What wonders of disingenuousness the auto industry is capable of! Right now,
the Big Three are worried about proposals to mandate that they increase the
fuel economy of the vehicles they sell, and so they’re wheeling
out economists to say that the proposals don’t make sense. But one would
think they could do better than this.
The economists (Robert Crandall and Hal Singer) start off badly by asserting
that "no one disputes that more stringent CAFE standards would increase
the cost of making a car". CAFE stands for corporate average fuel economy,
and is the mechanism by which the US government regulates automobile mileage.
And I, for one, am far from convinced that higher CAFE standards would increase
the costs of making a car. In fact, insofar as they encouraged auto makers to
make smaller cars and fewer SUVs, higher CAFE standards might even decrease
the costs of making a car. Remember that cheaper cars, as a rule, are actually
more fuel-efficient, not less.
So color me unconvinced that "carmakers would have to employ very expensive
technologies" if this legislation goes through. Every time the US government
wants to regulate Detroit we hear the same thing, and every time the regulation
happens, the costs magically fail to materialize. Besides, regulations in the
US are far less stringent than they are in Europe and Asia. Since the US car
companies compete in those markets already, why can’t they just import their
own technologies from abroad?
Then comes my favorite part of the whole piece:
If there was fuel-saving technology out there that cost $1,000 but generated
$2,500 in the discounted present value of fuel savings over the life of the
vehicle, carmakers would surely voluntarily embrace that technology. The carmaker
could split the net benefits (equal to the difference between the discounted
fuel savings and the cost of the technology) with the car buyer such that
both parties to the transaction would be better off.
No need for regulation there. With large numbers of vehicle producers and
well-informed consumers, the market is so efficient, in fact, that it ensures
that all such transactions will occur, generating the socially optimal level
of fuel economy.
Tell that to Amory Lovins. The US economy is chock-full of areas where an up-front
cost would save money in net present value terms, but isn’t implemented. And
automobiles are one of those areas. The example here implies that consumers
are willing to spend $1,000 more on a new car, if the NPV of their fuel savings
was more than that. Ha! I’m sorry, but I simply don’t believe that, and I defy
Messrs Crandall and Singer to provide any empirical evidence that it’s the case.
If this were true, then no one would pay a premium for a Hummer: they’d all
require a discount, because of the vast NPV of future fuel costs.
Of course, Crandall and Singer are advisers to General Motors, which has made
a great deal of money from selling the Hummer over the years, and would hate
to see such a cash cow regulated out of existence. This is surely the real reason
why Detroit opposes higher CAFE standards: overseas rivals, especially from
Japan, are better at making fuel-efficient cars, while Detroit specializes these
days in thirsty trucks and SUVs. Which only leaves the question:
Why is Toyota opposing CAFE as well?
(Via Mankiw)