Sunday, January 18, 2009


Recently it has came out that Barak Obama plans to take the idea of rasing gasoline taxes off the table. This is a great call, and may show testament that we have elected a leader that will bring real ‘change’ to the Whitehouse. Genuine change would mean that he is going to have to ruffle some feathers among those members of his party that have so long ridiculed free markets, the auto industry, and thrash and burn environmental policies. This blog post from the Washington Post/Newsweek is testament to the feather ruffling that will be required if we are going to see more ‘change’ from the democratic party. The author starts off by stating:

“But by failing to raise the gasoline tax, the president-elect risks complicating another problem: Fixing the U.S. automobile industry.”

Actually he doesn’t. The author ( and many in the media and politicians) want to perpetuate the myth that the market, or the automobile industry has something inherently wrong with it that needs fixing. Really, all that needs to be done is for government to get out of the way and let them do what they do best.

“Here's the problem. Obama and leading members of Congress keep saying they want ailing automakers to make more fuel-efficient vehicles. But the automakers in the past made more money on the guzzlers”

Well let’s ask why they make more money on gas guzzlers? Could it be that these are the cars that American’s want to buy? Over the last 10 years what were the top selling models? – TRUCKS and SUV’s. Even with increased gas prices ( which had a lot of help from Congress by the way, ) the top 2 selling vehicles in the US for 2008 were trucks.

“in the future, they will have trouble charging enough to make money on new cars using costly new technologies for plug-in or hybrid cars. So the car company of the future may be a money-losing operation, just like the car company of the present.”

Well, the author may be correct, but for the wrong reasons.
A company fails to make money when they fail to provide products or services that consumers want. ( like TRUCKS &SUV’s). Why have the automakers been losing money? Because (harmful and deadly) fuel economy standards have forced automakers to make a lot of small fuel efficient cars that no one wants to buy. Resources that could have went into the costly engineering problem of developing more fuel efficient TRUCKS and SUV’s over time have hastily been funneled to meet immediate regulatory demands. Further, automakers not only had to waste resources building these low quality cars that no one wants to drive, but they had to absorb heavy losses because they don’t sell. Were it not for the regulatory requirements imposed ‘yesterday’ it is likely that we would have more fuel efficient options in TRUCKS & SUV’s for the higher gas prices ‘today.’

So yes, forcing automakers to produce more cars using costly new technologies for plug-in or hybrid cars that most people don’t want to drive will likely lead to a car company of the future that is a money losing operation, ‘just like the present.’

‘Raising the gasoline tax would increase consumer demand for more fuel-efficient vehicles. That could help automakers charge more for them and make more money on sales of plug-ins, hybrids or more efficient conventional engines.’

Well, it is true that if we use the force and coercion of government to get people to buy cars they don’t want, those selling the cars will benefit. Most environmental legislation and government regulation in general involves taking from one party and giving to another in some way shape or form by using government. There is always a disingenuous justification that it will be ‘good’ for the 'consumer' or the environment. It is what economists refer to as ‘rent seeking’.

‘Not surprisingly, Ford and General Motors both belong to the U.S. Climate Action Partnership, which this week proposed a detailed blueprint for a cap-and-trade system for carbon dioxide emissions. Such a system would put a price on carbon and would effectively tax gasoline and all other fossil fuels.’

Yeah, ‘not surprisingly’ big business is engaging in rent seeking behavior. The problem however, is that while there may be some consensus on the causes of ‘global warming’ there is NO CONSESUS on the actual effects, or what an optimal carbon tax should be to prevent it without doing more harm to the economy, public health, the environment, or the poor.

“After being burned last summer by sky-high gasoline prices, do Americans really need higher gasoline taxes to get them to buy fuel-efficient cars? Yes, actually. Americans have an astonishingly short memory about gasoline prices. Sales of the Toyota Prius have hit the skids now that gasoline prices are back below $2 a gallon. And sales of SUVs are relatively strong compared to many other models.”

Frankly this is a very condescending view of the American consumer. The fact that Americans prefer to drive TRUCKS & SUVs over GO-CARTs like the PRIUS does not mean they have a short memory. Sales of SUVs have been relatively strong over the last 10 years, and automakers have done the right thing to continue to make cars that Americans want to buy. Gasoline at $4 /gallon reflected a strong economy, uncertainty in the Middle East, and lack of commitment to developing existing fossil fuel resources. $2 / gallon fuel today reflects the collapse of the financial market ( again due to mis-priced risk via government distortions)

"If Obama did want to raise gasoline taxes without imposing a hardship on Americans at a time of economic duress, there are (at least) two ways of going about it other than throwing it out the car window. First, he could cut other taxes to compensate people for the fuel tax. Second, he could delay the effective date of the tax, or increase it in small steps over time. A phased-in tax increase would still have a big impact on the choices people make when purchasing cars, which tend to stay on the road for 10 years or so. "

These may actually be great ideas. Taxing carbon actually makes a lot more sense than fuel economy standards and emissions standards.( the author actually goes on to say this) But again we are way too uncertain about what the price of carbon should be, and so we don’t know how much the tax should be. The harm done could be greater than the benefit.

The best solution would be to strike down corporate fuel economy standards, relax emissions standards ( which make the engineering for fuel economy so difficult) forget about a tax, and let the automakers plow that money into making better TRUCKS & SUVs. Over time, if fuel becomes more scarce and gasoline prices increase, automakers will be forced to make more fuel efficient TRUCKS & SUVs or consumers will adapt their choices to other vehicles that are more fuel efficient.

Of course, to prevent huge spikes in energy prices ( which hurt consumers and automakers severely this past year )we need continued commitment to developing existing energy sources including ethanol, wind, natural gas etc. and keep government out of the housing and financial markets ( recall, after financial stocks took a beating once they started correcting for government distortions, many investors took on commodities driving up the cost of oil).

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