David R. Henderson  

CAFE Kills (GM)

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General Motors does produce competitive cars and trucks, but not one of them is small. Consumer Reports recommends three GM cars and three GM trucks. The recommended cars are the Chevy Malibu (the unrecommended hybrid has been dropped), the large Buick Lucerne and the Cadillac DTS. Consumer Reports recommends the Chevy Avalanche and Silverado and the GMC Sierra trucks. Car enthusiast magazines insist on adding Camaro, Corvette and the 556-horsepower Cadillac CTS-V to that list.

Among those nine best GM vehicles, only the four-cylinder Malibu achieved as much as 25 mpg in Consumer Reports testing. The others get 12-17 mpg, yet they are no less fuel-efficient than comparable foreign brands. The Environmental Protection Agency rates the mileage of the Toyota Sienna van and Nissan Titan pickup as worst in their class, and comparable Chevys as best. Unlike GM, however, Japanese car companies sell enough small cars to offset the large and thus hold down the average figures.

This is from Thursday's Wall Street Journal. Alan Reynolds points out that CAFE is killing General Motors.

His basic argument is that firms specialize and that GM is the one major auto/truck company that specializes in heavier, bigger cars and trucks.

Keeping CAFE won't prevent us from buying the cars and trucks we want. We'll just buy them from firms other than GM. Reynolds writes:

Americans will still buy Jaguars, but from an Indian firm, Tata, rather than Ford. They'll buy Hummers, but from a Chinese firm, Tengzhong, rather than GM.

Reynolds proposes replacing CAFE with a fuel tax that is uniform across various fuels. He points out that it would "remove an irrational tax penalty on buying diesel-powered cars -- arguably the most cost-effective way to improve mileage without reducing car size or performance." I agree that the federal tax should be uniform--at zero.

During Michael Dukakis's campaign for president in 1988, his economic advisor Larry Summers advocated ending CAFE. Too bad Summers has no power in the current administration.


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CATEGORIES: International Trade



COMMENTS (9 to date)
Kevin writes:

CAFE has been brutal for the US manufacturers. Holman Jenkins has covered this extensively for the WSJ. He points out that Wagner Act + UAW + CAFE = eventual BK. Because a relatively high proportion of the costs of small, efficient cars comes from labor, the Big 3 are totally unable to compete in this space.

They should make muscle cars, trucks, SUV's, and Caddys. Let the companies that can profitably compete in the small car space do so.

Craig writes:

That's odd, I thought that those evil rent-seeking corporations always "captured" the regulators.

SydB writes:

"Alan Reynolds points out that CAFE is killing General Motors."

Any specific facts on how CAFE has been killing GM so far? It doesn't seem that the referenced opinion provides such facts.

Mike Hammock writes:

I am confused. Are you actually arguing that the fuel tax should be zero? That is a very uncommon argument among economists, for two reasons.

1) Fuel taxes are one of the few taxes that (loosely) link consumption of a government-provided good to the price paid by its consumers. That is, people who drive more pay more.
2) Because car emissions produce negative externalities, taxing them is an efficient way to raise revenue--efficient because it reduces the negative externality. If the tax is not set too high, it may not even create a deadweight loss.

If I were cutting taxes, taxes on dirty fuels would be one of the last places I would look for cuts.

Liam McDonald writes:

Mike,

Interesting points, however a fuel tax is a heavier burden on low income familes as a larger percentage of their income must be spent on fuel. People do not drive more because they can in most cases but because they have to.

Jeremy, Alabama writes:

Simple plan that could have saved GM:

- End CAFE: allows GM to build profitable cars that Americans want

- Sales tax (Fair Tax) replaces corporate and income tax: all cars, from all countries, pay the same tax!

- End Federal pension guarantee: forces unions to renegotiate in good faith, or lose everything

Mike Hammock writes:

Liam,

That is true, not only for gasoline, but for most sales taxes. I think it makes more sense to deal with that sort of problem through income redistribution (either with spending or income tax policy) rather than through excise taxes, though. An increase in the EITC could be funded with pollution taxes, or we could use pollution taxes to eliminate payroll taxes.

Alan Reynolds writes:

The title may suggest CAFE "is" killing GM in the present, but authors don't write titles.

The mix of GM vehicles that consumers choose to buy could not even meet current CAFE standards except that Congress gives the company extra Brownie points for making "flexible fuel" trucks (which almost always run on gas and would get 30% worse mileage on E85).

Unless GM can get a much larger market share in small cars -- at the expense of Toyota, Honda, Hyundai, Ford, etc. -- then GM can achieve future "average" mileage standards only by reducing production of the larger and/or more powerful vehicles they now sell at a price that covers cost. But CAFE is not really enforceable, since it would be absurd to fine GM or Chrysler while also subsidizing them.

Europe and Asia levy stiff consumer taxes on fuel(partly a user fee) and in many cases also on buying new vehicles with large engines. They have not imposed binding regulatory mandates on producers. Some firms can then specialize in making Ferraris, Maybachs and Aston Martins while others mainly make smaller Renaults, VWs and Fiats.

Taxes and regulations are both coercive, but I'd rather pay an extra tax for my 300-horsepower Bimmer than face Puritanical prohibition by zealous greens.

David R. Henderson writes:

Alan Reynolds,

Thanks for the clarification on headlines. (And thanks even more for the article.) I was talking "killing" GM in a present value sense. Re taxes, like you, I would much prefer taxes to regulations. However, I'm advocating what's ideal, not what I think I can get.

Mike Hammock,

You're not confused. You're right that I'm making an argument that economists don't typically make. The reason is that they typically take government roads as a given and I don't. I want to change that too, for reasons that Ben Powell discusses at:
http://www.econlib.org/library/Columns/y2009/Powellstreets.html
Also, on car emissions, you're right that it's a negative externality, but it's mainly an externality at a local or, at most, state level. Like Alan Reynolds, I was discussing the federal tax on gasoline.

Best,
David

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