GM's Weak Arguments Against Increased Fuel Economy

What wonders of disingenuousness the auto industry is capable of! Right now, the Big Three are worried about proposals to mandate that they increase the fuel economy of the vehicles they sell, and so they're wheeling out economists to say that the proposals don't make sense. But one would think they could do better than this.

The economists (Robert Crandall and Hal Singer) start off badly by asserting that "no one disputes that more stringent CAFE standards would increase the cost of making a car". CAFE stands for corporate average fuel economy, and is the mechanism by which the US government regulates automobile mileage. And I, for one, am far from convinced that higher CAFE standards would increase the costs of making a car. In fact, insofar as they encouraged auto makers to make smaller cars and fewer SUVs, higher CAFE standards might even decrease the costs of making a car. Remember that cheaper cars, as a rule, are actually more fuel-efficient, not less.

So color me unconvinced that "carmakers would have to employ very expensive technologies" if this legislation goes through. Every time the US government wants to regulate Detroit we hear the same thing, and every time the regulation happens, the costs magically fail to materialize. Besides, regulations in the US are far less stringent than they are in Europe and Asia. Since the US car companies compete in those markets already, why can't they just import their own technologies from abroad?

Then comes my favorite part of the whole piece:

If there was 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. The carmaker could split the net benefits (equal to the difference between the discounted fuel savings and the cost of the technology) with the car buyer such that both parties to the transaction would be better off.
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.

Tell that to Amory Lovins. The US economy is chock-full of areas where an up-front cost would save money in net present value terms, but isn't implemented. And automobiles are one of those areas. The example here implies that consumers are willing to spend $1,000 more on a new car, if the NPV of their fuel savings was more than that. Ha! I'm sorry, but I simply don't believe that, and I defy Messrs Crandall and Singer to provide any empirical evidence that it's the case. If this were true, then no one would pay a premium for a Hummer: they'd all require a discount, because of the vast NPV of future fuel costs.

Of course, Crandall and Singer are advisers to General Motors, which has made a great deal of money from selling the Hummer over the years, and would hate to see such a cash cow regulated out of existence. This is surely the real reason why Detroit opposes higher CAFE standards: overseas rivals, especially from Japan, are better at making fuel-efficient cars, while Detroit specializes these days in thirsty trucks and SUVs. Which only leaves the question: Why is Toyota opposing CAFE as well?

(Via Mankiw)

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