Friday, August 3, 2012

CAFE: Bad Policy Is Good Politics

The Corporate Average Fuel Economy is a provision passed by Congress in 1975 that forces certain fuel standards that the major automakers have to meet. And it is spectacularly bad policy.

By forcing car manufacturers to meet an arbitrary standard of fuel economy, it prevents them from making the cars that people want to buy. Because fuel economy is only one selling point. Forcing the auto companies to keep that one factor in mind influences a car's entire design.

Everybody wants higher fuel economy. But nobody wants to pay for it. Because fuel efficient cars means smaller size, less weight (less safe in a crash), more expensive materials (high strength steel and aluminum cost more than regular steel), and less equipment (because the weight adds up). So it prevents market forces from aligning consumer wants with a manufacturer's design capability.

If the Federal government wants to promote better fuel economy or reduce gasoline consumption, the easiest and the most honest way to do it is via a higher gasoline excise tax. Currently the tax is 18.4 cents per gallon at the Federal level. In European countries, the tax man often takes 4-5 dollars per gallon. As a result, Europeans prefer smaller, more fuel efficient cars.

When Energy Secretary Steven Chu testified before Congress that we needed to figure out a way to boost gasoline prices to European levels, he became a political pariah. He had to backtrack his statements and apologize. But he was telling the truth. And the truth is the current government doesn't want you driving so much and using up so much fuel. And it desperately wants to raise gasoline taxes, but since taxes are so politically unpopular they have to resort to gradually raising CAFE levels to 54.5 MPG by 2025.

What's worse is the two fleets rule, which stipulates that automakers must meet the CAFE standard both with its domestically assembled vehicles and its foreign assembled vehicles. This was a sop to the UAW since they wanted to prevent manufacturers from concentrating SUV/truck production in the US (since they are high margin products) and sedans and compact cars abroad.

In the end, we get the kind of legislation that offends nobody but is terrible policy. It doesn't accomplish the original intent and it becomes a vehicle for a payday to politically connected interests.

This is the Federal government at work. And it's a reason why I'm always skeptical about new proposed laws and regulation that the government says is for the public good. The best case is it's just another case of social engineering. The worst case is that it's nothing but cover for throwing more subsidies and payouts to extremely narrow interest groups.

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