By on July 25, 2011


Dare to suggest that a strong CAFE standard won’t ruin any automaker, and you’ll be overwhelmed by deafening cries of “what about the market,” “think of consumer choice,” and “don’t you tell me what to drive.” Now, I’ve made it very clear that I’m not a huge CAFE fan, but the fact of the matter is that since nobody is leading a charge for a gas tax (least of all the industry that says it would be a good thing) it’s the only option on the table. Which leaves just one question: why regulate fuel economy at all? There are all kinds of arguments against regulating fuel economy, but most stem from a desire to “let the market do its thing.” That’s an argument I’m highly sympathetic towards, but it doesn’t necessarily require that the government but out and let the era of cheap, thirsty trucks roll on unabated. What maybe, just maybe, if the market actually wants more fuel economy? Well guess what campers… according to research by IHS Global Insight [via Automotive News [sub], the market does want more fuel economy.

The major trend is visible enough in the graph above to prove the point: 8 cylinder engines have allen to a mere 18 percent of the market, while four-cylinder engines now make up the plurality of engine choices, at 43%. But if you’re looking at retail buyers only, there’s even more evidence that private consumers are more interested in fuel economy:

So far this year, more than half the vehicles sold to retail consumers had four cylinders, up sharply from a third in 2006, says J.D. Power and Associates.

So the whole line that “Americans like big, inefficient cars and trucks and therefore governmental regulation of fuel economy hurts consumers as well as the (primarily “domestic”) automakers who sell most of these vehicles” turns out to be bunk (incidentally, small and mid-sized vehicles account for 44 percent of sales this year vs. 36 percent in 2005). The market is objectively running away from big, thirsty vehicles with haste. Meanwhile, the two factors that are causing this shift have an interesting story to tell about the government’s role in the market. According to AN’s report:

Two factors are driving the shift. Buyers beset by high fuel prices are downsizing vehicles or opting for the smaller of two engine choices. And manufacturers are shrinking vehicles and engines to meet tougher 2016 federal fuel economy rules.

This is crucial: were this simply a question of high gas prices, we could sit back and argue that the government need not get involved. If automakers were truly responsive to their customers, the market would effectively provide the vehicles that consumers demand in the face of high gas prices. But as AN points out, governmental regulations actually play a huge role in making the market work. After all, automakers have no intrinsic incentive to offer highly-efficient vehicles: they typically cost more to build than, say, a Body-On-Frame truck,  and command lower prices. And because the traditional mode of American consumption is to “buy as little fuel economy as you can afford” (to paraphrase Bob Lutz), automakers have every incentive to improve fuel economy slowly. After all, Americans will happily buy an inefficient vehicle if they can afford it, which in turn yields greater profits to the manufacturer. And because the product is moving, the manufacturers have the luxury of arguing that they are just “giving the market what it wants.”

But without high-quality, fuel-efficient alternatives available on the same lot, claiming that the market is functioning properly is highly misleading. For consumers to actually signal their (and therefore, the market’s) true preference, they need to have real choices. But, as was discussed in the previous paragraph, automakers have little incentive to offer a true choice. Which is where CAFE comes in: by forcing to offer something that the OEMs insist the market doesn’t really want (an incidentally earns them less profit), the government guarantees the choice which allows the market to actually signal its preferences. And, as the forthcoming 2016 standards have forced automakers to introduce new generations of high-quality small and fuel-efficient cars, we’re seeing the market slowly swing away from the guzzlers we previously assumed it “demanded” and towards the smaller engines and greater fuel economy.

This sends two important messages: first, that CAFE helps the market function properly and second, that CAFE shouldn’t be feared. Though manufacturers and their allies paint frightening pictures of CAFE leading to a market divorced from consumer demand, if anything the lesson seems to be that demand for fuel efficiency could well outstrip CAFE’s requirement to provide it. With continued instability in the Middle East, it seems likely that another shock in gas prices could occur before the 2025 standard goes into place (if scarcity driven by huge increases in developing-world consumption doesn’t steadily raise the price first). And with a trend towards fuel efficient engines already well underway, it’s highly likely that the market will demand as much or more fuel economy than CAFE mandates at some point in the next 15 years.

