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Fri September 14, 2012
Stalled at the CAFE: How the federal government may end up hurting GM
Here is a quiz:
The Obama Administration is responsible for:
a) The financial rescue of General Motors;
b) The future financial failure of General Motors;
c) Both a) and b);
d) None of the above.
You won’t find the correct answer in upside-down small print at the bottom of this blog. I am not quite sure myself what the right answer might be. But answer (b) might not be such an incredible response.
Last week, President Obama announced the finalization of increased standards for “corporate average fuel economy.” It’s routinely known as CAFE. While the regulations actually originate out of the National Highway Traffic Safety Administration, and while the U.S. Environmental Protection Agency measures individual vehicles, make no mistake; the White House laid down this law, and it is essentially a political statement.
The new standard will require automakers to reach a fleet average of 54.5 mpg by 2025, calculated under a set of rules so complicated that I defy anyone to explain them in a space equivalent to this commentary. (Include the definitions of “harmonic mean,” “the two-fleet rule”, and “vehicle footprint” if you decide to make that attempt.)
And what does 54.5 mpg looks like? A Toyota Prius won’t get you there. The Prius gets maybe 50 miles per gallon in the city, and less on the highway where it runs on mostly gasoline. A new 650cc Kawasaki motorcycle will get you 55 mpg. But the 54.5 number is not just for a few super-performing vehicles. That number, or else some impenetrably complicated lesser number, would be required for the entire national fleet of Ford, General Motors and Chrysler passenger cars.
CAFE is a profoundly dumb regulation. It always has been dumb, and it is getting much worse thanks to the Obama Administration’s new regulatory gift to environmentalists.
No other advanced auto-making nation has been suckered into such a preposterous scheme. In fact, the German automakers that do big business in the United States haven’t much cared about our CAFE standards since their inception. Mercedes-Benz and BMW routinely fail to meet annual requirements on their corporate fleets and happily pay the fines that go along with their willful violations. Not that I blame them; amortizing their fines as $100 or $200 per vehicle on the cost of a $70,000 biturbo sports coupe is no big deal. The Germans are worried about building cars that customers want, not averaging out their fleet economy.
Meanwhile, the American automakers live in desperate fear of, or abject dependence on, a federal government that is laced with interests who would cause them terrible trouble if they did the economically sensible thing and thumbed their noses at CAFE.
And it is not as though CAFE standards actually do anything about Americans’ use of gasoline. Many studies have shown that when Americans are offered – or are forced into – more fuel-efficient cars, one pervasive result is that those Americans drive greater distances, negating any net fuel consumption benefit. Economists call it the “rebound effect;” like letting electrical equipment run more when it is cheap to do so.
Of course government could reduce U.S. motorists’ consumption of gasoline, if lawmakers had the guts, or the stupidity, to do the one thing that would produce that one intended result (and probably lots of ugly unintended results as well). If the federal government really wanted all of us to burn less gasoline in our cars, it would impose a very large tax on gasoline. That would make gasoline so painfully expensive, that Americans’ driving behavior changed drastically. Among the “unintended results” I alluded to, would be the electoral defeat of most politicians who voted for such a tax.
So the politicians’ answer has been the one that looks good on paper, is seemingly cost-free to consumers, and which, above all, avoids getting them unelected.
I’d be tempted to say that CAFE standards don’t do anything at all, but that wouldn’t be true. They have a real market-distortion effect. They make cars less safe and more expensive; they make cars more expensive to insure, and they force upon consumers odd things like the decline and disappearance of spare tires. It is assuredly true -- because the automakers have admitted it -- that some unprofitable cars are produced, and some good quality foreign-built cars are not sold, so as to juggle their mandated CAFE numbers favorably.
President Obama proclaimed that his administration’s CAFE standards would “reduce our dependence on foreign oil.” It is such a transparently phony, evidence-free assertion that it is just easier to say that his CAFE standards will instead “increase our dependence on foreign Hyundais.”
Which brings us back to my little quiz and answer b), the “future financial failure of General Motors.” Admittedly, it may be overwrought to suggest that CAFE standards, by themselves, will doom General Motors. GM, after all, makes some genuinely great, top-rated, profitable products. The problem is, many of those top-rated products are Corvettes, supercharged Cadillacs, Camaros and light trucks. The Chevy Volt, on the other hand, is no longer an unprofitable production vehicle only because it’s on a production break.
I’m tempted to suggest that CAFE standards are so intrinsically non-serious that no sane U.S. government official would ever allow them to kill off or even threaten General Motors. And indeed people are already talking about how the new Obama standards will be waived off in a kind of interim review process in 2017. 2017 comes conveniently before we reach the 2025 regulatory cliff, but after a second Obama administration would no longer have to worry about the issue.
In Michigan, like almost nowhere else, we know that automobile manufacturing is a wonderful business, but a brutally competitive one. We can’t afford any more proven failures like CAFE regulations. Automotive News editor Keith Crain recently wrote that if people think that General Motors has now been safely rescued and is beyond the threat of failure, just think of two other companies in another competitive industry, and how fragile is the difference between world-class success and disastrous competitive defeat. The two companies he named were Apple, and Research in Motion (RIM) the now-distressed maker of Blackberries. Apple just became the company with the largest market capitalization in world history. There was a time, when that position was held by General Motors.
Charles Brown is an attorney from Livonia. His views are his own and do not necessarily reflect those of Michigan Radio, its management, or its license holder, the University of Michigan.