Obama Running Not One Auto Company but All of Them

Posted on Fri 07/29/2011 by


By Nicolas Loris

When President Obama bailed out General Motors, he stressed that he had “no intention” of running the auto company. Now he’s intent on running all of them.

The Obama Administration tomorrow will announce new auto efficiency regulations that will create stricter miles per gallon (mpg) standards for cars and light-duty trucks for the model years 2017–2025. The target would be an average of 54.5 mpg by 2025 standard, slightly down from the initial proposal of 56.2 mpg. White House press secretary Jay Carney said the new regulations will “result in significant cost savings for consumers at the pump, dramatically reduce oil consumption, cut pollution and create jobs.” As nice as all that sounds, this is bad news for the American consumer.

We are fortunate to have President Obama and his expertise in the auto industry looking out for the consumers and saving us money. But will consumers actually save money? It depends on whom you talk to. The government acknowledges that increased fuel efficiency standards will increase the upfront cost of a vehicle but that higher prices will be offset by savings on gasoline. Generally, these cost savings assume that the buyer keeps the vehicle for its entire lifespan, which usually doesn’t happen, and it also assumes the government’s increased price tag is accurate. Automotive systems engineers argue that it’s not—it’s much higher.

Higher prices reduce demand and force people to hold onto their older vehicles longer. Reduced demand means fewer cars produced, which means automakers have to shed jobs. The Michigan-based consulting firm Defour Group projected that a 56 mpg standard would destroy 220,000 jobs.

When it comes to greenhouse gas emissions, The Atlantic’s Megan McArdle notes that fuel efficiency standards will reduce carbon dioxide emissions, “but not by as much as advertised, because more fuel efficient cars make driving cheaper, so people will do more of it. This ‘rebound’ effect robs about 25% of gains, and also means more congestion, and more wear-and-tear on roads.” The rebound effect also takes away some of the estimated cost savings and oil reduction.

It’s important to note that not all vehicle efficiency standards are the same, so trucks and sport utility vehicles will have easier targets to meet. The Detroit News obtained information that in 2017 light duty truck fuel efficiency will increase 1.7 percent, and passenger car fuel efficiency will increase 5.2 percent. The paper also said that “foreign automakers have said privately the plan could have the effect of pushing them into building more trucks—because it would be easier to meet the new requirements—than building more passenger cars.”

At the heart of the issue is consumer choice. Consumers have plenty of vehicles to choose from, including over 160 different models today that get better than 30 mpg. The problem is not the lack of availability but the lack of consumer demand. Only 4 percent of car buyers bought cars getting 30 mpg or better in 2010. While it’s difficult to predict how consumers will react to the regulations, the fact is that consumers have largely demanded bigger automobiles. Toward the end of 2010, even with high gas prices, Chrysler’s sales were boosted by trucks and SUVs.

As my colleague David Kreutzer writes when it comes to energy efficiency, “The implication here is that consumers and producers are unwilling to save money. A more likely explanation is that those contending that markets do not take full advantage of efficiency have themselves ignored other factors that should be included.” Consumers have different preferences and different needs and take a number of variables into account when buying a car, fuel efficiency being an important one. The market—not the government—knows how to take all these variables into account to meet consumer demand.

President Obama doesn’t own all the blame for fuel efficiency standards. They date back to the 1970s. But they were a bad idea then and are a bad idea now.

Nicolas Loris is a Research Assistant at The Heritage Foundation . http://www.heritage.org/  Roe Institute for Economic Policy Studies. Loris studies energy, environment and regulation issues such as the economic impacts of climate change legislation, a free market approach to nuclear energy and the effects of environmental policy on energy prices and the economy.

Read more informative articles at Heritage – The Foundry . http://blog.heritage.org/

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