Tweak Cafe and Save Detroit
By David Henderson
My favorite writer/thinker at the Wall Street Journal, Holman Jenkins, had a marvelous article yesterday on how to save Detroit. His solution is to tweak CAFE standards. CAFE, you might recall, stands for Corporate Average Fuel Economy. Imposed by President Ford and Congress, the CAFE law requires companies to achieve at least a certain average fuel economy in the cars it sells for each model year. The push for the law came about due to high oil prices set by OPEC and shortages of gasoline caused by Nixon’s price controls.
In response to pressure from the United Auto Workers in the late 1970s, the law was changed to require auto producers to meet standards on domestically produced cars and, separately, on foreign cars that they imported. The UAW saw this “two-fleet” change explicitly as a protectionist measure. How so? Although the separate standards did reduce the number of large cars produced in the U.S., it also increased the number of small cars produced here, causing the auto companies to import fewer small cars. In a 1985 article on CAFE, I quoted former UAW economist Dan Luria’s approving statement, “CAFE acts like a domestic content law.”
I also noted that according to William Niskanen, former chief economist at Ford, Ford dropped its Fiesta in the late 1970s, not despite, but because of, the car’s potentially large market: Ford feared its German-made Fiesta would “steal” sales from its U.S.-made Escort, thus lowering its domestic CAFE average.
Of course, it would be nice to end CAFE altogether and let consumers make their own trade-offs between fuel economy and other things such as safety. That’s what I advocated in my 1985 article.
But a lesser deregulation would also help. Holman Jenkins advocates getting rid of the separate domestic and foreign standards and letting auto companies meet the CAFE standards with their cars sold in the U.S. market no matter they are produced. This, he notes, would give them leverage over the UAW and allow them to pay closer-to-competitive, that is, lower wages. His proposed change even seems feasible. He writes:
In last year’s CAFE bill, the Senate actually voted to get rid of two-fleet, though it crept back via a House-Senate conference.