Going to a ‘café’ where choice is restricted
Imagine that you decide to go out for dinner and do so by paying a visit to a local café you have frequented for years. You have your mouth all set for dining on some delicacy you have ordered many times in the past, and all seems right with the world. You are shown to your seat and without even looking at the menu, you tell your waiter the culinary choice that you have been anticipating throughout the day. As you do so, your waiter tells you the government has ordered them to stop selling that precise item they offered in the past, but there is a government-approved substitute that is available, and government feels the alternative is better for you health-wise.
According to some auto manufacturers, related trade associations, and many economists this is what the American public will face as the year 2025 approaches under new Obama administration CAFÉ (corporate average fuel economy) mandates, nearly doubling current requirements. Released last week, the new standards are meant to improve fuel efficiency, reduce greenhouse gas emissions, and (hopefully) move consumers slowly away from internal-combustion-engine automobiles. According to the Obama administration, the price of a new vehicle (other factors held constant) will increase about $2,800 while gas savings for vehicles still powered in the traditional fashion will drop between $5,700 and $7,400 during the car’s lifetime.
What’s more, one of the criticisms of past CAFÉ standard changes has been improved upon in the latest mandates. In the past, one obvious problem was the actual buying pattern of Americans. If they chose to continue buying gas-powered and non-fuel-efficient vehicles, the only way to meet government standards was to try selling lots of small fuel-efficient cars at a loss to offset the larger, consumer-desired vehicles, with profits potentially suffering (or losses accelerating) Under the new guidelines, “classes” of vehicles would be established with each having its own fuel-efficiency targets (such as pickups/SUVs, mid-sized cars, etc.). If consumers continue to purchase the non-efficient vehicles, CAFÉ mandates might be revised for a particular auto-maker so long as the class standards are met. All-in-all, the government indicates, a pretty good deal for everyone involved.
Of course the government’s analysis could be highly simplistic and the costs to future consumers could be considerably higher. Even to meet the class-standards, vehicles will almost certainly need smaller engines and use far lighter materials. This could well drive up R&D costs to auto companies and these costs will be passed along to consumers; possibly far above the government’s $2,800 estimate.
With lighter materials being needed to meet fuel efficiency standards, the safety of the vehicles may also be compromised. Imagine tooling around town in a lightweight, fuel-efficient Campbell’s soup can (sans soup) to get to your destination. Obviously, this is a preposterous exaggeration, but it gets to a point. If the new mandated vehicles are less safe for you and your family, is it really a good tradeoff? And if such vehicles are lighter and less safe over time, doesn’t it seem reasonable to suppose that auto insurance companies will increase premiums? And if more people die due to safety-related issues, will higher life insurance rates for the driving-age population be far behind? Sadly, these very predictable results seem conveniently absent from the government’s analysis.
And what about the cost-savings on gasoline that is supposed to make this a good deal financially? If, indeed, there is greater fuel efficiency, won’t this produce a decrease in the demand for gas (other factors held constant) and thus drive down the cost of gas? If so, the supposed “savings” from higher future gasoline prices would be lessened. What’s more, this does not consider the movements currently being seen in the U.S. with regard to the supply of energy products. Some feel that technological advances such as fracking could make America more energy independent by increasing the supply of oil and natural gas. An increase in the supply of oil also has the effect of reducing price and eliminating the gasoline cost-savings to consumers. No doubt the development of fracking activities will, over time, need to be balanced against environmental concerns, but it once again exposes the overly simplistic (and possibly self-serving) government analysis.
In the end, according to critics of the government, the café mandates may have all of the sizzle of a promised steak dinner, but a true taste-sensation more closely approximated by a serving of liver and onions.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.