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57 Comments on “How CAFE Helps The Market Function...”

  • avatar

    Interesting idea that I think does a good job pointing out that despite what you learn in intro microeconomics the ‘market’ isn’t a balanced ecosystem. In the absence of a gas tax there isn’t really any other option than CAFE. There’s always going to be some regulation, and if you look at places where there’s little to none you’re not going to see a particularly well off society.

    CAFE also is a part of regulations that affect air quality which is another topic all together but one that’s certainly beneficial to the country as a whole.

    • 0 avatar

      I think the thing you’ll find — regulation is cumulative; we don’t repeal things. Monarchies at least had a natural break with the previous government every time the old man died. Centralization is inexorable in a Western republic. Therefore, a highly regulated country that still functions and hasn’t gone the way of Argentina has been able to bear the cost of that added regulation; it wasn’t born of regulation.

      Clean air, clean water, porcelain tooth fillings, cars with unique safety features — all of these are costs that a wealthy society can bear. In terms of cause and effect, regulation is the result of wealth, not the cause of it. America’s cars can’t be sold as is abroad because they’d cost too much; the cost of federalization works both directions for import and export. Your average Indian can’t afford a Chevy Malibu, but he can afford a Suzuki that they never intend to sell in the United States.

      In defense of the market: My other comment summed up: You can’t say that the market won’t work without one thumb of government tipping the scale a certain way when the government is still standing in the other balancing dish. You can’t remove CAFE without removing the safety requirements as well — otherwise, a cheap, little, fuel efficient car is impossible to make profitably.

      • 0 avatar

        This ignores the fact that regulations play in developing new technologies to the point where they become the most cost-effective solutions. The regulations provide the incubator period during which they mature. It takes time to drive the high cost out of any new approach to solving a problem. In a pure-market environment, it’s much harder for that type of product development to take place.

      • 0 avatar


        unless you assume regulators are a somehow a priori better at picking which technologies need to be incubated than industry participants, your argument falls flat on it’s face.

        Regulation can, at least theoretically, serve a positive role if it compensates victims of externalities that are difficult to capture in a finite complexity market. But it still have to do this efficiently, or the costs of enforcement and distortions themselves more than negates any potential gain.

      • 0 avatar

        So, all regulations are all created in an environment completely isolated from industry?

        Sorry, I don’t buy your argument. First, there’s plenty of evidence of regulation driving technological advances. It’s true that when regulations are too connected to the “how” as opposed to the “goal”, things can often go really wrong. Perhaps the single best automotive example is emissions regulation. It’s hard to see how automakers would have arrived at the current state of ICE development so quickly without the need to meet ever-tightening emissions standards.

      • 0 avatar

        American cars are sold abroad, but only in some markets which have as defining characteristic cheap gas. And federalization isn’t the issue as that isn’t an issue in Third World countries. But they don’t import the old models stamps from America to make cars as they do with Europe.

      • 0 avatar

        “I think the thing you’ll find — regulation is cumulative; we don’t repeal things.“

        ^This is why government regulation and bureaucracy seem so odious to many Americans.

    • 0 avatar

      After reading this pro-CAFE and pro gas-tax stuff on TTAC for a while, I’ve done some major checking. At least on Wikipedia, and everyone knows thats like, you know, having a degree at Harvard, right?

      Well, it seems that not only is CAFE and gas taxes good for the auto industry, it seems that we would be all riding in flaming wooden Vegas if it wasn’t for the Federal Government!

      Before the Federal Government got involved, auto manufacturers were making cars out of asbestos and Melmac. That’s right, Chrysler actually built a plant to recycle dinnerware into New Yorker fenders. Those 1961 Dodges and Plymouths? Turns out that Virgil Exner had used the 1952 Melmac line as inspiration. Well, that and he dropped acid watching sci-fi.

      Thanks to the Feds, our tires are made of rubber. Originally, they were all wooden with glass spokes filled with gasoline. So when they broke, cars would be engulfed in flames. That explains the names of some cars like the old Studebaker Bonfire 300 Coupe O’ Death.

