WSJ: Oppose CAFE! Ignore Reality! Why, Because I Know Econ 101!

In today's Journal, Robert Crandall and Hal Singer argue that America shouldn't drink the corporate average fuel economy standard (CAFE) Kool-Aid. Why? Well why do you think? Because the market is perfect and thus there is no problem! Bring on the Econ 101!

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...if there was [sic] 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...
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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...
i-9d936ebcbb671ac98c18d0fb1b4e58c6-4s.jpeg Are these guys parodying economists? I wonder, because this is so ill informed, and so unsophisticated that it is difficult to take them seriously. Our "socially optimal" level of fuel economy is so poor because many carmakers have used technology to increase power and performance instead of efficiency. We have hybrid cars that use the electric engine to provide more horsepower rather than save gas!

But it gets worse, ladies and gentlemen, because they feel compelled to explain what they learned in class today--the idea of "market failure:"

Any call for regulation must be based on a market "failure" -- that is, failure of private markets to provide the proper incentives for contributing to social value. In the case of the current call for increases in CAFE, the market failure is generally identified as global warming or national security. But CAFE is a horribly inefficient mechanism for reducing carbon emissions because it does nothing to reduce emissions from power plants, older vehicles, home furnaces or industrial facilities. Nor would it apply to any emissions outside the U.S. Even if one accepts the debatable proposition that less reliance on oil would improve our national security, we should focus our attention on all oil consumption, not just that used in new vehicles. The cost of trying to reduce the harmful external effects of any form of consumption by arbitrarily taxing just 5% of it is extremely costly. A smaller tax on a much wider tax base always reduces the distortions caused by the tax.

Where to start with this? Because CAFE doesn't address old home furnaces, it isn't worth pursing?

My favorite part about this absurd oped is how often they bemoan the benighted state of politics, because the public ignores economists:

Aside from economists, whose voices often carry little weight in Washington, there is virtually no opposition to this form of regulation. Not even from a Republican president.

[...]

When exposed to the piercing light of economic analysis, the alleged benefits of more stringent CAFE standards burn away. Too bad these proposals will not be subjected to economic scrutiny before they become law.

[...]

Ask any economist and he'll tell you that estimating the private costs and private benefits of increasing fuel economy is a fool's errand.

Maybe we should have an "ask any economist" contest. What, exactly, should be the response to someone who asserts, "any economist would say X." Should "so what?" be the response? My favorite response comes from one of my brainy students here at Berkeley: "being an economist means never having to say you're wrong!"

I could go on forever, but will leave it with this:

Mr. Crandall is senior fellow in economic studies at the Brookings Institution. Mr. Singer is the president of Criterion Economics. They have advised General Motors on CAFE issues.

Oh, maybe this explains why no one wants a GM car! Instead of leading like Toyota and Honda on fuel efficiency, they think the market has solved the problem. GM should fire these guys.

More like this

It's worth noting that in the years after the 1973 Arab oil embargo and in the early years of CAFE standard being enforced, US fuel economy increased noticably, from 14 MPG (cars) and 12 MPG (trucks) in 1975 to 22-24 MPG (cars) and 18 MPG (trucks) by 1985. This was during the period where there was a political and economic imputus to ween the US of A off the black stuff.

CAFE contributed in no small way. This is thought to save the nation 2.8 million barrels of crude a day. According to the NAS:

"Improved fuel economy has reduced dependence on imported oil, improved the nation�s terms of trade, and reduced emissions of carbon dioxide, a principal greenhouse gas, relative to what they otherwise would have been"

However, since that time fuel economy has remained stangant (for truck excluding "light truck" SUVs) or gotten worse for other vehicles. The average fuel economy of the fleet as a whole is at it's lowest point since 1980. Japans top ten most fuel efficient cars get on average 19.4% better mileage on highways and 34% better mileage in the city than the top ten most efficient American cars.

It's not cooincidence that since this time, congress has passed legislation that have weakened CAFE standards and other regulations. In 1996 a rider placed a "CAFE-freeze", which essentialy stopped any further CAFE standards being added. Auto industry lobbyists cited "market efficiency" among their reasons.

The CAFE standards weren't a silver bullet, but they certainly helped. Free-market idelogues are incapable of operating in the real world, where the market doesn't respond to problems in the real workd, or responds too slowly.

Now the lobbyists tell us that this would just happen spontaneously thanks to the invisible hand. It's a ruse to reduce regulations so they can go about their buisness as usual and never change. Not bloody likely...

It has happened sort of spontaneously. Here in Europe we consider 40 mpg for highway/long-distance driving somewhat normal for a family car. There was demand, but no government regulation to enforce the fuel consumption restrictions.

It did to a considerable degree remove U.S. built cars from the scenery, and to a while bit also the European car industry quite hard.

Juuro: It's funny how the invisible hand magically seems to work much better when when Europeans pay 2 - 2.5 times as much for gasoline. Instead of government mandated fuel efficiency standards, there are government mandated taxes of about 70% of the cost per liter where Americans pay only about 15-20% of the cost of gas as taxes.

But so much more American taxes go to the indirect costs of trying to keep an oil hegemony.

Why don't Crandall & Singer come out with their real argument: Waaaaaaaahh!! The big bad government wants to take away Bobby's Hummer and poor little Hal's Navigator. Waaaahhh!!!

