Wednesday, June 3, 2009

More on CAFE standards and GM

Now that the taxpayer owns GM it is important to recall the impact of CAFE standards on the auto industry. Mark Jacobsen wrote an important paper on this. He divides the auto industry into three groups: those constrained by CAFE who obey; those constrained who disobey and pay the fines; and those for whom the constraints don't apply because their fleets are already fuel-efficient. Naturally, the "Big Three" are the first group, Mercedes and BMW are in the second group, and Toyota and Honda lead the third group. Jacobsen then analyzes how CAFE standards impact the three groups.

There are many important results. Jim Hamilton discussed them in this post a while back. Perhaps, most important, is the simple inefficiency of CAFE standards. They reduce carbon but at perhaps 6 times the cost of a gasoline tax. But most important for now is the differential impact. Because producers like Toyota and Honda are not constrained they pick up the residual demand for larger cars not served by the Big Three who must shrink their fleets in response to higher standards. Think more Accuras and less Buicks. Since larger cars are more profitable, Toyota and Honda gain and the Big Three lose.

Thinking about these results in the wake of the increase in CAFE standards combined with the bankruptcy of GM and Chrysler one cannot help but think about the dissonance of these policies. By raising CAFE the government is making our new government-owned auto companies less profitable. Doublethink s the act of simultaneously accepting as correct two mutually contradictory beliefs, as defined by George Orwell in 1984. One might speculate about that in this case, though I think that politics is the more likely explanation. CAFE standards give off the impression of doing something, even though it is costly. And support for the auto industry is politically beneficial to the constituents of those in power. The fact that the former policy makes the latter even more costly is, perhaps, recognized, but it is ignored because this policy package is politically palatable.

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