What About Changing CAFE Standards and Gas Taxes?

By Alan Stewart Carl | Related entries in Business, Cars, Congress

There has been plenty of talk about how the federal government can save the American auto industry by pumping in billions of dollars in loans and requiring the Big Three to conform to new government mandates. What hasn’t been as fully discussed is how current government regulations are affecting the industry.

In The Wall Street Journal, Holman Jenkins explains how the CAFÉ standards haven’t exactly made it easy for U.S. automakers to be profitable.

The tragedy of GM and Ford is that, inside each, are perfectly viable businesses, albeit that have been slowly murdered over 30 years by CAFE. Both have decent global operations. At home, both have successful, profitable businesses selling pickups, SUVs and other larger vehicles to willing consumers, despite having to pay high UAW wages.

All this is dragged down by federal fuel-economy mandates that require them to lose tens of billions making small cars Americans don’t want in high-cost UAW factories. Understand something: Ford and GM in Europe successfully sell cars that are small but not cheap. Europeans are willing to pay top dollar for a refined small car that gets excellent mileage, because they face gasoline prices as high as $9. Americans are not Europeans. In the U.S., except during bouts of high gas prices or in the grip of a Prius fad, the small cars that American consumers buy aren’t bought for high mileage, but for low sticker prices. And the Big Three, with their high labor costs, cannot deliver as much value in a cheap car as the transplants can.

Under a law of politics, such truths were unmentionable in last week’s televised circus because legislators are unwilling to do anything about them. They won’t repeal CAFE because they fear the greens. They won’t repeal CAFE’s “two fleets” rule (which effectively requires the Big Three to make small cars in domestic factories) because they fear the UAW. They won’t hike gas prices because they fear voters.

Simply put, for GM and Ford to achieve long-term financial success, something’s got to give. We can reform CAFÉ. We can hike up gas prices with a new tax. Or we could do both. But any auto bailout really should include market adjustments that 1) make it easier for American automakers to sell cheap, high-quality small cars in America and/or 2) make high gas mileage cars more desirable to American consumers.

You can’t force these changes simply by creating new rules and regulations. I know that a lot of people are wary of market forces these days, but unless you want to ban all foreign car imports, American automakers will succeed or fail based on their ability to make cars people want. A lot of this is up to the automakers themselves. But the government can help with more than just a bailout.

Just something to consider…

This entry was posted on Wednesday, December 10th, 2008 and is filed under Business, Cars, Congress. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

6 Responses to “What About Changing CAFE Standards and Gas Taxes?”

  1. Chris Says:

    Gm and company have had years to reform their gas guzzlers, and you’re right, the motivation wasn’t there so they fought and bought congress for the last 30 years about it. But now, when they see the folly of their ways they’re crying for help. maybe they could’ve just had a little insight into the future instead of trying to force the market to buy what it makes instead of what the market wants.

  2. Cody Says:

    The Companies did this to them selves. If they would have cut down the CEO’s salary then maybe they wouldn’t need so much money from a bail-out plan. They could have just started making gas saving cars years ago, just like japan. But that’s not what American’s wanted. We want big loud hunks of junk that throw our money down the drain, or should I say gas tank? If auto companies would have said hey we really need to do something about this environmental problem and start making the best, cost effective, gas saving cars with stylish looks and sporty models, then thats not really taking anything away that American’s are used to. Simply take a hummer and re engineer it to get 40 mpg. It’s possiable to do this, we have the technology. But us as American’s are to blind to excersise the power of the dollar. Simply stop buying gas guzzlers and trucks that you don’t need. how many soccer moms drive a suv? Quite a few. Do they really need that?, NO! The auto manufactures will pick up on this and change the way they make things accordingly to fit the demands of the buyers. But us as American’s are to stubborn and that there is the problem. So stop buying trucks and suvs unless your towing or in construction and such. but what about them being safer and such. The less trucks and suvs on the road, the less likely you are to be hit by one.

  3. Jimmy the Dhimmi Says:

    Call the new federal “Car Tzar” and ask him what Americans should buy, and then force auto workers to make them. That’ll fix the problem.

  4. L Says:

    Alan is definitely on to something with the CAFE vs. gas tax argument, and in fact the CBO has done studies and has found the gas tax as both a cheaper and more efficient policy to reduce gasoline consumption (it’s on the internet somewhere).

    Of course, that shouldn’t be the primary goal of the national government but what should be is to rectify the negative externalities produced from driving. The government, in my opinion, should step in here because this is considered a market failure, in that society pays the cost of environmental damage, national security issues, congestion, saftey, etc. that the individual consumer does not. Why not remove the inefficient CAFE standards and impose a higher gas tax? I cannot agree that auto companies “did this to themselves.” They were producing what people were demanding, they don’t drive demand just respond to it. Politicians need to face the music and pass an unpopular but important policy.

  5. SFOtter Says:

    Toyota still managed to turn a profit inspite of CAFE standards.

    Thesis disproven.

  6. ExiledIndependent Says:

    SF, don’t forget that Toyota operates under drastically different domestic policies in Japan than US automakers face here. Check out their government’s measures to encourage the Japanese to buy Japanese cars and report back. If US automakers suggested a quid pro quo approach (treat the Japanese here the same way foreign brands are treated in Japan), they’d be accused of advocating a Laffer-esque tariff policy.

    Free market forces should rule the day here. Instead of the government mandating that the automakers produce unprofitable vehicles, let them sell vehicles that a) people want and b) they can sell at a profit. This could be anything from the Hummer XXL to Chevy HydroGreen.

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