Friday, August 29, 2008

Big request from Big Three

The Energy Independence and Security Act of 2007 authorized up to $25 billion in federal government loan guarantees to auto manufacturers in the US. It also increased the CAFE standards 27.5 mpg for cars and 22.7 mpg for trucks to a fleet-wide 35 mpg by 2020. For reference, Toyota’s Prius, Corolla, and Yaris, the MINI Cooper, Honda’s Fit and Civic Hybrid, and everything made by Smart already meet or beat this.
GM now claims that the industry needs $50 billion in loan guarantees, in part because consumers are demanding more fuel efficient cars and because CAFE standards are placing an unfair regulatory burden on the auto US industry. With Michigan and Ohio as presidential battleground states, candidates seem to think that this is a great idea.
I pose some questions to the reader: Is it appropriate to loan $50 billion in public funds to private companies? If German and Japanese auto companies can successfully build and market fuel efficient cars, why do US companies seem to struggle with this? Is this the same thing as the 1980 bailout of Chrysler (which would be valued at $3.7 bn in today’s dollars)? Is this capitalism? Socialism? Good business? Is this a matter of lobbyists exploiting an election? Is this necessary for US firms to remain competitive?

Image sources:
National Archives and Records Administration; ARC Identifier 547699
Car and Driver


Chris McClure aka Panhandle Poet said...

In return, I ask this question: Are mandates capitalism? If you want a free market, get the government out and let market forces drive (no pun intended) automobile production.

Chris Crawford said...

I agree that the CAFE standards are a bad idea. They impose artificial constraints on the industry that distort the market. I would much prefer a fuel tax that seeks the same goal: sending a clear price signal to consumers that gasoline will get ever more expensive.

There's an interesting political question here: should government send price signals that consumers are too stupid to anticipate? That is, should the government have set gasoline taxes so that the net price to the consumer over the last few years would have slowly, steadily risen, rather than letting the consumers be surprised by the sudden jump in prices that we experienced? Anybody with any knowledge of the oil industry could have seen that price jump coming, but consumers were too stupid to see it. The measure of their stupidity is the sudden drop in prices of used SUVs, and the dramatic jump in prices of used Priuses. (You now have to pay more for a two-year old Prius than a brand new one would have cost you one year ago.)

In a properly functioning market, this problem Would have been arbitraged by smart people whom politicians call 'speculators', but in fact various pragmatic and political considerations reduced the effectiveness of this market mechanism. So, is the government justified in using fuel taxes to make up for the deficiencies of the market? Should the government intervene to protect stupid consumers from their own stupidity?

We all seem to be asking more questions than answering them... I suppose that's good.

Chris McClure aka Panhandle Poet said...

Chris C: There's a lot of arrogance in the phrase "consumers are too stupid" which you use repeatedly.

I agree that consumers make a lot of spending mistakes -- most of them are out of ignorance, not stupidity. The biggest mistake they make is spending more than they make. (nice turn of phrase don't you think?)

You talk about "properly functioning markets" and then turn around and talk about tinkering with the taxes. ANY government interference -- taxes, mandates, etc. -- affects the proper functioning of the market.

It is not the government's role or responsibility to send price signals. That is the function of the marketplace. The one exception to this is the "money" market which is "managed" or "manipulated" to control the overall economy.

Chris Crawford said...

Chris, how can the statement be arrogant if it's true? The sudden change in prices for used cars demonstrates quite clearly that consumers didn't know what was coming. Whether that's 'stupid' or 'ignorant' seems immaterial to me -- had they paid attention to the world, they would have seen it coming.

I agree, first, that properly functioning markets are the desideratum, and second, that any government intrusion into the marketplace distorts the economy, usually in undesirable ways. However, I asked some questions that I think are interesting: is it desirable to have the government intervene in the marketplace when the marketplace fails to function to the best benefit of the citizenry? The sudden jump in gas prices and its attendant effects provides us with a good example. Would we be better off today if the government had imposed a fuel tax that had anticipated the jump in the price of gasoline and provided consumers with a smoothly rising price that allowed them to make better purchase decisions?

Chris McClure aka Panhandle Poet said...

It is arrogant in that it implies you to be all-knowing and the average consumer to be stupid (unable to know). Ignorance merely describes uninformed.

What adjustments in behavior did you make 2-3 years ago in anticipation that gasoline prices would rise dramatically? Were those adjusments (if any) made because of anticipated gasoline price rises or because of other criteria? If you can predict the markets that well, that far in advance, why aren't you basking on a beach in Tahiti rather than commenting on this blog? Accurate Oracles are in high demand.

Chris Crawford said...

I ask again, Chris: what is arrogant about a truthful statement?

