During the presidential campaign, President Obama established a goal of 1 million new plug-in hybrid cars on the road by 2015. His recent efforts to intervene in automakers’ decisions shows that he is willing to do what it takes to meet this goal, respect for property rights and free markets be damned. But he made a good point in his 100-days speech: if Japanese car companies can produce more fuel-efficient cars, why can’t American car companies do it? Maybe they can, but consumers don’t want to buy many more hybrids than they are already buying from the Japanese companies. Chevy was making the Volt, but the Obama administration wanted them to scrap those plans because apparently the car wasn’t profitable. Ford has new hybrid models this year. Will we buy them?

When gas prices spiked last summer, many people wished they had a hybrid, and prices of used SUVs plummeted as people tried to get rid of them. Now that gas prices have fallen by over 50% from their record levels, I haven’t heard as many people talking about the financial motivation to switch to a hybrid. Whether it is really a money-saving thing to do is debatable. At the Minnesota Economics Association’s conference on Energy and Environmental Economics in October 2007, a speaker talked about her choice between the Toyota Camry and the Camry Hybrid. In her situation, when gas was around $2.75/gallon at the time, she calculated that it would take her over 7 years in order to actually see any cost savings, since hybrid cars are more expensive up front. Add that to the lack of trunk space because of a giant battery, and she decided to save some green instead of going green. It seems that if you want to buy a hybrid, you are doing it to help the environment or feel good about yourself, not to save money.

In an effort to change that result, Obama said that he would give $7,000 to consumers who buy plug-in hybrids. I personally have a problem with the kind of government intervention that we have seen in the last few months, and with a giant subsidy like this (if people don’t want the cars, why are you spending taxpayer money to bribe people into buying them?). But even if I didn’t have a problem with it, the question I ask in this post is: is $7,000 enough? It’s probably enough to change the math so that, at current gas prices, it would only take you a few years to have it be a good decision financially. Even so, there are other considerations.

When you buy a hybrid car, you are trading higher costs now for fuel savings in the future, but there is another trade-off many people are making: trading down from a larger car or SUV to a smaller hybrid that often saves fuel costs by being lighter. When you make that trade down in size, you also unfortunately increase the probability that an accident will become fatal. I love my SUV, but I would like a more fuel-efficient car, especially for those long road trips back to California and Arizona. Should I be worried about the increased risk? Here are the numbers from the NTSB:

If we average the rates for cars and SUVS in each size category, the average deaths per million small vehicles is about 72, and the average deaths per million midsize and large vehicles is about 52, a difference of 20 deaths per million cars on the road each year.

For anyone trading down from a mid-size or large car to a small hybrid, the probability that you will die fatally in a car accident increases by 20/1,000,000 every year — arguably not that much. Assume you’re going to have the car for 5 years. A risk-neutral person would say that as long as the expected cost of the hybrid (increased crash risk times the value of your life) is less than the expected benefit ($7,000), the hybrid is a good move. You would have to value your life at $70,000,000 or more for you to be worse off because of the safety concerns. Obviously many people might be risk-neutral or even a little risk-loving when it comes to their money, which explains why people gamble even if the odds say you will probably lose money. But when it comes to your life, are you really risk-neutral? I couldn’t find any research on this, but I would assume probably not. That explains why we go overboard about swine flu when it’s less virulent than regular flu, and why we are a nation at war with peanuts, even though you are more likely to die from lightning than killer peanuts. There will be some that will say the increased risk of a fatal accident is not worth the $7,000 in savings, and I understand that. Those that value their life beyond any monetary measure may feel there’s no amount of money that would be worth the increased risk. I’m not sure I would believe them — give them a free hybrid and they’ll probably drive it.  It seems to me that the trade down in safety is worth the $7,000 present from Obama your fellow taxpayers. Will I buy a hybrid? Probably not. When it’s “your money or your life,” sometimes even an economist has to choose life. If I were older or more miserable, maybe I’d buy a hybrid. But not yet.

Market Forces Postscript: The previous analysis assumes that the price of hybrids at dealerships would not increase, which is probably not going to happen: with much higher demand for hybrids because everyone wants their $7,000 rebate, you might expect to see prices of hybrids rise at dealerships — maybe even an amount close to $7,000. Then much of the benefit from buying a hybrid evaporates.