Of Chicken Taxes, CAFE, and gas guzzlers

Holman Jenkins column today (How to Save Detroit And $50 Billion) reiterates his postion that CAFE (government mandated fuel-mileage standards) has at best not helped to reduce fuel consumption. This is absolutely correct — he does however stretch his arguement beyond the breaking point by ignoring (selective amnesia?) other, conflicting, regulation when he states:

“Had CAFE not existed, there is no reason the Big Three today could not be competitive”, and “Yet notice that their (US auto makers) profitable product lines, in which they invest to be truly competitive — such as SUVs, pickups and minivans — hold their own against the Japanese and command real loyalty among U.S. consumers”

Competitive? Truly competitive? As If! The real reason US automakers profited so handsomely from the SUV craze was because it was a protected market for decades, to the tune of 25% import tariff [1], and always either exempted outright, or subject to more lax regulations (not just CAFE, but emissions, and safety as well).

There is to this day a gas guzzler tax. Due to a crafty automobile maker’s lobby (including UAW) SUVs are, it should come as no surprise, exempted.

In a more recent column Yes, Detroit Can Be Fixed, Nov 5, 2008,  Jenkins writes of the “two fleet” CAFE rules that I had never heard of; and their unintended consequences. “Under the nonsensical ‘two fleet’ rule that now applies, manufacturers meet the standards separately with their ‘domestically’ and ‘nondomestically’ produced fleets…. It’s a naked handout to the UAW”

[1] A 25%(!) tariff was imposed by the U.S. against imported trucks beginning in 1964. It was targeted at West Germany, and Volkswagon’s Kombi light duty delivery van. See High and Mighty: The Dangerous Rise of the Suv, by Keith Bradsher for more about the tariff. Sometimes called the “Chicken Tax”, it began as U.S. retaliation against European tariffs on frozen chicken imports — which was hurting U.S. chicken producers. I’m not sure what became of the tariff — another trade deal being debated in 2006 relating to Thailand would have ended it… by this time, other trade deals (like NAFTA) had in effect removed most of the barriers. Bradsher sums up “because of the chicken dispute light trucks would remain almost the exclusive turf of Detroit automakers all the way into the late 1990’s. Time and again government regulators would soften the blow of new rules by applying them first to cars and only later, if at all, to the Detroit-dominated market for light trucks”

How to Save Detroit And $50 Billion
September 10, 2008; Page A13

For a sum small compared to their revenues but large in relation to their market caps, the Detroit auto makers were all over the two conventions. Their lobbyists had something to sell — a plea for $50 billion in federal loans. Congress practically owes us this money, Ford, GM and Chrysler argue — because Congress slammed us with new fuel mileage mandates that will cost us $100 billion to meet.

John McCain caved. The White House is in the process of caving. Barack Obama didn’t need to cave. But before rushing to pass the legislation, there’s an easy way to save $50 billion or whatever part of these loans wouldn’t be paid back: Just repeal the fuel economy rules.

It must infuriate the auto makers how readily their critics attribute their problems to their own incompetence. Then how to explain that GM is thriving in Europe, selling small cars that get lots of miles per gallon? Buick is among the biggest selling brands in China. GM is running away with Latin America.

The Big Three’s problem, to be blunt, is North America. They should have pulled out long ago.

Not only did history saddle them with a UAW labor monopoly that their foreign competitors have managed to avoid. Even that might not have been fatal had Congress not enacted its “corporate average fuel economy” rules in the 1970s.

Look at gallons consumed, miles driven, barrels imported or emissions emitted: CAFE has had no significant impact on energy consumption. Its sole practical effect has been to inflict on Detroit the need to produce, with high-cost U.S. labor, millions of small cars designed to lose money.

CAFE has to be the most perverse exercise in product regulation in industrial history. It confronted the Big Three with the choice only of whether to lose a lot of money, by matching Toyota and Honda on quality and features; or somewhat less money, by scrimping on quality and features and discounting, discounting, discounting. Rationally, they scrimped — and still live under a reputational cloud in the eyes of sedan buyers. Yet notice that their profitable product lines, in which they invest to be truly competitive — such as SUVs, pickups and minivans — hold their own against the Japanese and command real loyalty among U.S. consumers.

Let us have a moment of nonflagellating realism. Toyota is as capable of poor market timing as GM or Ford — witness its multibillion-dollar bet on the Tundra pickup. It flies in the face of human and business realities to imagine that, generation after generation, Detroit hired idiots while Toyota recruited geniuses — though that’s the usual explanation of Detroit’s troubles.

Had CAFE not existed, there is no reason the Big Three today could not be competitive. As businesses do, they would have allocated capital to products capable of recovering their costs. Investments in fuel efficiency would still have taken place — to the extent consumers valued those investments. That is, if they were profitable.

If Washington found this unsatisfactory, it could have done as the Europeans do and raised fuel taxes to coax the public to make different choices. Politically inexpedient? Well, yes, but that doesn’t mean CAFE is an effective substitute. It isn’t and never was.

“When exposed to the piercing light of economic analysis, the alleged benefits of more stringent CAFE standards burn away,” Robert Crandall of the Brookings Institution wrote here last year. “Too bad these proposals will not be subjected to economic scrutiny before they become law.”

Yup. We won’t second-guess Detroit’s political behavior during its 30-year fuel economy captivity, which consisted mostly of offering lip service to Congress’s delusions. It might have done as Volvo, Mercedes, BMW and others did, and simply paid fines for failing to meet the targets. No doubt its friends in Congress advised that doing so would only make its political situation worse.

Having squandered the domestic auto industry’s capital on millions and millions of cars that lost money, now Congress will squander the taxpayer’s capital. It will lend the auto makers $50 billion to invest in fuel efficiency innovations that, by definition, won’t command from car shoppers a price high enough to cover the cost of making them. Which makes it very unlikely we will get the $50 billion back.

Bottom line: Fifty billion won’t turn CAFE into effective policy. It will do just fine, though, as an indicator of Washington’s willingness to throw good money after bad rather than admit the folly of its own long-running handiwork.

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