David R. Henderson  

Barney Frank Admits "Mistake"

Percent Job Loss... Crisis Prophet...

On CNBC this morning, Congressman Barney Frank was shown making his opening statement in the hearings on the bailout of GM, Ford, and Chrysler. He actually admitted that Congress had made mistakes and mentioned one such mistake. Perhaps, you might think, it was that Congress passed the Corporate Average Fuel Economy laws under President Ford or that Congress, at the behest of the United Auto Workers union, tightened these laws under President Carter.

Well, no. Congressman did make a mistake on CAFE, Mr. Frank admitted, but Congress's mistake was that it "failed to increase CAFE." In other words, Congress erred by failing to tighten the restrictions on the auto companies further.

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COMMENTS (16 to date)
floccina writes:

The way that I read CAFE it means that no car company can specialize in big cars. That just seems to me to be too stupid for words. I do not think that people trust Ford, GM and Chrysler to make good small cars. I do not know if CAFE was a contributor to the current troubles but CAFE seems stupid anyway.

TSH writes:

That was his mistake?! How about forcing banks to lend money to people who didn't qualify for loans? How about ignoring warnings that Fannie and Freddie were in way over their heads. Sheesh, what a dunce that guy is, and piling on the auto makers too. The "Big 3" don't deserve a bailout at least not until they radically change their business models. Subsidizing the same old same old is not a good idea. As for CAFE, remember, Toyota, Nissan,etc are held to the same standards and they aren't asking for a bailout

aaron writes:

As much as it pains me, I agree with Mr. Frank. I think the CBO evaluation of CAFE vs Tax is flawed. It costs more financially, but I think the economics favors CAFE. A .46 gas tax eventually has the same effect on fuel efficiency of new cars as a more costly CAFE, but I think this is at great economic cost. During implementation, the pressure for fuel economy improvements happens because of people forgoing economic activity. CAFE has the benefit of inducing demand, stimulating economic activity.

Les writes:

If aaron is correct that "the economics favors CAFE" then I don't understand why CAFE was enacted. Once "the economics favors CAFE" it should have come about automatically without requiring legislation.

But if it is not true that "the economics favors CAFE" then CAFE would indeed have required to be legislated, or it would not come about automatically.

Dick king writes:

aaron, how exactly does CAFE inducing demand [assuming that's a good thing]?

CAFE standards, or a tax on large cars, is obviously a poor approach for saving energy as opposed to a fuel tax. If you want to impose a Pigeauvian tax, tax the activity with the negative externality.

If someone wants a large vehicle for hir five trips to the mountains per year for a total distance of 4000 miles, the tax regime shouldn't affect him nearly as much as his neighbor who wants the vehicle for hir 20000-miles-per-year commute. The CAFE standards treat these two purchases the same, but a gas tax would rightfully bear down more heavily on the commuter.


aaron writes:

It lowers fuel prices.

aaron writes:

Les, I think you are right. I think they are both probably bad ideas, but I think CAFE is better. With CAFE, less car are likely to be built/sold, that might be as economically damaging as the higher gas prices. I think high gas prices are still probably worse though, because they increase the marginal cost of all economic activity.

Sam writes:

LOL at the comment RE banks being forced to lend to unqualified borrowers...

I'm so sorry you bought that line. Honestly... the lending levels that the subprime AND prime lenders were engaged in had NOTHING to do with with anybody being FORCED to lend.

These banks BOUGHT these mortgages and related securities quite happily. There was a huge demand for those securities and it drove lenders to create more supply to meet that demand.

The demand was NOT generated by anybody being forced to lend. If that were the case why were they not all writing up their fears in their annual reports instead of giving themselves huge bonuses for a job well done?

Get real, man.

aaron writes:

I probably shouldn't have said I agree with Frank. I just think he might be right. CAFE could potentially boost the economy. Lots of cheap passanger vehicles are fuel efficient, so I don't think CAFE will destroy a lot of demand on the lower income quintiles. But, I do worry about trucks and SUV. I know many people who own these because the use them for work (besides commuting).

Drew in Seattle writes:

I think it's fair to say that if congress would have prevented the CAFE loophole allowing SUVs to be classified as "trucks" it may have helped Detroit pursue a better business model that wouldn't have bit them in the arse when gas hit $4/gal +

I really don't understand the "blame the CAFE" argument. I'll grant that it's not the most efficient way of achieving the desired end, but it certainly is a negligible factor relative to poor design, bad management, and bloated union contacts.

comsense08 writes:

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comsense08 writes:

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Lord writes:

The automakers would likely be in a much stronger position today if they had. Management was very shortsighted.

arnie writes:

Imagine CAFE-like standards in other relatively less-regulated industries.

1. Movies.
Problem? They are too short and the viewer pays the same ticket price for less entertainment. Movies must find fill material to all "Average" 2 hours in 2010, 2 hours and 10 minutes in 2015, increasing to 3 hours by 2025. Hooray!
Result? Cinemas slowly die.

2. Cell phones.
Problem? Screen size is too small. Within 20 years all phones sold must be the size a toaster. Hooray!
Result? obvious insanity.

CAFE is as studid, perhaps more so, than these two examples.

Sam writes:

The fact of the matter is these companies are severely mismanaged. Awarding them $25 billion in loans would do nothing to change the management. If anything, the halfhearted attempt to get these loans arranged shows how ineffective they are.

Rather than hearing that these guys are going to only work for $1 a year, I'd rather hear that they are going to step down completely and that the replacement will work for a salary and no stock options or grants of any type. Perhaps a bonus tied to balance sheet related goals.

Bankruptcy is the right solution. Restructuring is what our economy needs, not life support for the status quo.

John Vance writes:

Enough trying to bail the bullies out that smashed the electric cars by forcing people to give up their leased vehicles for less efficient vehicles. Im sure, as educated individuals, that we all remember the documentary 'Who killed the Electric Car' and GMs name was mentioned more than 15 times in that non-fictional film.
So Barney says that he wants to bail them out with preconditions regarding fuel economy and this CAFE ding dong idea.
Who should get help now? The electric car companies that weren't given a chance while GM made fuel inefficient SUVs and made our dependence on foreign oil worse.
I will go back to writing my paper about the failings of the Financial Services Committee.


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