Jenkins on CAFE
By David Henderson
My favorite Wall Street Journal columnist, Holman W. Jenkins, Jr., has another good column today on how the Corporate Average Fuel Economy law hampers the Detroit-based auto companies (note: not the U.S. auto industry.) Jenkins points out that in an industry with as many companies as the auto industry, it makes sense for them to specialize. A key paragraph:
The Big Three, left to their own devices, would surely specialize in those vehicles on which they make money — i.e., those with hefty price tags and markups relative to their man-hour content. Even at the peak of gas prices, half the vehicles sold in the U.S. were light trucks. In November, amid a collapsed home construction industry and with $4 gasoline fresh in mind, what were the two top sellers? Pickups by Ford and Chevy — and the Dodge Ram was No. 7.
The whole column is worth reading.
Jenkins also raises another issue that I raised with Ford executives when I was the senior economist for energy with President Reagan’s Council of Economic Advisers: the issue of simply paying the modest fines for not meeting the CAFE standards. Jenkins points out that BMW, Volvo, and Daimler, all of which specialize in low-fuel-economy cars, pay fines and produce the cars they and their customers want. The fines are $5.50 per tenth of a mile per gallon over the standard multiplied by the production that year for the U.S. market. An automaker that missed the target by 2 miles per gallon and produced one million cars, therefore, would pay a fine that year of $110 million (20 tenths times $5.50 times one million.)
Why don’t the Big Three take this out [the out of just paying the fine]? Explains the Government Accountability Office, because they fear the political repercussions of being tagged with “unlawful conduct.”
When Vice-President George H.W. Bush’s chief counsel, Boyden Gray, and I met at the White House with Ford executives who were seeking regulatory relief, I sympathized with them but wondered why they didn’t just pay the fine. They answered that Ford’s executives feared stockholder suits against the executives for violating the law. I asked them if simply changing the fine into a tax would solve the problem. They seemed to hesitant to answer (my memory about details 25 years ago is admittedly sketchy) but I’ve learned that when lobbyists come to meet you, they rarely want to go off-script. Still, I should have done due diligence and checked with a few lawyers to see if that made sense.