Mandates, consumers and manufacturers

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President Obama can’t seem to make up his mind about auto manufacturers. Does he want them to survive and even thrive, or not?

In the late Bush and early Obama administrations, the idea was about trying to “save” General Motors and Chrysler with bailouts. After Congress voted against subsidizing the automakers, President Bush nonetheless doled out taxpayer-backed loans in December 2008. Obama expanded the handouts in 2009.

The wisdom of such corporate welfare is debatable, to say the least, especially since the subsidies were meant to avoid bankruptcy. Yet, both Chrysler and General Motors wound up in bankruptcy, while getting additional taxpayer handouts.

But what about socking automakers with increased regulation? Does that make any sense, and what are the eventual costs?

In May 2009, President Obama imposed higher corporate average fuel economy (CAFE) standards on auto manufacturers, and appears ready to jack up those standards once again to previously unimaginable levels.

For 2011, the mandate is 30.2 miles per gallon (mpg) for new vehicles. That is set to rise to 34.1 mpg by 2016. Looking ahead to 2017-2025, the Obama administration has been considering a range of 47 mpg to 62 mpg. Various reports at the end of June indicated that the Obama White House was focusing on 56.2 mpg.

Since first imposed, the idea behind CAFE standards was to save fuel, and reduce U.S. reliance on foreign sources of petroleum. Neither, of course, has occurred. The U.S. uses more fuel and gets more of its oil from foreign sources.

But CAFE mandates have other negative consequences.

For example, these fuel efficiency requirements have raised the cost of producing and purchasing vehicles — and that will continue to be the case if CAFE standards continue to be tightened. A recent Reuters report was on target in noting, “The push to boost fuel efficiency has forced automakers to redesign their vehicles by adopting more fuel-efficient designs and using lighter but more expensive materials. These efforts are likely to raise the cost of vehicles and may pinch automakers’ margins.”

The National Highway Traffic Safety Administration (NHTSA) has projected that the 2012-2016 Obama CAFE standards will cost automakers $51.5 billion.

The sharply higher mandates under consideration for 2017-2025 would further jack up auto prices. According to a Detroit News report, the NHTSA and EPA put the estimates at $770 to $3,500 per vehicle, while the Ann Arbor-based Center for Automotive Research projected the per vehicle costs at $3,744 to $9,790. The NHTSA and EPA, of course, assert that fuel cost savings will overwhelm the added per vehicle costs. However, that is countered by the Center for Automotive Research’s estimate that, with gas at an inflation-adjusted $3.50 per gallon, vehicle costs to consumers would rise by 28 percent, after considering fuel savings, due to more stringent CAFE standards.

The center also points to a reduction of 5.5 million in auto sales, and 260,000 jobs lost as a result.

By the way, taxpayers may not be out of the woods. According to Reuters, Transportation Secretary Ray LaHood would not rule out having the taxpayers pick up some of these added costs. He was quoted: “I assume at some point after the standard is announced we could have discussions with the car companies about what the costs are going to be and who is going to absorb those costs.”

But there’s more. Other costs are involved with ramped up CAFE mandates. While engineering improvements can squeeze a few more miles out of a gallon of gas, there clearly are diminishing returns. Much of the gains in fuel economy have and will continue to come from making smaller and lighter vehicles. Physics being physics, smaller and lighter means reduced safety for drivers and passengers.

The Insurance Institute for Highway Safety released its latest report on driver deaths in June. It pointed out that “drivers of today’s SUVs are among the least likely to die in a crash … due largely to the widespread availability of electronic stability control (ESC), which helps prevent rollovers. With the propensity to roll over reduced, SUVs are on balance safer than cars because their bigger size and weight provide greater protection in a crash.”

Among cars, the institute noted that “4-door minicars have a death rate of 82 [per million registered vehicle years], compared with 46 for very large 4-doors.” So, the death rate is 78 percent higher in minicars compared to big four-door cars. Compare 4-door minis to large, four-wheel-drive SUVs, and the minicar death rate is 447 percent higher.

Quite simply, pushing drivers into smaller and lighter cars due to government CAFE standards translates into more deaths on our roads.

In the end, consumers should decide what they need, with automakers having every incentive to meet the demands of the driving public. While most consumers want greater fuel efficiency, other factors come into play, such as family size and, yes, safety. Having politicians and their appointees dictate fuel efficiency, and thereby, the size and safety of vehicles, has always been an absurdity — a very costly absurdity in terms of both dollars and lives lost.

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council, can be reached at rkeating@sbecouncil.org. His new book is titled Warrior Monk: A Pastor Stephen Grant Novel.