      Thanks to the Feds, we have steering wheels! It wasn’t until Nixon demanded that the auto manufacturers put steering wheels in cars, auto manufacturers expected customers to buy three cars – one that only turned right, one that only turned left, and one that only went straight. Can you imagine how hard it was to drive in the Rockies west of Idaho Springs when you had to take three cars to get up I-70?

      Yup – TTAC’s editors have exposed the benefits of CAFE and gas taxes! Thanks to our federal government, we would have all died two years ago in Ford Explorer roll overs!

  • avatar

    You’re giving CAFE standards credit for what the Federal Reserve bank hath wrought.

  • avatar

    As far as I can tell, the only thing that the chart proves is that consumers are sensitive to higher fuel prices or the threat of higher fuel prices. That has nothing to do with CAFE.

    For consumers to actually signal their (and therefore, the market’s) true preference, they need to have real choices. But, as was discussed in the previous paragraph, automakers have little incentive to offer a true choice. Which is where CAFE comes in: by forcing to offer something that the OEMs insist the market doesn’t really want (an incidentally earns them less profit), the government guarantees the choice which allows the market to actually signal its preferences.

    The Japanese were able to build share in the US during the 70s OPEC crisis because they offered products that gave Americans the fuel economy that they started to want once fuel became more expensive and scarce.

    The manufacturers respond to CAFE by looking for loopholes and hiring lobbyists. If the American consumer wants good smaller cars, the smart companies will do their best to build them while the dumb ones will scoff at them and…oh, you know, require federal bailouts and restructuring.

    There would have always have been smart companies with or without CAFE, but for the most part, they weren’t headquartered in Michigan. For all of our theoretical talk about efficiency this and profit-motivation that, a lot of business comes down to whether the management can adjust to change. In many cases, they won’t, and there isn’t a law that can purge arrogance from the management suite.

  • avatar

    Even if CAFE were removed, we would not have a free market in making autos. Automobile manufacturing is a highly regulated oligopoly because of safety as well. The government says – model year X must have tire pressure sensors; model year Y must have antilock brakes; model year Z must have rain-sensing wipers and rear-view cameras.

    The government, at the same time, grants patents on these safety devices. How do you get access to those? By being in the club. So, to start with, a start-up either has to have huge amounts of money to overcome this barrier to entry or just give up. So, already, there is no free market in new autos.

    These safety requirements are demands for new weight to be added. You could make a killing crapping out Geo Metro 3-cylinder cars in this economy at a $4,000 cost and a $5,000 price. However, you can’t make a Geo Metro as we knew it then, because it must be weighted down with every crazy safety invention — because of the socialism on medical treatment that says your injury becomes my cost, that a hospital must treat you if you splatter against a concrete embankment even if you’re dirt poor, because everyone else will pay the bill. And, he who pays the bills makes the rules, so we get to put those 1,500 pounds of safety equipment on that 1,500 pound car and kill it.

    All in all, if you can’t kill the socialism, and you can’t have a free market — and, really, America can’t even decide if the best thing to do when you’re out of money is to stop spending or to borrow more — it’s nice to have two competing government agencies — one saying — make those cars as heavy and safe as possible! — and the other saying — make those cars as light and efficient as possible!

    Because it would be easy to only sell Chevy Suburbans or Toyota Land Cruisers to make the safest possible vehicle, but those are known for being particularly thirsty.

    • 0 avatar

      Car manufacturing is an oligopoly because the equipment needed to manufacture a new car (that actually is competitive on cost and features) is incredibly expensive, as is the engineering talent needed to design one. Barriers to entry are, in fact, a real thing.

      If we dismantled both safety regulations and emissions regulations, the only thing we’d get out of it is a series of Chinese-manufactured wheezy deathtraps rebadged “Durabrand” and sold at Wal-Mart for three grand apiece.

      Actual limited-run auto companies, of the sort that exist in (e.g.) the UK, where the regulatory climate is favorable to them, can’t make a car that actually competes with the major league players because the economies of scale don’t work in their favor, so they make niche-market vehicles like the Ariel Atom.

      You may notice that all of the smaller auto companies in the US went out of business long before CAFE came about (well, unless you count AMC as “small”, anyway). Studebaker, Nash, Packard, Tucker, and the rest of these guys all fell to the economies of scale without anyone in the government hobbling them.

      This is a business that only has room for the 800 lb. gorillas.

