Obama’s Misguided Fuel Efficiency Policy

Today, President Obama announced his goal to increase fuel efficiency standards in our cars to an average of 35.5 gallons by 2016.  What he didn’t say is that he is going to keep using the horrible and unfair CAFE fuel efficiency standards and how this is going to absolutely kill the American automakers.  His policies are straight out of a “Politics 101” textbook.  They are so naive and idealistic and he does not realize that there are unintended consequences of his policies.

I’m not an expert on fuel efficiency and the auto industry, but a quick search on wikipedia for “CAFE Fuel Standards” was all I needed.  A little research showed me how the rules and regulations are broken.  Instead of addressing the root of the problem with our auto industry and efficiency standards, our President just reaches for pie in the sky goals with no regard for the blowback of his actions.

As I wrote before, the problem with the Corporate Average Fuel Efficiency (CAFE) standards is that they measure the harmonic mean of all the cars sold domestically by automakers.  Since the domestic automakers sell mostly trucks, they then have to sell – not just produce – an equal amount of crappy, fuel efficient cars that no one wants to buy in order to meet the standard.  They end up having to sell these at huge discounts or even at a loss to rental car agencies.  The Big Three lose money on every compact car they make because of labor and union costs, but make money on every truck and SUV they sell.  The importers from Asia and Europe sell mostly compact cars, so they are at an advantage.  They build these cars using the same US labor, but they are not burdened with the labor costs the US automakers are strapped with.   They can meet the fuel standards and be profitable at the same time.

On a side note, we know that US labor costs are not going to go down either.   The United Auto Workers are now majority owners in Chrysler, and will probably come out the same with GM.  With a partnership of labor and the government running the company, how can we expect labor costs to decrease?  Instead, they will continue to increase, and the taxpayers will keep giving them more money to prop them up.

But back to fuel efficiency.  I believe that we need more efficient cars, and we are already on our way there.  Hybrids are all the rage, and the automakers can’t keep up with the demand.  But are hybrids really green?  Massive amounts of energy go into producing the electric batteries they use.  I won’t get into that debate here, but the consumer demand for more efficient cars is very, very strong.

Why not just let the consumer and the market dictate fuel efficiency?  Why do we need laws created by bureaucrats to overregulate the industry?  Look at how competitive and innovative trucks have become in the last year or so.  As gas prices skyrocketed, consumers wanted fuel efficiency.  Toyota came out marketing their Tundra aggressively, and Ford, Chevy and Dodge responded.  All of the commercials touting features and miles per gallon were a testament that the market works and if consumers demand something, the automakers will listen.  It was capitalism and the free markets at their finest!

But why punish our auto industry for making the best trucks?  Even if they get a truck that can average 30 MPG by 2016, they will have sell an equal amount of compact cars that average 40 MPG to meet the tougher standard.  Or, if they can only get 25 MPG out of the truck, they will have to sell even more 40 MPG compacts.  The smaller cars are money losers for the US auto makers, so we are forcing them to make an unprofitable product.  What kind of business can succeed with that kind of regulation placed on them?

If we were to measure anything, we should measure how much progress is being made by a manufacturer for that particular make and model.  If the auto makers make a truck 250% more efficient than last year’s model, they should be rewarded.  If they can’t make money producing small compact cars, don’t force them to make them.  Let the imports fill that market and let the US automakers focus on making their breadwinners, the trucks and SUVs better.

The bottom line is that consumers are already demanding more efficient vehicles.  Let that demand drive what is produced and sold in the US.  Don’t regulate for the sake of regulating and sign the death sentence for the US auto industry.  We need real changes in the policies of our country, not more well intentioned but horribly executed Politics 101, pipe-dream nonsense from our leaders in Washington.

A Great Example of the Free Market

This weekend, during the NFL Playoff games, I was bombarded with truck commercials from Toyota, Ford, Dodge and Chevy.  Each was touting their own features and downplaying those of their competitors, and all four talked about their great fuel economy.

