In today’s Journal, Robert Crandall and Hal Singer argue that America shouldn’t drink the corporate average fuel economy standard (CAFE) Kool-Aid. Why? Well why do you think? Because the market is perfect and thus there is no problem! Bring on the Econ 101!
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Are these guys parodying economists? I wonder, because this is so ill informed, and so unsophisticated that it is difficult to take them seriously. Our “socially optimal” level of fuel economy is so poor because many carmakers have used technology to increase power and performance instead of efficiency. We have hybrid cars that use the electric engine to provide more horsepower rather than save gas! |
But it gets worse, ladies and gentlemen, because they feel compelled to explain what they learned in class today–the idea of “market failure:”
Any call for regulation must be based on a market “failure” — that is, failure of private markets to provide the proper incentives for contributing to social value. In the case of the current call for increases in CAFE, the market failure is generally identified as global warming or national security. But 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. Nor would it apply to any emissions outside the U.S. Even if one accepts the debatable proposition that less reliance on oil would improve our national security, we should focus our attention on all oil consumption, not just that used in new vehicles. The cost of trying to reduce the harmful external effects of any form of consumption by arbitrarily taxing just 5% of it is extremely costly. A smaller tax on a much wider tax base always reduces the distortions caused by the tax.
Where to start with this? Because CAFE doesn’t address old home furnaces, it isn’t worth pursing?
My favorite part about this absurd oped is how often they bemoan the benighted state of politics, because the public ignores economists:
Aside from economists, whose voices often carry little weight in Washington, there is virtually no opposition to this form of regulation. Not even from a Republican president.
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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.
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Ask any economist and he’ll tell you that estimating the private costs and private benefits of increasing fuel economy is a fool’s errand.
Maybe we should have an “ask any economist” contest. What, exactly, should be the response to someone who asserts, “any economist would say X.” Should “so what?” be the response? My favorite response comes from one of my brainy students here at Berkeley: “being an economist means never having to say you’re wrong!”
I could go on forever, but will leave it with this:
Mr. Crandall is senior fellow in economic studies at the Brookings Institution. Mr. Singer is the president of Criterion Economics. They have advised General Motors on CAFE issues.
Oh, maybe this explains why no one wants a GM car! Instead of leading like Toyota and Honda on fuel efficiency, they think the market has solved the problem. GM should fire these guys.
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