      • 0 avatar

        You may not want the “Chinese-manufactured wheezy deathtraps rebadged ‘Durabrand’ and sold at Wal-Mart for three grand apiece”, but you’re making choices for minimal safety equipment required for somebody to drive a vehicle. Your statement shows you have a demand for minimum safety and performance features. And how many of those features that you say you need are those very same safety features I’m criticizing?

        I know it’s unfashionable to like the Chevy Cobalt and the old Kia Rio — they were death traps, sure; they were made of flimsy plastic, sure; but they put people on wheels who otherwise wouldn’t have been. Just like the K-Car was not a great vehicle — it put people on the road.

        There is no free market because we don’t know how many people would buy a Durabrand. In China, a land of greater economic choice and freedom, they buy them. I might say it would be huge in America; you might say it is not — how would your expensive manufacturing equipment cost if can amortize it over 10 million Durabrands sold per year? At that point, it’s pretty cheap for a manufacturing start-up.

        If somebody only has $3,000, I say he should have the right to buy a Durabrand and try to get a job to better himself. He knows it’s a death trap and he will try to better himself and afford a nice Ford, Chevy, Honda, or other acceptable car. He does that by driving the death trap to work. You say he doesn’t get to have that choice. Thus, there is no market niche because, with the safety and emissions regulations, the market opportunity to sell that Durabrand is outlawed.

      • 0 avatar

        +1 Greenman.

        The real choice they’re saving you from isn’t the nobrainer between a Durabrand deathtrap and a federally compliant car with 10 airbags, 4 O2 sensors, TPMS, 100 pounds of steel in the pillars, etc.

        It’s between the Durabrand and a 10 year old ex rental with a buck plus on the ticker and expensive service looming ahead.

      • 0 avatar

        In a normal mature car market a new $3000 car can’t compete with second hand $3000 car. Not even on durability so why would anybody buy one?

  • avatar

    Right, MrGreenMan. Saying that we might need CAFE because consumers really don’t have a choice under the current structure is like saying that the solution to the fact that your boats keep sinking is to buy a fleet of helicopters to follow your boats around for the rescue missions. How about figure out why your boats always sink, first?

    Let’s figure out why the barriers to entry to new and innovative manufacturers are so ridiculously high. I think I know why. Obviously, one of the factors is that good cars are not easy to take from concept to delivery. However, one of the prime features of regulatory capture is the suppression of new players.

    Sure, something like CAFE pushes cars as we know them in incremental steps in a single direction toward a single goal that some people have decided is better for all of us. But what other directions and absolute innovations are lost to this kind of top-down direction? Not only will we never know, but we never CAN know.

    To address aristurtle’s point, too, there are significant barriers to entry beyond the regulations. But those barriers are barriers to entry in the market as we see it today. A true innovation in practice can blow all that away in an instant. The 800lb gorilla thing is what keeps new competition from entering the marketplace and competing on the same level and in the same arena. It’s the gov’t regs that prevent entirely new arenas from developing that supplant the old ones. That’s my concern. If someone comes up with something new, incredible, etc. that satisfies the needs of the consumer in a revolutionary fashion, it will almost certainly be illegal under current regs, which is not necessarily congruent with being bad or dangerous.

    • 0 avatar

      The American market is not the only market so why don’t we see a true innovation in practice blow past the competition in other markets? Why did it take Hyundai 30 years to make a not crappy car or why hasn’t that Malaysian maker still not succeeded in that goal.

      Simple answer is that cars are very complex with not one thing that has to be good but a dozen. Only a good engine or body is simply not enough

    • 0 avatar

      If someone comes up with something new, incredible, etc. that satisfies the needs of the consumer in a revolutionary fashion, it will almost certainly be illegal under current regs, which is not necessarily congruent with being bad or dangerous.

      Two words, Catalytic Converter.

      Didn’t someone else on here once mention that the reason Catalytic Converters are mandated by law is because the Big 3 didn’t want to invest profits in anti-emission technology and so they lobbied Congress to ham-string foreign competitors who had?

