Business

What About Changing CAFE Standards and Gas Taxes?

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There has been plenty of talk about how the federal government can save the American auto industry by pumping in billions of dollars in loans and requiring the Big Three to conform to new government mandates. What hasn’t been as fully discussed is how current government regulations are affecting the industry.

In The Wall Street Journal, Holman Jenkins explains how the CAFÉ standards haven’t exactly made it easy for U.S. automakers to be profitable.

The tragedy of GM and Ford is that, inside each, are perfectly viable businesses, albeit that have been slowly murdered over 30 years by CAFE. Both have decent global operations. At home, both have successful, profitable businesses selling pickups, SUVs and other larger vehicles to willing consumers, despite having to pay high UAW wages.

All this is dragged down by federal fuel-economy mandates that require them to lose tens of billions making small cars Americans don’t want in high-cost UAW factories. Understand something: Ford and GM in Europe successfully sell cars that are small but not cheap. Europeans are willing to pay top dollar for a refined small car that gets excellent mileage, because they face gasoline prices as high as $9. Americans are not Europeans. In the U.S., except during bouts of high gas prices or in the grip of a Prius fad, the small cars that American consumers buy aren’t bought for high mileage, but for low sticker prices. And the Big Three, with their high labor costs, cannot deliver as much value in a cheap car as the transplants can.

Under a law of politics, such truths were unmentionable in last week’s televised circus because legislators are unwilling to do anything about them. They won’t repeal CAFE because they fear the greens. They won’t repeal CAFE’s “two fleets” rule (which effectively requires the Big Three to make small cars in domestic factories) because they fear the UAW. They won’t hike gas prices because they fear voters.

Simply put, for GM and Ford to achieve long-term financial success, something’s got to give. We can reform CAFÉ. We can hike up gas prices with a new tax. Or we could do both. But any auto bailout really should include market adjustments that 1) make it easier for American automakers to sell cheap, high-quality small cars in America and/or 2) make high gas mileage cars more desirable to American consumers.

You can’t force these changes simply by creating new rules and regulations. I know that a lot of people are wary of market forces these days, but unless you want to ban all foreign car imports, American automakers will succeed or fail based on their ability to make cars people want. A lot of this is up to the automakers themselves. But the government can help with more than just a bailout.

Just something to consider…