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December 10, 2008

Low Gas Prices Will Kill detroit.gov

It's nice to blame the auto execs: who else would be dumb enough to come to handoutville in corporate jets? But Congress deserves a fair share of the blame for Detroit's current fix. Creating detroit.gov and turning over product design to Congress is probably one of the few ways we can assure that Detroit makes worse decisions in the future than it has in the past.

Setting CAFE (Corporate Average Fuel Economy) has been Washington's prescription for ending our dependence on foreign oil ever since the first Arab Oil Embargo in the 1970s. You may have noticed that it didn't work. Some people think that is because the standards were set too low; others, including the non-partisan Congressional Budget Office, think that fuel economy standards are far inferior to a gas tax as a way of reducing petroleum imports.

Even if CAFE didn't wean us off imported oil, it did help kill Detroit. It worked like this: The standard is an average. If you're going to sell some SUVs to people who want them, then you've got to sell enough smaller cars so that the fleet average mileage works out right. That part is straightforward enough except that initially vehicles over 6000 pounds didn't count in the fleet; later that was raised to 8000; still Hummers didn't count until this year. So a minor flaw was that the rules were actually an inducement to build very heavy vehicles instead of just sort of heavy vehicles. But that's just a quibble.

The worst thing about the CAFE standard as far as American manufacturing is concerned was the two fleet rule which essentially mandates that North American manufacturers cannot count cars they manufacture out of North America but sell here to meet their quota for small cars. It turns out that Ford and GM do make fuel efficient cars abroad which sell pretty well in the rest of the world because they're competitively priced. Turns out that most people who care about gas prices also care how much they pay for a car so they won't – actually can't – buy more expensive cars in order to save on gas, especially when gas is cheap. Ford and GM could have imported these cars to meet their quotas but they weren't allowed to because that would have cost UAW jobs here in the US. So, to meet the standards, Detroit manufacturers had to use over-priced UAW labor to build small cars here and sell them at little or no margin. What margin they got, came from the trucks and SUVs. Companies that don't build in the US can use their imports to meet the standards. Companies like Toyota that do build here have a lower labor cost and they can profitably make small cars that cost-conscious people want to buy.

So CAFE had a great deal to do with the "dumb" decision by Detroit to innovate in the design of vehicles from which they actually made money. That was Washington management at work.

Innovation in economical cars came from countries with high gas prices. Those countries gave consumers a reason to choose more efficient cars and people did. That's pretty simple. We could have raised the gas tax and we didn't. The result, given CAFE rules, was predictable; both high gas imports and Detroit's concentration on profitable gas guzzlers that people did want to buy.

Things have gotten even weirder with the political fixation on corny ethanol. Congress needed some cars that would burn the stuff despite its low yield in MPG. "dual fuel" vehicles get a special break under CAFE as now written even if they are never filled with ethanol (which may be better economically and environmentally than if they are).

The late, great surge in gasoline prices showed us how effective gas price can be in changing behavior. Duh. If we want to break our dependence on foreign oil, the solution that'll work is to tax gas prices back up again. Gulp! Raising taxes in a recession is usually an awful idea so this should only be done by making sure that at least 100% of the increase gets fed back in at the bottom of the economy from where it can gush up – forgiving the first $500 of social security taxes would both help workers and employers, for example.

Raising gas taxes is politically tough. Congress and the Bush Administration look like they're ready for a short-term bailout of Detroit from both its own mistakes and those of Washington – although Washington doesn't have to humbly confess the error of its ways and foreswear private jets.

But, if the result of a bailout is to create detroit.gov that builds politically correct cars according to the pc whim of the moment, then we will have to forcibly unionize the foreign manufactures who do build here to dramatically raise their costs, subject them to strict government controls on what they build despite the fact that they haven't asked for a bailout, and put huge tariffs on imports or Americans won't buy what detroit.gov builds.

Or we could just raise the price of gas before OPEC is in a position to do that again and give all manufacturers a chance to compete wherever in the market they're best.

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