Why It's Harder to Be a Clueless Consumer

New letter grades for cars would continue a helpful trend.


The nanny state has been getting a few things right.

American consumers hate being told what to do, and to prove it, we routinely make choices that are irrational and counterproductive. We make impulse purchases we can't afford. We build bigger houses than we need, chaining ourselves to an onerous mortgage for years. We drive rugged, four-wheel-drive vehicles even though we never leave the pavement. We buy Snuggies.

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A few killjoys would like to see stricter rules or higher taxes meant to discourage excessive consumption. But the government, for once, has demonstrated a better idea: more information about what exactly you're spending your money on.

In case you haven't noticed, we're in the midst of a labeling revolution. The latest idea is to grade cars on their fuel economy and emissions, to help buyers sort out their choices in a marketplace that's getting considerably more complicated. The government would give cars a grade ranging from A to D, based on how a car's fuel consumption and emissions compare with all other cars. There's no baseline for passing or failing, so this would amount to grading on a curve. There are no Fs.

There's predictable grumbling from some corners of the car industry, with critics arguing that it's not the government's job to choose winners and losers in the marketplace. Weak argument. This is actually a terrific idea that will help consumers with minimal, and perhaps no additional burden on the car industry. A sudden surge in new types of automobiles—hybrids, electrics, semi-electrics, diesels, natural-gas powered vehicles, and better gas-powered cars—is making it harder for car shoppers to know how any given product measures up. The government, for example, is still trying to figure out how to assign a comprehensible fuel-economy rating to new electrics like the Chevy Volt and Nissan Leaf, since the old miles-per-gallon formulation only works for cars burning liquid fuel. The new letter grades will help clarify the choices and perhaps make buyers smarter. It might seem surprising, for instance, that thrifty cars like the Honda Fit and Toyota Yaris (which both average 31 mpg) would only earn a B+. To earn an A, cars will likely have to get the mileage of a hybrid or electric.

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This is a classic information-age solution that does nothing more than package data already publicly available into a simplified, user-friendly format. Car companies wouldn't have to do anything differently or pay extra money, since their vehicles already undergo fuel-economy tests. And the additional cost to the government is so low that the new rule is deemed economically insignificant. The only thing that's dismaying about the idea is that some entrepreneur didn't think of it first, since it would be pretty easy to calculate car grades and publish them on a website. A few bureaucrats have outsmarted the vaunted private sector. Hmmmm.

A lot of other labeling changes are starting to appear, with more in the works. Banks and credit-card issuers now have to tell the truth about how they're hoping to gouge you on interest rates, minimum payments, and fees that used to be hidden in the gobbledygook on the back of your statement. If you haven't already done this, check the first page of your latest credit card statement, somewhere around the top fold, for the new box that explains how long it will take to pay off your balance if you only make the minimum payment. Then there's another helpful figure stating how much extra you'll pay in interest if you choose the minimum-payment plan. It's probably more than the entire balance. Yes, anybody eligible for a credit card ought to be able to do this math himself, but the fact is that we don't. For all the overkill out of Washington, the feds are actually doing American consumers a useful service by now forcing banks to spell out their terms.

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The new Consumer Financial Protection Bureau created by the 2010 financial reforms will probably require more disclosures like this on mortgages, car loans, and other financial products. The same thing is happening with food. One provision of the new healthcare reform law will require fat and calorie counts to be published for food sold through chain restaurants and vending machines. Some state and local governments could expand the requirement to smaller outlets. Food labeling is especially helpful because it's harder for consumers to know whether a given product is virtuous or poisonous. Sure, we could probably guess that a Double Whopper with cheese is a fat bomb, but now we know its true explosive power (960 calories, 62 grams of fat, 1,310 mg of salt).

In a simpler world, decades ago, car engines all relied on internal combustion, credit cards didn't exist, and food came from a farm, not a factory. Tea Partiers and other government haters can lament the vastly expanded role of government in commerce, but the fact is that the economy has grown so complex that it's nearly impossible for consumers to gather all the information they need on their own. Without required labeling, there's no way to tell where most products come from, what's in them, or how they're likely to perform.

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The free market sometimes produces its own solutions, like eBay's feedback ratings, for example. But it also creates huge "information asymmetries" that benefit the party who knows more—usually the producer or seller—at the expense of the party who knows less, which is usually the consumer. There will always be purists who disagree, but as a society, we generally accept the premise that leveling the playing field for consumers is a legitimate role of government.

We're in the midst of a huge national argument over what else the government should do and how big it should be. President Obama clearly favors an activist government, but he's been inconsistent about how deeply it should get involved in commerce. On one hand, his new healthcare legislation establishes a complex set of new guidelines that companies must figure out and follow, on a matter that used to be largely up to them. But his financial reforms were less punishing than they could have been, and under the bank bailouts, the administration basically propped up most recipient banks for awhile, then sent them merrily on their way once they repaid the money.

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Car grades, nutrition info, and credit-card disclosures represent a good guideline for future government activity. They provide useful information that can help consumers make choices, while imposing a relatively light burden on the companies affected. Of course consumers are free to disregard all that info and keep buying gas guzzlers, eating fatty food and paying exorbitant interest rates. The nanny state doesn't prohibit that, yet.