David R. Henderson  

UCS's Flawed Economic Reasoning

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Last week, I received a request from the Union of Concerned Scientists to sign a letter asking the government to impose even higher miles-per-gallon standards on cars. The letter explains:

Last year, the Environmental Protection Agency (EPA), the National Highway Traffic Safety Administration (NHTSA), and the California Air Resources Board (CARB) worked together to set standards through 2016 that would raise the average fuel efficiency of new vehicles to about 34.1 miles per gallon and cut the average global warming pollution from new vehicles to about 250 grams per mile. Now, your agencies are working together to develop the second phase of standards covering new vehicles sold in model years 2017-2025 that could cut new vehicle global warming emissions up to an additional 45 percent and raise fuel efficiency standards to as much as 60 miles per gallon.

What I found striking about the letter is that it doesn't read as if it was written by an economist. Let me count the ways.

1. The letter states:

Strong, cost-effective standards will provide consumers with a wider choice of cleaner and more fuel efficient vehicles that save drivers money. In the absence of standards, market barriers prevent drivers from realizing these savings, leaving drivers without the options they need to respond to volatile and rising gasoline prices. Standards are the right policy approach given the realities of this marketplace.

Reducing choice will increase choice? How does that work? What are the market barriers that prevent drivers from realizing these savings? They don't say.

2. The letter states:

Our continued dependence on oil puts our economy at risk from the effects of oil price volatility and energy insecurity. Oil price spikes were associated with most of the U.S. recessions in the past 40 years. The United States currently sends $1 billion each day to foreign countries to pay for oil and other petroleum products--that is equivalent to more than half of the average daily U.S. trade deficit over the last decade.

Do they realize that as long as the oil market is a world market, we are subject to oil price volatility? This has nothing to do with we're we are a net importer or exporter. Also, depending on imports does not imply energy insecurity, as I have written about elsewhere (here and here.)

3. The letter states:

Strong standards that save drivers money can also support robust employment. Increasing standards will promote new vehicle technologies and increase investment in the auto industry, generating new jobs throughout that sector. The savings consumers realize at the pump will also shift consumer purchases away from the petroleum and wholesale industries to other parts of the economy that generate more jobs for every dollar spent.

Translation: These standards will be expensive. Remember that jobs are a cost of a policy, not a benefit.

Totally missing from the letter is any recognition of tradeoffs. Yes, we can have cars that get higher miles per gallon but these cars, all else equal, will be more expensive, less safe, and less well-performing. Also, raising the standards so high will cause people to hold on to their lower mpg vehicles even longer.

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COMMENTS (10 to date)
Lance writes:

The letter also doesn't realize that the deepness of the oil market allows for future markets which allows for decreased volatility and the increased ability of heavy oil users to navigate oil price shocks.

B.B. writes:

The academic Left, which includes UCS, has adopted the economics of J K Galbraith.

The view is that Big Corporations do not respond to the market (which is a myth anyway), that consumers have no real choices, that advertising creates demand, that corporations need to be forced to do what is best for consumers (who don't really understand what is best for them anyway).

From that view, regulating the production and sale of new types of cars is giving the consumers what they truly want, if they were smart enough to understand their own interests.

Chris T writes:

The really silly thing is that 'uses less' is not what efficiency even is. Efficiency is 'uses less while providing equivalent utility'. Focus on just using less tends to be more costly in terms of resources on net.

Lori writes:

One way in which I perceive markets to fail (so use markets, right?) is failing the used car market. I don't know what percentage of the American population is frequently in the market for a new car. Some of us are perennially in the used car market, while others will buy a new car, but being durability freaks, will not go there often. It would seem the at least some of lower income (or thriftier) people who never buy new would be more likely to prioritize energy efficiency over things like speed, roomy-ness, perceived safety vis-a-vis the intimidation factor, etc. I propose that at least a segment of the used car segment wants a car that rates well above average in reliability, efficiency and insurability. Since these are people most likely to opt out of the luxury called collision/comprehensive, by insurability we're talking about the poor tax called personal liability insurance (the mandatory part of auto insurance), so in this context insurability is more about which car causes the least damage than which one suffers the least damage. Now of course there is feedback from the used-car-only consumer to the OEM manufacturer through what they call resale value. I question, though, whether this particular signal is strong enough to result in car designs that serve the interests of the thrifty.

