Monday, March 05, 2007

News from the Department of Unintended Consequences

Econbrowser: CAFE standards
There is an interesting new study of this by Mark Jacobsen, an economics Ph.D. student at Stanford whom we're trying to persuade to join our faculty at UCSD. Jacobsen notes that auto producers generally fall into one of three groups, as exemplified by Toyota, Ford, and BMW in the diagram below. The fleet of a Japanese producer like Toyota usually has an average fuel economy that is higher than the existing CAFE standard, meaning that a modest increase in the standard would not affect them directly. European producers like BMW fail to meet existing CAFE standards, and choose to just pay the fine that is required for any company that fails to comply. The third group is the U.S. producers like Ford, who feel that violating the CAFE standards would expose them to unwanted publicity, litigation, or further undesirable legislation, and therefore stay just inside the standard. It is thus the U.S. auto producers who do the adjusting when CAFE standards are tightened.

Jacobsen builds a detailed model of the American new and used car market based on the choices consumers make between different kinds of cars. His simulations suggest that one consequence of tightening CAFE standards is an increase in the number of imported cars and a decrease in the fuel efficiency of those cars. Essentially the European producers have an advantage over the American producers in being more willing to flaunt their violation of the CAFE standards, and the Japanese producers have the advantage of selling enough compact vehicles to be allowed to expand less-efficient models such as the Acura. Thus, people who like bigger cars end up buying more of them from the importers when the standards are tightened.

......Although it is hard to motivate CAFE from sound economic principles, somehow it has political staying power. The public evidently sees the costs associated with CAFE as borne by "somebody else" whereas they know they pay the gasoline taxes themselves. But here's another possible proposal that might be suggested by Jacobsen's research. Why not start decrying the fact that some of those foreign companies are failing to comply with our existing CAFE standards, and claim that what we need to do is get more serious about enforcing these, and raise the payment required per vehicle of any company that fails to meet the standards? In practice, this would amount to either raising the tax on BMWs, or forcing the European importers to sell some more fuel-efficient vehicles. Ford and GM would be spared, as long as they continue to stay within the existing standards. [emphasis added]

Of course a gas tax is politically unpopular (never mind we can't seem to come up with the cash to maintain infrastructure much less expand it to meet our growing needs). Americans have gotten used to the "free lunch" of the tax revolt mentality that took hold in the 70's (which has generally meant in practical terms eating a lunch on the tab of your descendants).

Given the blind acceptance of free trade as a panacea by both parties and the desire to be seen to be "doing something" about climate change and oil dependence, the best we can hope for is some government largesse to soften the blow to the workers of the big 2.5 who will suffer when the goalposts move. There will be a double whammy of reduced market share for the big 2.5 and within that smaller share more of the product will be made overseas. The big 2.5 have a lot of old, old plants and whenever you do a major revamp of product a certain number of them are not going to be cost effective to upgrade and will be replaced. This is speeding up a secular trend, not creating a new one but such subtleties will be lost on those affected.

Thoma's proposal would certainly be more progressive by and large, passing the tab to those most able to pay, but politically that is hardly a point in its favor even among Democrats (who tend to treat progressives a bit like Republicans treat libertarians That's interesting, dear. Now run along and play, Daddy is working.).

If we are going to increase CAFE let's do it right, run one standard all the way to 10,000lbs GVWR. Allow a 5 year window before the new rules take effect to allow the automakers time to shift plans and develop new product. Lower the threshold for the 12% Federal Excise tax on heavy trucks to 10,001 lbs (presently at 33,000 lbs) so that we don't push passenger vehicles up the weight ladder. Change the gas guzzler tax from the current mpg graduated system to a simple 12% excise tax (so the tax rate for guzzlers is GVWR neutral). Automakers (whatever their ownership) get massive tax credits for upgrading stateside facilities. Big money is put into subsidizing R&D for the big 2.5 (perhaps under the fig leaf of a University of Michigan research program). Last but not least unemployment and retraining benefits are expanded for people who lose their job within a certain period of time.. How to pay for it? The added FET revenues should help and maybe a gas tax (wink)

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