Fuel Efficiency Standards and a Hyperactive Government

Yesterday Obama announced new fuel efficiency standards that “mandate an average fuel economy of 54.5 miles per gallon” by 2025. This is the sort of arbitrary government intervention that hits all the libertarian buttons – distorting the market, deceiving consumers, enhancing the corrupt link between big businesses and big government – although I have to admit it’s likely that it won’t make things worse and may even make them better. However, the mandate does illustrate how the government is so hyperactively involved in so many things these days that an attempt to fix something with one hand may break something it’s already fixing with another hand.

The Corporate Average Fuel Economy (CAFE) program always felt like an amusingly bureaucratic invention to me. First you have to quantify “average miles per gallon” for a single vehicle that varies significantly by highway or city and various driving conditions. Then you have to quantify that average across an entire manufacturer’s fleet (is it by number of vehicles sold? is it by number of models?). Additionally, a mandate based on miles per gallon is built on an assumption that the MPG is fairly constant regardless of trip length, but hybrid and electric vehicles break that assumption. Now you have to forcibly quantify into your old system a vehicle that uses no gas for X miles and then either uses Y mpg after that or can’t go anywhere at all. Finally, once you assume you can quantify everything satisfactorily, you build a new assumption that future technology will be able to meet an arbitrary number sometime in the future.

Another suspicious aspect about the mandates is that most of the major auto manufacturers “welcomed the standards.” Industry support for regulation is often used as proof that the regulation is good, but if you’re familiar with economics you know that established big businesses tend to support regulation because it increases costs they can handle while raising barriers to entry that protect them from new competition, which ultimately hurts consumers with higher costs and less innovation.

They say these mandates are supported by 13 manufacturers that make up 90% of the market, and there’s still plenty of competition between them, but I don’t understand the alleged reason for manufacturer support: it gives them “the certainty they need to make manufacturing plans far into the future.” If consumers already want better mileage, and they think they can handle it, why do they need a mandate to do it? Why don’t they just supply it already? It’s supposed to be a win for consumers because now they’ll get better gas mileage, but the whole thing feels to me like a bizarro paradigm where The White House sets the Reality of What Is Possible To Make. Consumers can’t demand and manufacturers can’t supply better cars until the Voice of the Executive Branch speaks, but once it speaks, suddenly it’s possible for more efficient vehicles to roll off the assembly lines. (Why doesn’t the Voice speak an even higher number?)

The best critique of these enhanced mandates is that it will make new vehicles cost more (Mitt Romney’s anti-Obama knee-jerk gets this one right), and I’m trying to imagine narratives where, for example, manufacturers know consumers want better MPGs but they don’t know how much more it will cost and what consumers are willing to pay – after all, GM is suspending production of the expensive Chevy Volt because it’s not selling enough. But, hey, if everybody’s cars have to be made this way, then it’s less “risky” for any one manufacturer because all the new cars will be more expensive! Obama’s transportation secretary Ray LaHood says savings of $8K on gas will make up for $2-3K of increased car costs, but if that’s accurate and it’s only that expensive, why aren’t they doing it already? The program is being touted as creating “hundreds of thousands of jobs” – won’t consumers have to pay for that? And like the Volt, will they just get laid off again if people can’t afford the cars?

Still, aside from the uncertainty about future costs, I have to admit that this mandate probably isn’t headed for a boondoggled disaster, as much as I strongly dislike it. There’s a mid-mandate “review” that gives the government a chance to correct itself if costs are exploding too much; apparently carmakers are already meeting existing mandate increases without too much trouble. It’s popular to worry about lower safety from lighter cars (the cheap way to increase mileage), but driving fatalities have decreased immensely over the last couple decades even as mileage increased, and advances in automated technologies should improve safety even further. I suppose the mandates could distort the market by slowing driverless technologies at the expense of focusing on mileage that would probably increase at least somewhat anyway; that would be pretty bad, and maybe even a net loss to the public.

But even if consumers do save money and pollution is reduced and the poor aren’t priced out of the market (how much will maintenance and repairs be on these fancy cars once they’re used?), these new mandates still illustrate the over-complexity of our government these days.

The government collects taxes on every gallon of gasoline to pay for roads. It’s already underfunded, and by actively encouraging fewer gallons of gas, the government is hurting its purported source of funding. The government has also mandated the production of billions of gallons of ethanol. There hasn’t been enough pure demand for the fuel to meet the supply, but it has found a backdoor through E10 – it’s now 10% of almost every gallon of gas. If the government helps consumers use half as much gas, there won’t be enough demand for all the ethanol the government wants made. My nightmare is that government will “fix” this with more intervention: Obama’s administration is already pushing E15. Is E20 or E25 next? Of course, that would make the mileage standards harder to meet, and maybe kill some engines along the way. Given the government’s penchant for doubling down on its broken fixes with more broken fixes, I’ll almost be surprised if they don’t…