The authors convincingly demolish any reason for legislating vehicle fuel economy standards. To begin with, they note,
"To bolster support for these new rules, CAFE proponents have issued two studies that purport to show that increasing the CAFE standard to 35 miles per gallon would generate fuel savings for car owners in excess of the admittedly higher costs of automobiles; increase carmakers' profits; and generate nearly a quarter of a million U.S. jobs.
A study by the University of Michigan's Transportation Research Institute supports the first two alleged benefits of increasing CAFE, and the third alleged benefit is touted by the Union of Concerned Scientists. Unfortunately, elementary economic principles require one to conclude that the directional change of more stringent CAFE standards on consumer welfare, carmakers' profits, and jobs is exactly the opposite of what these studies suggest."
Having introduced such 'evidence, they continue by analyzing the context in which the new CAFE standards would be applied,
"Ask any economist and he'll tell you that estimating the private costs and private benefits of increasing fuel economy is a fool's errand. This is precisely the job of a well-functioning market. For example, 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. Markets may generate too little fuel economy if there are social benefits not captured fully by private parties, but CAFE proponents have failed to demonstrate such external benefits. Indeed, external benefits are not even part of their argument.
According to our preliminary estimates, every new GM customer would incur a net loss of several hundred dollars under the newly proposed standard, as the higher cost of the car would exceed the discounted fuel savings. Multiply this loss per vehicle by the number of new vehicles sold and you arrive at annual welfare losses in the billions of dollars."
Thus, Crandall and Singer debunk the idea that there's even a direct, otherwise-unattainable economic resource allocation benefit to CAFE standards. They continue to dismantle the other two 'conclusions' noted in their first paragraph- employment and corporate profits.
For the former, they note that employing more people to create inefficient products is irrational, and a senseless method by which to allocate society's scarce resources. It's something akin, they, I am sure, would agree, to pointing out the economic benefits of rebuilding parts of Florida after a major hurricane causes billions of dollars of damage. Better that the damage had never occurred. It's a net loss to society.
As for corporate profits, they argue that those are better earned by adding value for which consumers will pay of their own volition. Regulatory fiat is not necessary, and, again, distorts basic societal resource allocation.
The authors conclude, pointedly, by noting,
"Any call for regulation must be based on a market "failure" -- that is, failure of private markets to provide the proper incentives for contributing to social value. In the case of the current call for increases in CAFE, the market failure is generally identified as global warming or national security. But CAFE is a horribly inefficient mechanism for reducing carbon emissions because it does nothing to reduce emissions from power plants, older vehicles, home furnaces or industrial facilities. Nor would it apply to any emissions outside the U.S. Even if one accepts the debatable proposition that less reliance on oil would improve our national security, we should focus our attention on all oil consumption, not just that used in new vehicles. The cost of trying to reduce the harmful external effects of any form of consumption by arbitrarily taxing just 5% of it is extremely costly. A smaller tax on a much wider tax base always reduces the distortions caused by the tax.
When exposed to the piercing light of economic analysis, the alleged benefits of more stringent CAFE standards burn away. Too bad these proposals will not be subjected to economic scrutiny before they become law."
Worth reading the entire piece. But I've captured the essential elements here. I find virtually everything that Crandall writes or says (periodically as guest host on CNBC's morning program) to be sensible, correct, and notable.
Too bad he's too wise, plain-spoken and intelligent to become the Commerce or Treasury Secretary he could easily, and effectively, be.
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