  • avatar

    Just as an aside, I would not consider IHS economists or market researchers as any kind of credible source. (I work in a field that treats IHS pronastications and opinions like a Rex Reed movie review) This is a company that has so many conflicts of interest regarding industry and government that it would take a year to sort them out. Moreover, IHS is a company that has been at the absolute bottom of the pile when it comes to understanding the implications and effects of the recession…

    Thus, their Chief Economist – on the verge of the biggest economic collapse in 70 years – dismisses a housing slowdown, notes ‘strong fundamentals’, and predicts a ‘little’ slower growth in the upcoming years:


    • 0 avatar

      You and are kind of saying the same thing (although I don’t have an opinion on IHS).

      When the economy slows down, car buying patterns change, not just if they will buy but what they will buy, and economic cars sell better because they are cheaper.

  • avatar

    If car companies can convince humans – who have been in their present form for 10’s of thousands of years, most of which were spent without cars – that a big gas guzzling truck is essential to their image and well being and to get a gallon of milk from Walmart; then surely those same car companies can convince humans that a fuel efficient car that whispers along on fossil fumes is desirable too.

    The first situation is most profitable to the private entity due to the low tech-ness of the trucks; the second is less profitable. Which is best for the stockholders? The first.

    The first is worse for the country, future, the war machine, and the environment, so the public gets to place their hand on the scale.

    • 0 avatar

      Naked assumptions in your post:
      – People who own large vehicles only do so because of image. The contrapositive of that is that people who own very small cars do NOT do so because of image, which I know from personal knowledge to be untrue.

      – Can you point to any kind of mapping of fuel-efficiency in a car to profitability of that model? I looked and couldn’t find any. So, you’re just assuming that to be true.

      – You seem to be particularly worried that somehow auto advertising manipulates people into making choices that they otherwise wouldn’t. This A) assumes people can’t and don’t do basic research about cars to help them choose; B) are pudding-minded fools and C) ignores the fact that the biggest barrier to consumer choice is that consumers are stuck with the current auto industry as a whole due to just these types of regs.

      – Finally, your assumption that big cars are bad for “country, future, etc.” kind of plays your hand about where you’re coming from, and at the same time is incredibly short-sighted. You can probably make an okay argument for any one of those for the short term, but to think that you can do so reliably for the long term is laughable.

      • 0 avatar

        If advertising didn’t manipulate people, car companies and other companies wouldn’t spend billions of dollars on it.

      • 0 avatar

        The fact that many people who buy trucks don’t need them is in fact not even disputed except by armchair analysts like yourself. I’ve lived in Dallas for a good while and those people stand out like a sore thumb. You can usually tell because they are the ones spending 30 grand + on a chromed out quad cab that never sees a speck of dirt in its life. You can tell the people who actually use their trucks for work (or leisure that involves something actually requiring a truck) because they buy ones with a bed that you can actually reach into, and they don’t get chrome as it looks like crap when it gets dirty.
        Or you can look at the market research. Either way, this debate has been settled for a long time.

      • 0 avatar

        You got something against people exercising their choices? Or is your main problem with it that their choices aren’t yours? Is there anything about your life in which you exercise choice? How about letting me make those choices for you so you can see the silliness of what you said here. Do you eat meat? Do you live in a house? Whatever it is, I’m sure you make choices that aren’t good for society. I say you quit eating meat and move to a Soviet style apartment block. And you don’t need anything at all beyond the bare necessities so give them up, it’s for your own good and societies too. Do your part citizen.

  • avatar

    So you’re drawing the singular conclusion that the electorate wants fuel economy based on improved sales of smaller, 4-cylinder vehicles as an ongoing trend ignoring the credit freeze that rocked the markets and the worst economic recession since the great depression that according to the folks that track these sorts of things, started in 2007.

    The V6 or V8 upgrade is a costly option, and one easily removed from the option sheet when overall economics are considered that go way beyond the fuel pump; like I can’t use my home equity as an ATM machine to buy a brand new BMW M3 so I guess the Audi A4 1.8T is going to have to do.

    Or if we want to get even more bargain basement, yes the 3.5 Altima is darn nice Mr. Salesman but the price delta between that and the 2.5 is too much, we can only afford the 4-banger and it’s good enough for us.

