DON'T DRINK THE CAFE KOOL-AID
September 6, 2007
To bolster support for these new corporate average fuel economy standard (CAFE) rules, proponents purport to show that increasing the CAFE standard to 35 miles per gallon would generate economic benefits to carmakers and consumers, say Robert Crandall, senior fellow in economic studies at the Brookings Institution and Hal J. Singer, president of Criterion Economics.
These claims, however, do not bear out:
- Requiring carmakers to spend more money on cars only diverts resources away from more productive endeavors.
- No country can expand its wealth by employing people in activities that entail more costs than benefits.
- The costs of excessive fuel-economy standards are added to the price of the vehicles, inducing consumers to buy fewer new cars, thereby reducing overall vehicle sales.
- Carmakers would be spending more to come into compliance with the higher standards; car buyers would be spending less on cars in the aggregate because the newer cars would be more expensive.
- Demand curves slope down, which means an increase in the price of cars would generate fewer car sales.
In addition, with respect to the global warming debate, CAFE is a horribly inefficient mechanism for reducing carbon emissions because it does nothing to reduce emissions from power plants, older vehicles, home furnaces or industrial facilities, say Crandall and Singer. The cost of trying to reduce the harmful external effects of any form of consumption by arbitrarily taxing just 5 percent of it is extremely costly.
When exposed to the piercing light of economic analysis, the alleged benefits of more stringent CAFE standards burn away. Too bad these proposals will not be subjected to economic scrutiny before they become law, say Crandall and Singer.
Source: Robert Crandall and Hal J. Singer, "Don't Drink the CAFE Kool-Aid," Wall Street Journal, September 6, 2007.
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