By natural cynic (not verified) on 06 Sep 2007 #permalink

Chris, are economists really to blame here? I would not be surprised to find that this situation is analogous to the "many biologists, by following the evidence, have been lead to embrace Intelligent Design". In other words, I would not be surprised to find that these guys are lying.

By Valhar2000 (not verified) on 07 Sep 2007 #permalink

Yes, Cynic, the gasoline tax is unpleasantly high on this continent. You mean that because people are less willing to pay these exorbitant prices, the automobile industry naturally will make more fuel-efficient cars?

I'm afraid I'm still too narrow-sighted to see the market mechanism that would correspond to the mandatory efficiency standards.

Valhar, yes, that's a very pertinent question. At least with global warming or evolution we have a clearly identifiable solid scientific consensus, however much the denialists obfuscate.

With economics, this is much harder to see. Is there an evidence-based consensus? Or just a mishmash of conflicting opinions? Or worse still, a consensus not based on evidence (the Econ 101 so beloved of libertarian trolls)?

It's possible to detect industry-based denialism using the deck of cards, but it would be nice to know what the 'science' actually says, the way we can with evolution and global warming, but I never see that in disputes about economics.

"...I never see that in disputes about economics."
-Vagueofgodalming

There is an old saying about putting three economists in a room and getting three opinions... I don't believe there is any consensus among economists beyond certain "Duh" level basics. That is why I usually discount libertarian Econ 101 talk.

@Valhar2000, I do think that economists have a well-founded trust in the market, and sometimes I think they hard pedal market solutions even where they're skeptical, in order to prevent a kind of culture of calling for regulation to solve each problem. What I'm saying is that I think some put a thumb on the scale of market solutions.

But this oped is, for lack of a better word, retarded.

Your little jeremiad reminds me of a conversation I had recently with three of my fellow physicists at university.

They were bemoaning the fact that the government wasn't mandating that car companies build many more hybrid vehicles. When I pointed out that none of the three had purchased one of these planetary saviors even though two of them had recently purchased new cars,(a V-8 SUV and a V-6 turbo sports car) they bristled.

They all defiantly rattled off reasons why they "needed" the gas guzzling vehicles they had purchased and not the fuel sipping hybrids they wanted forced on "everyone else".

Funny how these planet saving mandates always apply to "everyone else". I won't revisit the embarrassing facts about all of the the jet setting "green" celebs and politicians using tens of times the evil carbon laden fuel based energy of the unwashed masses.

Oh, and BTW, GM sales were up 6.1% over the same quarter last year while hybrid happy Toyota's were down 2.8%. And by the by Honda has decided to stop building hybrid Accords due to slow sales. But hey don't let the facts and freedom of choice get in the way of your plans for the rest of us.

As a general rule, a post can be ignored when it consists of three paragraphs of unverifiable anecdote, one paragraph of guilt by association and ad hominem, and another paragraph of statistics that are completely irrelevant to the argument at hand.

Also, when easily checked figures are completely made up on the spot:

Auto sales figures for 2006
COMPANIES
BMW Group –10.6% at 23,303 (9/05: 25,079)
Chrysler Group –7.49% at 168,888 (9/05: 175,556)
Ford Motor Co .66% at 238,848 (9/05: 228,157)
General Motors –6.8% at 338,380 (9/05: 349,202)
Honda America –7.76% at 116,226 (9/05: 121,163)
Nissan North America –9.2% at 88,340 (9/05: 93,540)
Toyota Motor Co. 20.2% at 222,950 (9/05: 178,417)

via http://www.autoblog.com/2006/10/03/by-the-numbers-september-2006/

Hmm... looks like Toyota was UP 20% for 2006, while GM was DOWN 6.8% Cherry-picking one quarter's numbers does not a solid argument make.

Re LanceH

Who's the worlds' largest automaker Mr. LanceH? Not GM any longer.

...if there was [sic] 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...

If this were true, we'd all be using compact fluorescent lights. People do tend to put excess weight on the upfront costs.

If this were true, we'd all be using compact fluorescent lights.

Aren't you? We are, we Old Europeans. I mean, we aren't all yet, but everyone seems to have stopped buying lightbulbs (for ceiling lamps at least) simply because they need a lot more electricity, which costs money. The transition seems to be about halfway over.

"Compact fluorescent light" is even Energiesparlampe in German -- "energy-saving lamp". I happen to have one by Philips lying around here; it's called "Turbo Energy Saver" and advertised as saving energy in 6 languages on the front side and 13 on the back.

By David Marjanović (not verified) on 09 Sep 2007 #permalink

Alas, David, I write these words from the country that elected george w. bush and where some 25% still think he'ss a heck of a guy.

It's a pity that Lance H's physicist ex-friends seem as ignorant as Lance H himself of a basic point about legislation.

Legislation is needed when behaviour that is to individual advantage is to collective disadvantage. In many cases the amount of advantage is such that it's impractical to pioneer the behaviour that is to be legislated. If you nevertheless have the wit to see the long term destructive consequences, it's entirely consistent to call for legislation to make you (and everyone else) act to the collective benefit.

LanceR, I think the full version was that if you put three economists in a room you get three different opinions, unless one of them is John Maynard Keynes, in which case you get four.

I was hoping that things might have moved on a little since his day.