E. R. Dunhill said...

Chris M,
I don't want a completely free market. I find that most people who claim that they do actually don't. A truly free market is volatile and creates some winners and lots of losers. It is brutally efficient. I think pockets of free markets are great, and markets are a good way to internalize a number of economic externalities.
In answer to your question, mandates are not free-market capitalism, nor are CAFE standards, nor are $50 billion dollar loan guarantees. Our method of choice for solving a problem we've created by fiddling with the market is to fiddle with the market. I think completely refraining from fiscal engineering would have negative consequences.
While I bristle at the idea of such a large hand-out, I think it may be a lesser evil. On the one hand, the federal government has already offered car companies financial incentives to produce fuel efficient cars. Toyota used its annual quotas, selling thousands of hybrids to US buyers. US manufacturers declined the to make substantial use of the benefit, instead trying to convince buyers that they don't really want the fuel-efficient cars they're buying in droves.
While this is fundamentally bad marketing, US manufacturing jobs have increasingly moved overseas, we've become increasingly dependent upon foreign energy, and we've just witnessed some high profile shifts in American industry: Anheuser-Busch is now owned by a Belgian firm, and Dreamworks seems ready to jump-ship from Paramount for Reliance, the Indian superconglomerate. These aren't unique situations. Taking a lesson from Sun Tzu, it may be appropriate to pass the hat among the US tax-payers to keep such large US firms in business, in US ownership (inasmuch as they are), and internationally competitive.
I do wonder how many times Chrysler will push gas-guzzlers during fuel crises, ultimately requiring billions in tax dollars to put out the fire. Maybe that one should be allowed to burn itself out. Perhaps not. I'm also interested as to why the current offer of $25 billion just won't do, and what changes they'll make to prevent recurrance.

E. R. Dunhill said...

Chris M, Chris C,
I'm a little curious (perhaps this is a post in and of itself):
In an ostensibly free society where everyone gets to vote, our leaders and bureaucrats have some degree of public accountability, and government workers and the military are hired/recruited directly from the general public, what's the distinction between the government and the governed? Aren't we it?

Progressive said...

Without entirely reading the comments, I'll throw my thoughts out there...

First, the handouts to U.S. automakers seems to be a remnant of the automaker forced government intervention for over the past 60-70 years. The need for government aid is because our automakers are well behind those internationally because their profits and business models were unnaturally lofty due to government tariffs, etc. I'm not necessarily an expert on the history of Ford, GM, and others, but it is quite clear that they have refused to meet the progress the rest of the market has set.

Second, the new CAFE standard is much different than what most people assume CAFE is. They aren't necessarily a bad idea, especially when the market that so often rely on, moves too slow for societal need. The current CAFE standard that the Chris's speak of is actually a manufacture, fleetwide average that includes the is weighted by the number of each vehicle type produced. More so, bonus systems are built into the process, so if a manufacture produces vehicles that exceed the CAFE, they receive credits that allow for the production of less efficient, but more performance based vehicles (that us Americans so love).

In essence, CAFE has included more market-type solutions.

Sue said...

Prog (like the new icon!) -- thanks for explaining the way CAFE standards work, that does indeed seem to balance both market forces with a general push for higher gas mileage.

I have a personal frustration with the market and fuel efficiency. In the last decade, the auto industry has made fuel efficiency a "luxury" good that is attainable by those who can afford a hybrid. But many of us who want fuel efficiency (including myself) want it because we are not affluent and we need to save money. When I bought a Chevy Metro in 1999, I was enormously glad it got 45/50 mpg because that helped my budget, but I primarily bought it because it only cost $8000 which was all I could afford. What really seems to be missing from the current auto market are stripped down, bare bones, inexpensive to purchase and inexpensive to operate vehicles, of the type I've always purchased (my first car was a very basic VW Beetle, the second a no-frills Toyota Tercel -- in both cases among the lower priced, yet higher efficiency cars in their respective years of manufacture). The auto industry as a whole seems reluctant to offer cars that meet the needs of the lower lower 50 percent of car buyers, because there is so much less profit margin on bare-bones vehicles.

Chris Crawford said...

I disagree with the comment that CAFE standards are market-friendly. While they are less constraining because they apply to the fleet rather than individual vehicles, they still constitute a mandate and a distorting influence. SUVs are a perfect example of how CAFE standards distort the market. SUVs are not included in the CAFE calculation, so manufacturers exploited the loophole to the fullest.

If you want to hit a target with a policy, it is best to aim directly at the target rather than go through indirect routes. The goal of CAFE standards is to reduce our dependence upon foreign oil -- an important goal that we have not given much priority. The smoothest and most libertarian way to decrease consumption -- note the wording!!! -- is to increase the end price to the consumer. This can most directly be done via taxation. Unfortunately, if we tax only foreign oil, then we hand a windfall profit to domestic oil producers who would raise their prices to match the price of foreign oil. Therefore, the best overall approach is a tax on all oil. CAFE standards are due to political cowardice: politicians don't get any flack for indirectly clobbering consumers with mandates, but they'd catch hell for raising taxes, even if they balanced that tax increase with a comparable decrease in other taxes.

Motherhussy said...

lol @ "Accurate Oracles are in high demand."