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Who Doesn’t Want Fuel Efficient Cars?

May 19, 2009

President Barack Obama will announce plans on Tuesday for a national fuel-economy and greenhouse-gas standard for automobiles in an effort to give more certainty to car companies as they struggle for survival.
The plan marks the first time there has been a nationwide standard for emissions of greenhouse gasses, and it will require an average mileage standard of 39 miles per gallon for cars and 30 mpg for trucks by 2016.

That’s a dramatic increase from current levels – the White House says the average fuel efficiency for the current model year is just 25 mpg.

– Politico

Interesting proposal, right? I mean, who doesn’t want cars with better fuel efficiency? As it turns out – this is a surprisingly relevant question to be asking. If the majority of people want more fuel efficient cars, why aren’t the auto-makers selling them? In fact, let’s try to answer this question, by first answering several other foundational questions about this proposal. the idea here is simply to think beyond stage one of, “Better Fuel Economy – by Government Mandate.”

First, Economist Thomas Sowell’s big three ‘Must answer’ questions concerning any proposal:

1) Who pays for it?

Mostly, you – the consumer. Of course, the car companies and auto workers will also suffer, as the cost to produce their vehicles is driven up arbitrarily, rather than by market demand. They will have no choice but to raise the prices of their cars, trim back weight and features, and/or take even bigger losses on each car sold. If that seems like a raw deal, it is likely that we all will also be paying (as we currently are) to keep the auto companies in business, if these fuel efficient cars don’t sell.

2) How much will it cost?

The senior administration official said the new standards will add an expected $600 to the cost of an average car, but the White House hopes that increase will be recouped through lower gas costs. The economic models used by the administration required a guess of the price of gas in the year 2016. The figure they used was $3.50 a gallon.

Politico

Government guessing the price of gas in 2016? This should immediately raise flags, given that last year alone, fuel prices rose to $4.00+ in the summer, and then fell to $2.50 or so, and are now rising again. How the government can possibly make this prediction 7 years into the future with any certainty should be laughable.

Regarding the cost, $600 is the conservative guess by the way. The Washington Post mentioned $1,300 on average, per car.

And let’s not forget the increase in loss-of-life due to lighter, less safe vehicles on the road. (See crash tests below)

3) Will it work?

Well – that’s the real question, now isn’t it? I am not exactly optimistic.

Sure, brand new cars will be required to meet better fuel economy standards by 2016. However, will the auto makers be able to survive, and become profitable again selling them? Only if there is a sufficient demand by auto buyers to cover the required increase in production costs that the auto makers will be forced to shoulder.

Similarly, considering the environmental goals: does creating and buying more vehicles, and disposing of current ones, really achieve a lowering of environmental impact?

Let’s also re-visit my question at the top: Who doesn’t want cars with better fuel efficiency? Apparently, you don’t. Perhaps a better way to frame this question may be – why haven’t more fuel efficient cars been made? The answer is actually so unremarkably boring and simple that most people skip over it, favoring instead vastly more complicated theories, and or corporate conspiracies.

The answer is Price.

Behind all that wild theories, the laws behind the efficient allocation of scarce resources that have alternate uses* (commonly called: economics) still march on, like an unstoppable rebel force.

The basic economic fact is that the market (at current fuel prices) cannot bear the increase in automobile prices (due to higher fuel efficient cars) in a way that would be profitable for auto makers. If it could have, you can bet the automakers would have already jumped on the possibility, as they did briefly last summer when the price of oil peaked (At the time, ‘Green’ cars and Hybrids like the Toyota Prius were all the rage, as were car ads that emphasized M.P.G.). Note that when the price of oil increased, the market responded, and consumers suddenly valued the higher priced Eco-Cars. No government mandate required.

Also, there is the Cost.

Increased fuel efficiency comes with a trade-off, or cost for the consumer: reduced safety. When the consumer considers the value in a vehicle, safety is usually a critical concern. It appears that at current fuel prices, consumers value vehicle safety, over fuel efficiency. And the trade-off for fuel efficiency vs. safety is huge. For instance, here is a Toyota Yaris and a Toyota Camry (note that a Camry is not a big vehicle) in your standard drift-across-the-yellow-line test:

Owned by a Camry!

And here’s the same test for a Honda Fit vs. a Honda Accord (also, not a large vehicle)

Are you going to put your kids in that?

This is the very real cost trade-off that consumers face when they go to purchase a vehicle. The reason that more fuel efficient cars don’t sell is that, at current gas prices, consumers would rather trade the extra cash, for their own life and safety, rather than a couple more miles-per-gallon. If gas prices were to rise again, consumers would automatically and incrementally start placing more value on fuel efficiency.

Central Planning vs. The Free Market

In the end, the heart of this issue illustrates the classic clash of two opposing views over the very real way economic factors function. Namely, that the will of a handful of elected officials can out-smart the will of millions upon millions of consumer, and producer choices.

In this case, The President has decided that fuel efficiency and eco-friendliness are the highest values, regardless of other concerns and costs. The intent of the idea may be noble, and certainly makes for exceptionally good political capital. However, in the end, the will of the consumer, the will of the auto makers, and even the stability of the auto worker’s employment, is traded in the name of eco-friendly cars.

And don’t get me wrong. This isn’t necessarily a knock on Obama. Many politicians jump at the opportunity to score political capital, without thinking beyond stage one. I’m fairly certain that McCain would have been on board with an idea similar to this.

In my opinion, the basic economic mechanisms of the free market, such as Price, Cost, and Supply and Demand, will force the creation of fuel efficient vehicles, and alternate fuel vehicles, when it actually makes economic sense – and without the mandate of any governing body.

Unfortunately, with the current central planning approach, we will have no choice but to bear the hidden costs.

You can read some other perspectives on this issue at: Politico, Time, The Washington Post, Hot Air, Michelle Malkin, The Heritage Foundation, and Steve Milloy’s Blog – just to start.

*The definition of economics, as explained in Basic Economics, by Economist Thomas Sowell

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4 Comments leave one →
  1. Jules permalink
    May 20, 2009 1:22 am

    So, all the doom and gloom about fuel efficient cars being unsafe. In Europe they’ve had fuel efficient cars for years. Do they have significantly higher road death figures in Europe than in the US?

  2. norris hall permalink
    May 20, 2009 2:07 pm

    Sorry but Honda has been making fuel efficient cars in the US that get excellent crash test ratings and they’ve been doing it for years
    Just Google “Honda crash test” and you’ll see a long list of safe, fuel efficient cars. with 5 star crash test rankings

    It’s time for conservatives to stop whining about why things “can’t be changed” or
    things “can’t be done”

    The kind of mentality is the reason US car manufacturers are on the brink of extinction, while their Japanese counterparts look to dominate the US car market for years to come

    Besides. It’s a moot point. When the worldwide recession is over and gas heads back up to 4 bucks a gallon US automakers will be scrambling to get fuel efficient cars to the market as fast as they can.

  3. May 20, 2009 3:41 pm

    @Jules yeah, they’re all diesel. Otherwise they’re just the same old BMWs and Mercedes we have over here.

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  1. Who Doesn't Want Fuel Efficient Cars? - Community Blog - American Issues Project

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