CAFE Kool-Aid

Last week's Wall Street Journal carried an excellent editorial co-authored by Bob Crandall, retired CEO of American Airlines, now a Brookings senior fellow, and Hal Singer, president of Criterion Economics.

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.

Has Peggy Noonan Been In Politics Too Long?

Over the past week, many pundits, including the inestimable Peggy Noonan, have weighed in on Fred Thompson's candidacy.

Larry Kudlow, editorial writers on the Wall Street Journal staff, and Noonan all decry Thompson's lack of 'new positions.'

To a person, they express something like the following:

'Nice try, Fred. Sure, you're folksy and charming. You have great visibility and name/face recognition from your films and Law & Order role. But do you have anything new to say? Any new, untaken positions to add to the Republican Presidential race? Being charming and folksy just won't cut it. You might shove McCain out, finally, and elbow past Romney. But why are you doing this? Finally, do you have the money and ground troops to actually win primaries?'

Honestly, when I read this sort of thing in Noonan's latest columns, I sighed to myself and wondered whether she's been in the political wars so long she's no longer capable of identifying with the average conservative voter.

True, Ronald Reagan had new ideas when we ran, and won, in 1980. And, now, Thompson's appeal, in part, is a return to Reagan's values and orientations.

What Noonan, Kudlow, and others, miss, in my opinion, is Thompson's character. Apparently, Bill Clinton was so effective at brainwashing Americans that Presidential character doesn't matter that even these conservative, Republican pundits have forgotten the concept.

I have not.

What I see in Thompson is the character I want in the Oval Office when the unexpected occurs. It's an often-overlooked fact that what a President focuses on in his/her campaign is rarely what s/he actually finds is the salient issue and crisis of her/his term in office.

For example, our current President ran primarily on domestic issues in 2000, but the salient issue of his two terms has been foreign-sourced terrorism's attack on our country, throughout the world.

Further, as a conservative friend reminded me yesterday at my health club, the President can only suggest and offer legislative expressions of his/her platform. Congress must pass it. Thus, the candidate's own agenda does not necessarily become his/her actual focus in office.

That said, two of my conservative friends agreed with me- the professional pundits seem to have forgotten that who says what is important in Presidential campaigns.

Thompson has been crystal clear from the beginning, as has Newt Gingrich, that if certain issues and positions are not appropriately handled or represented by the current crop of Republican candidates, then he will run. And he has decided to do so. Is that so hard for Peggy Noonan and Larry Kudlow to grasp?

Giuliani is suspect on two aspects of his candidacy. First, he's a social liberal among conservatives. No question. Are we getting the latest genetic product of the old Rockefeller wing of the party? Probably so. Second, why is he running? I don't hear Noonan screaming about Giuliani's reasons for wanting to be President, but they are, if anything, more suspect than Thompson's. I would venture that Rudy wants to be President as the crowning feather in his public service cap. Sure, he has good intentions, and is a desirable candidate on many bases. But he wants this. Really wants it.

Romney even more so. For Mitt, it is a sort of grand coronation to conclude his logical, Hooverish progression from successful private businessman, public servant for at the Salt Lake City Games, and governor of a blue state. Plus, to attain the office his father could not.

McCain is, quite simply, cut from the old Bob "It's My Turn" Dole cloth. He's been a wheeling-dealing, hacked up Senator long enough. By God, it's payback time for his years in the Hanoi Hilton.

Sorry, John, but that's not how it works.

Of all the Republican candidates, I personally find Thompson to be the most convincing, trustworthy, and credible. He'll decide among policy options using values I respect, often share, and trust. If the policies were devised by someone else, so be it.

Am I so unusual in recalling that it's the President's character, values and orientation which ultimately matter? What tests s/he will face are rarely known in advance. S/he can't control Congress- even his/her own party's leaders in those chambers. The only thing we elect, at the end of the day, is a President's values and capability to exercise power in a manner which is consistent with what s/he expressed during the campaign.

I'll discuss Thompson's one glaring weakness- executive experience- in another post.