David R. Henderson  

Jenkins on CAFE

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My favorite Wall Street Journal columnist, Holman W. Jenkins, Jr., has another good column today on how the Corporate Average Fuel Economy law hampers the Detroit-based auto companies (note: not the U.S. auto industry.) Jenkins points out that in an industry with as many companies as the auto industry, it makes sense for them to specialize. A key paragraph:

The Big Three, left to their own devices, would surely specialize in those vehicles on which they make money -- i.e., those with hefty price tags and markups relative to their man-hour content. Even at the peak of gas prices, half the vehicles sold in the U.S. were light trucks. In November, amid a collapsed home construction industry and with $4 gasoline fresh in mind, what were the two top sellers? Pickups by Ford and Chevy -- and the Dodge Ram was No. 7.

The whole column is worth reading.

Jenkins also raises another issue that I raised with Ford executives when I was the senior economist for energy with President Reagan's Council of Economic Advisers: the issue of simply paying the modest fines for not meeting the CAFE standards. Jenkins points out that BMW, Volvo, and Daimler, all of which specialize in low-fuel-economy cars, pay fines and produce the cars they and their customers want. The fines are $5.50 per tenth of a mile per gallon over the standard multiplied by the production that year for the U.S. market. An automaker that missed the target by 2 miles per gallon and produced one million cars, therefore, would pay a fine that year of $110 million (20 tenths times $5.50 times one million.)

Jenkins asks:

Why don't the Big Three take this out [the out of just paying the fine]? Explains the Government Accountability Office, because they fear the political repercussions of being tagged with "unlawful conduct."

When Vice-President George H.W. Bush's chief counsel, Boyden Gray, and I met at the White House with Ford executives who were seeking regulatory relief, I sympathized with them but wondered why they didn't just pay the fine. They answered that Ford's executives feared stockholder suits against the executives for violating the law. I asked them if simply changing the fine into a tax would solve the problem. They seemed to hesitant to answer (my memory about details 25 years ago is admittedly sketchy) but I've learned that when lobbyists come to meet you, they rarely want to go off-script. Still, I should have done due diligence and checked with a few lawyers to see if that made sense.


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COMMENTS (4 to date)
Kevin T. Keith writes:

Both the original article and your post make sense only if you assume that vehicle fuel-economy standards are simply illegitimate as a policy goal in general. Of course the Big Three would specialize in gas guzzlers if they had the option - and their competitors, even those who specialized in more reasonable cars, would undoubtedly build less-efficient ones, because it costs more money to provide better engineering, and provides more profit to load cars with energy-inefficient luxuries. But we need to tighten up the wastage of our finite resources of petroleum products in every area, and nowhere more so than vehicle fuel efficiency. That that is inconvenient for the manufacturers of gas-hog vehicles is no counter to fuel efficiency as a needed policy goal.

The CAFE standards simply require car companies to make at least some gesture in the direction of efficient resource utilization. The standards have to this day never been raised above their 1986 level, and give manufacturers complete freedom as to how they go about achieving their fleet average MPG. The law could hardly be more accommodating - and the automakers have proven over and over that they cannot be relied upon to act responsibly, in this and other areas, unless they are driven by regulation.

If it's true that foreign-owned firms are evading the standards with impunity, that loophole should be tightened or the penalties raised. But even by Jenkins's own figures, it is obvious that the CAFE fines those firms are paying are palty in comparison to their sales - meaning that the firms are selling cars at a profit while in close to full compliance with the CAFE standards, yet American firms cannot seem to make decent vehicles under any conditions. It is not the CAFE standards, but the US firms' own refusal to develop an effective plan for meeting them, that is to blame.

The Big Three executives insist on whining that their problems are everyone's fault but their own. Ludicrously, they even blame their lack of profitability on their own employees, who can do nothing but implement the plans chosen and approved by the managers who are now dissatisfied with the results. Jenkins and the Journal are merely enabling this bad faith scapegoating out of their own ideological antagonism to workers and unions.

I note, too, that Jenkins's offered "help" to the UAW is to recommend the entire repeal of federal laws guaranteeing unionization rights and collective bargaining. If this is his approach to unionization, it hardly seems reasonable to take his approach to fuel-efficiency any more seriously, either.

Jim W writes:

When CAFE was enacted in 1978, it was the auto industry's preferred alternative to a gas guzzler tax. Industry's concern was that the tax would encourage substitution of fuel efficient imported cars for U.S. cars. (The modest tax that was ultimately enacted that year in addition to CAFE was limited to very low mileage vehicles that were largely European imports.) In contrast, CAFE standards set at levels that the car companies were likely to attain anyway would not encourage imports.

Joe Marier writes:

See what happens? You miss one detail and Michigan goes down the tubes.

Dick King writes:

Kevin, you're using emotional terms like "act responsibly", but if you want to impose a Pigovian tax, impose a Pigovian tax. If overconsumption of gasoline is a problem, the CAFE standards are not the correct solution to that problem because they don't tax the activity which you believe to have a negative externality. For example, a particular car is taxed at the same rate no matter how much or how little that car is driven.

The proper tax to reduce gasoline consumption is a tax on gasoline. Congress knew they had no support for such a thing when they created the CAFE standards in the first place, so they tried to impose a hidden tax instead. Finally the voters are rejecting that too.

I believe the nation should have a stand-up debate as to what the externalities are for consuming one gallon of gasoline, tax gasoline by that amount, and reduce other broad-based taxes by that amount.

-dk

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