cynical liability lawsuits.

General aviation, then, is a rather extreme example of what happens when an industry is targeted for destruction by lawyers. Coal-fired power stations might be next. But, obviously, we all pay extra for everything because of the "embedded" cost of the litigation lottery.

ras writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Speed writes:

A brand new Cessna Skycatcher (162), produced in volume, built in China with two seats, 100 horsepower and basic modern avionics has a list price of $111,500. It is "certified" as a Light Sport Aircraft (LSA) which is less stringent than FAA Part 23 Normal category aircraft.

Standard features include a Neutrally Painted Interior and Cabin Door Armrests.

sch writes:

And the cost of aluminum, the primary structural
metal has gone up roughly 200% over the last
50yrs, ignoring any price spikes the past decade
of up to 300%. FWIW older era planes at some
point have to have a considerable amount of
corrosion control done inside the wings and
fuselage, as they were never expected to last
30-50yrs.

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