This is a perfect example of the free market at work.  First, when Toyota came out with their new Tundra, and their new commercials (the see saw and braking ones, etc) the American automakers didn’t have an answer.  Now, they have all innovated to create new features to compete with the Tundra.

Secondly, when consumers demanded better fuel efficiency, the truck makers had to listen, and now all of these full size trucks are getting over 20 miles per gallon, highway, even with a V8.  The fact that they made these trucks so much more efficient so quickly shows how innovative the automakers can be.

The best part?  All of this was done without any sort of government intervention or mandates.  In order to sell their trucks, Toyota upped the ante with the Tundra and their marketing campaign, and the American companies countered with their own new features.  Then when oil and gas shot through the roof, they innovated again to make their trucks more efficient.  It was purely a function of the free market and competition.  Capitalism at it’s best.

I know this is only a small anectdote for economics, but it shows that we don’t need government to tell us what to do in order to make things better.  Lately we have been conditioned to think we need government intervention, and we just lack the vision to see when the free markets really work.  It also shows what happens when consumers demand a better product.  When more people bought Tundras, Ford, Chevy and Dodge all upped their efforts.

Imagine if we can get this kind of action in our healthcare industry.  Our costs would plummet and our care would improve.  Instead, with government’s heavy involvement, healthcare is one of the only industries where technology makes things more expensive.  You’d also be hard pressed to find people that are totally satisfied with their healthcare as well.  However, we are so tied to the current system that a consumer revolt is almost impossible.  If government would get out of the way, maybe there would be a chance of true reform, not little tweaks to a horribly broken system.

The lesson is that the government doesn’t always know best, and that we need to let the markets work.  Have you ever read the CAFE fuel standards?  It is the most idiotic way to measure fuel efficiency ever.  So, rather than make each model more efficient, they could just sell crappy, compact cars.  Now, that consumers have demanded better fuel efficiency in trucks, the companies have listened.

We need to carry this model over to every aspect of our economy.  Only then will we be able to weed out the failures and move forward in the new industries that are arising today.  We need government to stop propping up businesses and getting involved in industries they don’t understand.  Let the companies work and the consumers dictate what they want and we’ll all be better off!

UAW Digging It’s Grave

They are already the scapegoat for the financial problems of the Big Three, and tonight, the UAW is making sure they look like the bad guys in this soap opera.

During negociations with members of Congress and the heads of the Big Three and the UAW, a bailout deal was supposedly really close.  It died when the UAW would not budge on pay cuts.  They said they would take cuts in 2011, but not in 2009.  Like they’re going to have a job in 2011 to get paid for in the first place!

The more hardball the union plays, the worse they are looking in the eyes of the public.  Who is going to have sympathy for them, when they get pensions, healthcare, and paid $30 an hour, when most of us have to fund our own 401k’s and foot some of our health insurance bills.  They are putting themselves in a very bad position, especially when Toyota, BMW and other foreign companies are keeping people employed and making a profit with non-union factories all across the Sun Belt.

The UAW needs the Big Three a lot more than the Big Three needs them, that’s for sure.  The loudest person saying “The Big Three are too big to fail” and “bankruptcy would be disasterous” is the head of the UAW, Ron Gettelfinger.  Why do you think he’s so adamant that the Big Three not go into bankruptcy?  Because he knows that when the automakers restructure, they will most likely ditch the UAW altogether.

The problem with their tough-guy stance right now, is that their tactics could backfire.  If they don’t make any concessions, the Big Three could turn to non-union workers now, with the full support of Congress and the public.  Why risk full unemployment for the entire union for a couple of bucks an hour?  Thirty bucks an hour is great pay for California!  They must live like kings in Michigan!

The UAW could look like heroes right now if they make the right concessions and act like they want to keep their jobs.  Instead, they are being uncooperative and are looking like the problem, not the solution.  I wonder how many union members actually are in favor of what their heads are doing?

All I know is that if they don’t get their act together soon, we’ll see the end of UAW within a few months.  While they might think they’re playing hardball for the benefit of the union members, the heads of the UAW are digging their own graves.