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.

Chrysler Dealers

In most communities auto dealers are among the local power elite. I wonder how many auto dealers vote Democratic. I ask this question after reading this article about how Chrysler dealers are being treated in the auto bailout. The disaffected have formed

the Committee of Chrysler Affected Dealers, who are contesting the company’s action. Next week and on June 3, the bankruptcy judge handling Chrysler’s case will consider their objections.

Many of those fighting the hardest are dealers who recently spent huge amounts of money to stay in the company’s good graces, who sacrificed their own profits to help keep the company intact or who otherwise thought they had bent over backward to ensure that Chrysler could survive, only to learn that they were the ones who would not.

Now I am certainly not contesting the view that Chrysler and GM have too many dealers. It is just that Chrysler and GM had too much of everything, but given electoral politics it seems that the President's auto task force is listening to the electoral polls as it distributes the burden among workers, bondholders, and dealers.

This has led to complaints from a group of Congressmen who argue (according to this article in the Post) that

the auto task force is waging a "war on capital" by favoring the United Auto Workers, who are being offered a 39 percent equity stake in the new GM, over bondholders, many of them small investors and retirees, who are being offered 10 percent.

The irony here, of course, is that most of the same Congressmen voted against any bailout when this issue was before the Congress. Given that they punted the ball to the President is it cool now to complain and demand that the ball be returned?