James Hamilton at EconBrowser gripes this morning about the proposal in a new energy plan from President Bush to raise CAFE standards -- the corporate average fuel economy rules that are designed to encourage automakers to build more fuel efficient vehicles.
Using as his hook a new paper by a Stanford economist on the job market, "Evaluating U.S. Fuel Economy Standards in a Model With Producer and Household Heterogeneity," Hamilton reprises a common economist complaint. CAFE standards don't work very well at changing automaker behavior; a gasoline tax would be a far more effective way of achieving desired ends.
Jacobsen's paper raises some interesting points. He divides automakers into three groups: the Japanese, whose fleets of cars already exceed CAFE standards, so they don't need to change their manufacturing methods at all, and in fact can actually ramp up production of their gas-guzzling luxury cars, if customer demand merits doing so, without undermining their overall compliance. Then there are the Europeans, namely BMW and Mercedes, whose cars don't meet CAFE requirements, but have decided they would rather pay a fine instead of improving their cars. And finally there is Detroit, always teetering right at the edge of noncompliance, but unwilling, possibly for public relations reasons, to pay a fine instead of adjust their fleet makeup.
(Ignore for now the worst ridiculousness about CAFE standards: the huge gaping loophole that allowed minivans and SUVS to escape the regulations aimed at passenger cars.)
The problem outlined by Jacobsen is that if CAFE standards are tightened, Detroit will be forced to put more resources into smaller, fuel efficient cars, which means that consumers who want to buy the big, luxury gas guzzlers will turn to Japan and Europe, which will be only too happy to satisfy them. So Detroit gets hurt economically, and the environment derives no benefit.
This is not an ideal situation, and it's easy to feel sympathy for the economists who argue that a gasoline tax would work much better. A gasoline tax would change both consumer and carmaker behavior. Consumers would drive fewer miles and be less eager to buy inefficient gas-guzzling monstrosities. Carmakers would likewise have an incentive to serve that market.
So we're all agreed. In a perfect world, a gasoline tax would be the most sensible solution.
And yet, as most economists will concede, we do not live in a perfect world, and there are huge political costs associated with imposing a gasoline tax. Which leads to a conundrum. Even if we acknowledge that raising CAFE standards hasn't worked as planned, does that mean we should abandon our efforts to improve CAFE in favor of pushing a gasoline tax solution whose political viability is seriously questionable? Or should we attempt to do what might be possible.
Aligning the art of the possible with the calculus of economics is never easy. But the fact that fuel economy efficiency standards aren't working as well as we like shouldn't be a reason to junk them in favor of an all or nothing strategy that will require American elected politicians to show true leadership.
Hamilton ends his analysis by advocating that fines be raised for non-compliance, so that the likes of BMW and Mercedes would be discouraged from their blithe disregard of increasing fuel efficiency. His closing line implies that putting pressure on foreign companies would be politically preferable.
Maybe not a proposal that an economist would love. But a politician might. And it seems that's the name of the game here.
But, but, but: That's always the name of the game!