Evan writes:

The UCS, like most of the left, has an intuitive model of human action that's inherent assumptions seem to be that ordinary people are cogs in a machine whose behavior is determined entirely by their external circumstances, whereas the actions of elites are totally unconstrained by circumstances and determined entirely by the internal moral character of the elites.

According to this leftist mental model the elites (car and oil corporate managers) do whatever they want, and the people are helpless.

This contrasts with the model of human action held by libertarians, and by many types of conservatives, which is that everyone, both ordinary and elite, has their actions constrained by circumstances, and that internal moral character counts for little.

According to this mental model the car and oil companies are constrained by both inherent technological tradeoffs, and by the preferences of consumers, and are therefore giving people what they, on average, desire.

Biagio writes:

I fully agree with you but on point 2 I want to give the writers the benefit of the doubt and assume that they did not formulate correctly what they meant.

Of course as long as one uses oil one will be subject to oil price volatility, but if I can reduce the percentage of my budget used for petrol from, say, 30% to 10% it will mean that only 10% will be touched by oil price volatility, which is better than 30%. Maybe that's what they meant.

GNZ writes:

The correct response to the externalities caused by polluting cars is to price the externalities - both the local health costs and the costs incurred through global warming (eg the recent disasters across the southern US).

But the political-economic reality is that most of the world does not price these externalities, and countries that do price these externalities probably do so well below the true cost. Therefore, if emissions-standards are effective in reducing emissions and are politically feasible, I'd rather have them until correct pricing comes in, despite their imperfections.

I'm not so worried about the trade-offs mentioned. The extra expense is another indirect cost on emitting (in the manufacture and use of cars). Less safe and poorer-performing? Not necessarily:
1. If all cars are having to meet the emissions standards they'll have to compete on other things than fuel economy.
2. Big heavy gas-guzzlers are a big safety risk to other road-users - lighter vehicles will do less damage to others in an accident.
3. As anyone who has driven a hybrid knows, there are aspects of performance where they are superior (eg take-off from intersections).
4. Government can (and should, given other externalities) regulate for safety, too.

Pandaemoni writes:

The points about the curious aspects of the letter are all valid, but I guess (not being familiar at all with the Union of Concerned Scientists), what I find odd is that a group of scientists was asking for the endorsement of an economist in the first place. Economics, interesting is it is, never struck me as very scientific. (That is not to say it's "invalid" by any stretch, just that it's more akin to philosophy than real science, math notwithstanding.)

Evan writes:
The points about the curious aspects of the letter are all valid, but I guess (not being familiar at all with the Union of Concerned Scientists), what I find odd is that a group of scientists was asking for the endorsement of an economist in the first place.
The UCS is an extreme environmental organization like Greenpeace or the Foundation On Economic trends. They use science to cloak an extremist environmental agenda. You can sort of tell by their manipulative name, it implies that any scientist who isn't a member isn't "concerned" and therefore doesn't care and is a bad person.
Jake Russ writes:

#1 is cleverly worded... "a wider choice of cleaner and more fuel efficient vehicles."

They're not being misleading, just choosing their words carefully. They're only interested in the 'clean car' market. If the standards reduce total consumer choice*, but increase the number 'clean car' options, that is perfectly consistent with the statement above. The seen and the unseen.

*By rendering certain car models illegal to sell for not meeting standards, or just simply forcing manufacturers to divert resources from other vehicle options to produce more 'clean cars.'

The 'market barrier' of which they speak is probably a lack of profitability. Otherwise, the car companies would be offering more fuel efficient cars to begin with. But the agency can't come out and say that.

We can see this market-making in practice already, the government is strong-arming the production of alternative vehicles and also having to offer sizable tax rebates in order to get people to buy them because they're so much more expensive. Double-dipping wasted resources.

When government agents don't like the outcome of a market they simply invent rules to try and circumvent the price signal.

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