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.

Posted by Jim Newton on Sep 4 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.