David R. Henderson  

Tweak Cafe and Save Detroit

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After the Election... In Defense of Rationalist Club...

My favorite writer/thinker at the Wall Street Journal, Holman Jenkins, had a marvelous article yesterday on how to save Detroit. His solution is to tweak CAFE standards. CAFE, you might recall, stands for Corporate Average Fuel Economy. Imposed by President Ford and Congress, the CAFE law requires companies to achieve at least a certain average fuel economy in the cars it sells for each model year. The push for the law came about due to high oil prices set by OPEC and shortages of gasoline caused by Nixon's price controls.

In response to pressure from the United Auto Workers in the late 1970s, the law was changed to require auto producers to meet standards on domestically produced cars and, separately, on foreign cars that they imported. The UAW saw this "two-fleet" change explicitly as a protectionist measure. How so? Although the separate standards did reduce the number of large cars produced in the U.S., it also increased the number of small cars produced here, causing the auto companies to import fewer small cars. In a 1985 article on CAFE, I quoted former UAW economist Dan Luria's approving statement, "CAFE acts like a domestic content law."

I also noted that according to William Niskanen, former chief economist at Ford, Ford dropped its Fiesta in the late 1970s, not despite, but because of, the car's potentially large market: Ford feared its German-made Fiesta would "steal" sales from its U.S.-made Escort, thus lowering its domestic CAFE average.

Of course, it would be nice to end CAFE altogether and let consumers make their own trade-offs between fuel economy and other things such as safety. That's what I advocated in my 1985 article.

But a lesser deregulation would also help. Holman Jenkins advocates getting rid of the separate domestic and foreign standards and letting auto companies meet the CAFE standards with their cars sold in the U.S. market no matter they are produced. This, he notes, would give them leverage over the UAW and allow them to pay closer-to-competitive, that is, lower wages. His proposed change even seems feasible. He writes:

In last year's CAFE bill, the Senate actually voted to get rid of two-fleet, though it crept back via a House-Senate conference.

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CATEGORIES: Regulation



COMMENTS (14 to date)
Bob Murphy writes:

David,

You are a friendlier guy than I am, and I presume have a lot more economist acquaintances. :) Can you tell us, do most regular economists agree that top-down regulations like CAFE are dumb? I.e. would even most "liberal" economists agree that a carbon tax (or a gas tax) would be preferable to CAFE standards?

manuelg writes:

> ...save Detroit...

No thank you.

I work in aero-space manufacturing in the United States. I am cognizant of how the tax-payer support of the military-industrial complex helps me, so I am hardly in a position to criticize, but...

If I got half the breaks of the Detroit car manufacturer management, I would have a lot more to show for it. Detroit car union labor and Detroit car manufacturer management are both in bed with the politicians, to the detriment of the future of United States manufacturing.

dWj writes:

At one point in the discussions, they were actually going to let one company (that missed its CAFE requirement) buy credits from another (that exceeded its requirement), which would have made this moot. I never heard whether this made it to the final version; I'm a tiny little bit heartbroken if it didn't.

Incidentally, though, last I saw, the fine for missing a CAFE requirement was approximately equivalent to a 20 cent per gallon gas tax, which makes me think it shouldn't have all that much bite.

Jacob Oost writes:

I suppose ending un-constitutional government support to labor monopolies is out of the question?

Jayson Virissimo writes:

"I suppose ending un-constitutional government support to labor monopolies is out of the question?"-Jacob Oost

Doesn't that go without saying?

aaron writes:

You might be interested in some plots I did earlier this week of fuel consumption and vehicle miles travelled and regular gasoline prices. The data is from the Energy Information Administration and the Department of Transportation Federal Highway Administration.

The first graph is the actual vehicle miles travelled over finished motor gasoline supplied change from previous month [e.g. MPG(Feb 76) / MPG(Jan 76) - 1] and the same for regular gasoline price. It also has 12 month smoothed lines and a 42month smoothed line for price.

The second graph shows the change in 12 month smoothed MPG for each month from the same month 1 year prior.

The 3rd and 4th graphs show the 12 month smoothed MPG over 1 year prior MPG plotted against price and including trend lines.

aaron writes:

Perhaps you can comment on what was happening when CAFE standards went into effect.

aaron writes:

Bob, I'm not an economist, but I'd much prefer CAFE to a carbon tax. With CAFE the costs are more are up front and obvious to car buyers, it goes right into the sticker price. With gas it is spead out over time and high gas prices seem to affect driving behavior in negative ways. Plus, changing gas prices adds risk to business and consumers cash flows. I suspect the oil and gas price increases are what caused the debt bubble to pop (and the unreasonbly high expectations that lead to the debt bubble probably pushed gas and oil demand beyond reason). When expenses went up and incomes didn't, risk no long matched the models financers and investors used.

Looking at the data I posted (though I don't know when exactly CAFE changes happened), suspect that CAFE is more effective than gas price affects. Especially looking at how fuel efficiency has changed over the last couple years even as driving has plateaued and fallen and the mix of vehicles entering the fleet has likely become more efficient (truck sales be down so much).

David R. Henderson writes:

Bob,
I don't think most "liberal" economists have taken a position on CAFE. With the degree of specialization we have in economics today, that's not surprising. It is true, though, that all the "liberal" economists I know who have thought about CAFE reject it. For example, during the 1988 Dukakis campaign for President, one of his advisors, Larry Summers, advocated repealing CAFE. And thanks for your comment about my friendliness. :-)
To answer Aaron, the two reasons economists who study the issue tend to favor a gas tax over CAFE, if those are the only choices, is that the gas tax is visible while the CAFE "tax" is not and, more important, that CAFE is a much more expensive way of achieving fuel economy. The CBO found that, for a given reduction in fuel consumption, CAFE costs about $700 million more per year than a gasoline tax costs. The CAFE does not go into the sticker price; what you probably have in mind is the gas guzzler tax.

aaron writes:

David, CAFE must go into the sticker price because it increases the design and manufacturing cost of vehicles. And the problem is that a gas tax is only good at reducing consumption, which is not a good goal in and of itself.

The benefit of CAFE is that increases productivy without capping consumption. CAFE doesn't destroy productivity like a gas tax does, unless car prices rise so much that people don't buy cars. But it has the benefit that car manufactures will be able to warn politician that if they are held to unreasonable standards they will start closing shop.

With a cap and trade, we are likely to endup with a situation similar to now, where risk changes cause systemic problems. A gas tax is better, it doesn't introduce the uncertainty that cap and trade does, but it still destroys productivity.

Tom DeMeo writes:

It is not a given that increases in fuel efficiency end up increasing manufacturing costs. It may or may not happen.

Larry writes:

Suspend CAFE.

Suspend the gas tax.

Dump the pension funds on PBGC.

Renegotiate labor contracts to allow real, straightforward layoffs.

Oh yeah. Fix health care.

The Detroit (no longer Big) 3 are months away from the end of the road. The alternative is for taxpayers to hand them $40-50B every year to support wages and work rules far more lucrative than those their funders enjoy.

aaron writes:

The reason that CAFE doesn't reduce consumption as much is that it effectively increases supply, lowering the price. The lower price actually acts as an economic stimulus.

CAFE acts as an economic stimulus.

aaron writes:

David, do you have a link to the CBO study?

Thanks,

Aaron

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