David R. Henderson  

Henderson on Oge's CAFE

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In the next few years, companies that sell cars and light trucks in the United States will have to comply with increasingly stringent federal regulations on fuel economy. The government's regulations call for a required average of 54.5 miles per gallon on new cars and trucks by 2025. The requirement will vary with the size of the car or truck, so each company will face a different required fuel economy average that varies with the size-mix of its sales. This is after the Obama administration had already raised the overall required average to 34.1 mpg for 2016.
How did such a large increase in required fuel economy happen? Margo Oge, former director of the Office of Transportation and Air Quality in the U.S. Environmental Protection Agency, tells the story in her book, Driving the Future. Oge had a large role in designing these regulations and negotiating for them within the Obama administration and with the auto makers, both foreign and domestic. Her book helps readers understand how this extreme regulatory requirement came about.
These are two of the opening three paragraphs of David R. Henderson, "Centrally Planning Fuel Economy," Regulation, Winter 2016-2017.

Another excerpt:

It's not as if she had no discussions with economists; she did, in both the George W. Bush and Obama administrations. She tells of one interaction with Michael Greenstone, chief economist on the Obama White House's Council of Economic Advisers. In her telling, she had reported a finding that the higher price of the more fuel-efficient car would be more than offset by the saving in fuel expenditures. Greenstone challenged her. She quotes him as saying, "The consumer won't fully value these fuel economy benefits, so we should discount them by 50 to 80 percent."

Oge doesn't say why he believed this. So I called him at the University of Chicago, where he is an economics professor, and asked him. He explained to me that if car buyers were not already demanding cars that had the fuel efficiency she was trying to achieve, it must be because there were other negatives besides the higher upfront price of the car. Those negatives might be the cars' performance, esthetics, safety, or other features.

Oge writes, "Academics like Greenstone would still worry that we are messing with the magic of the market." He explained to me that consumers know what they want better than central planners do. Summarizing her interaction with Greenstone, Oge writes, "The idea that the market functions perfectly is a powerful political and theoretical obstacle to fuel economy regulations." The idea that economists think that the market functions perfectly is a caricature that many non-economists share. You don't have to think that markets function perfectly--whatever that means--to think that they function well and, at least, better than government.

If one sentence crystallizes the problems caused by Oge's lack of understanding of economics, it is this one, written about the then-freshly formed Obama administration: "There will be others, even within the new administration, who are ideologically opposed to the regulations--as is almost inevitable in any room filled with Washington lawyers and academic economists." She, in short, sees economists--even ones in the Obama administration--as being ideologically opposed to regulation rather than being opposed because of their understanding of both markets and regulation.

Later in the review, I talk about how James Woolsey failed to understand the economics of price controls and how this colored the views of someone who went on to become President Clinton's director of the CIA.

COMMENTS (9 to date)
Thaomas writes:

Both sides of the issue seem to be missing the central issue which is why we are regulating fuel standards. The only reason I can see is as a second (or third or fourth) best way of taxing CO2 emissions. A carbon tax would make this kind of costly regulation unnecessary.

MikeP writes:

Interestingly, my copy of the article does not miss this central issue:

Remember that Oge’s and others’ ultimate goal is not better fuel economy per se but, rather, lower CO2 emissions. The least-cost way to get lower emissions is not to single out a particular sector of the economy—in this case, new cars and trucks—and require a minimum number of mpg. Instead, it is to have people cut the uses of CO2 that have the least value for a given amount of emission.

How would government do this? Economists offer two answers: a cap-and-trade system or a tax on CO2 emissions.

Well, that's one side. How about the other side? Oh:

Yet Oge does not consider the option of cap-and-trade or a tax on CO2 emissions. This omission is quite striking given how vocal economists have been in recent years about a tax or cap-and-trade.

To be fair, one side only has an article-length treatment, while the other wrote a whole book, so one could understand if the former missed this central issue.

MikeP writes:

Upon further consideration, I realize it is possible that you are not referring to the book and review at hand, but rather to the general debate over CAFE standards.

A carbon tax would make this kind of costly regulation unnecessary.

So you contend that the pro-government, pro-regulation, climate change alarmist side will actually let an economically defensible carbon tax be the entirety of all CO2 regulation?

I have a longer response in mind, but I must cut this short because my sides have split.

David R. Henderson writes:

Both sides of the issue seem to be missing the central issue which is why we are regulating fuel standards.
You would benefit greatly by reading my book review. I think that’s the point that MikeP is making above.

Tom West writes:

If you believe that government policy needs to address global warming, then I suspect CAFE standards have the highest "political cost"-to-"CO2 reduction" ratio of the available options.

It's not that it's particularly good, but it *is* particularly (politically) cheap.

Fralupo writes:

CAFE standards long pre-date the modern environmental focus on climate change so it is not surprising that they aren't very focused on fixing that problem

Thaomas writes:

I was commenting on the post, not the review or even less the entire CAFE debate.

@ MikeP I do not see how focusing only on the inefficiencies of a second best solution is better than doing that a AND advocating for a less inefficient solution. Opposition to minimum wages w/o advocating for a higher EITC mutatis mutandis.

Kitty_T writes:

This oddly coincides with a recent conversation with my auto mechanic about the hidden costs of fuel efficiency while we were getting a sadly expensive tune-up on my spouse's car (a turbo). He thinks a lot of people were going to be very, very shocked at the maintenance costs of cars complying with the new standards, because the method of manufacturer compliance is basically "stick a turbo onto an underpowered engine."

People who have had turbo charged engines, because it was a choice outside of the norm (and cost more), generally made some effort to get some information about what they were and their downsides. Why should anyone else be aware of this? People have gotten used to cars that just run without constant oversight. (Seriously, how many people do you know who would need to research how to check their own oil?)

Anyhow, my mechanic can't decide if he is or is not looking forward to making lots of money off of furious drivers who don't realize they will need to check and top up the oil every couple of fill-ups, and have the engine dismantled and cleaned and put back together every few years, and replace all the non-metal working parts on a regular basis, just to prevent their engine from exploding.

Tom West writes:

Oops. of course I meant highest "CO2 reduction"-to-"political cost" ratio.

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