    I don’t think CAFE is a singular reason for this trend; and history has shown in economic hard times when car buyers don’t defer a purchase for want or need, they tend to gravitate toward smaller cars with smaller engines because they are cheaper to buy. I really don’t think that 98% of Americans do the hard core math of TCO over 4 to 7 years on a new car. If they did, as one example, Toyota would be lucky to sell 100 Prii a month right now even if they had the inventory.

  • avatar

    Even people who claim a god-given right to drive wasteful vehicles in a wasteful manner, still actually consider gas mileage. This makes sense because when it comes right down, no one is happy to just throw money away. Even the most carbon-monoxide steeped brain does not mount a sheet of plywood upright and crosswise on their car/truck roof to prove that they don’t care about mileage.

    I suggest that government regulations actually are needed, to counter the social conditioning resulting from pervasive advertising by the automakers. The idea that automakers are just “giving the market what it wants” is a tired urban myth long past the due date.

    There needs to be provision for cars that are adequately safe at city speeds, while not engineered to provide safety at highway speeds and not allowed on highways. If bicycles, motorcycles and even completely unprotected pedestrians are allowed on the roads, then why not tuktuks and Kei cars?

    And it’s not just an issue of smaller, efficient cars. There are far more efficient ways than cars to accomplish many transportation needs.

  • avatar

    That’s an argument I’m highly sympathetic towards, but it doesn’t necessarily require that the government but out and let the era of cheap, thirsty trucks roll on unabated.

    Translation: I’m for free choice as long as it results in choices I personally approve of.

    Sorry, Niedermeyer. Some of us have real jobs that require more than a hairdresser’s car to get around in.

    • 0 avatar

      No, what I’m saying is that markets generally make the best/most equitable equitable decisions when they are working correctly. I’m looking at the market mechanism here, not the outcome. I could care less what the outcome is, what bothers me is that the manufacturers have incentives to not be responsive to consumer demand for fuel economy, thus perverting the function of the markets. I’m not arguing that CAFE is perfect or that trucks should be banned or anything like that… I’m simply pointing out that CAFE forces automakers to give consumers actual choice. If there’s a real choice then the market can actually work its magic.

      As someone who is fundamentally pro-market, it really bothers me to see the most powerful human idea used uncritically. If you’re not willing to concede that the government can make markets function better in certain circumstances (again, we’re looking at function not outcome), you can’t really claim to understand or appreciate markets. Using “the market” as an excuse to oppose an outcome you don’t like without examining the market’s actual function does a disservice (in my opinion) to the cause of market-guided governance.

      • 0 avatar

        CAFE hasn’t forced more efficient cars in 20 years. I am not sure how that is providing options.

        CAFE could be used to make more efficient vehicles, but really hasn’t been used for that in awhile. I don’t know how you look at the function without the outcome. The two are very related.

        Auto manufactures do have an incentive to make more efficient vehicles, competition. If there was only 1 manufacture in the US, then I would see your point. But with several manufactures, all advertising their MPG in every commercial, and higher gas prices, can you seriously say that CAFE has done ANYTHING in the past 20 years, besides give credits for ethanol?

      • 0 avatar

        EN: To support your point in this post, I point out that Hayek himself acknowledged that in certain areas, the gov’t should be used to actually improve/increase competition. So even from the founders of (classically) liberal economic theory, this is known. On the other hand, I’d argue that CAFE is not such a use, and is in fact constraining or cutting off entire other avenues of the market for a short-term, incremental expansion along a single axis, whose results are closely tied to a political viewpoint. From my standpoint, that’s textbook collectivism (power of state to push an outcome).

      • 0 avatar

        As someone who is fundamentally pro-market, it really bothers me to see the most powerful human idea used uncritically.

        If the market was such that small cars were all crap, then you’d have a point.

        But they aren’t. There is currently no shortage of good small car models available on the market. There has been a shortage of good small cars from certain manufacturers that didn’t know how to design or build them well, but the consumer has been able to adjust by giving their money to those companies with the competence to give people want they want.

        You need to disabuse yourself of these notions of supply-driven economics. They are usually wrong. They are correct in those few cases when there is unserved pent-up demand or when the goods are underpriced to the point that additional supply can be consumed at too low of a cost to the consumer (free roads, for example), but that’s about it.

        Those issues don’t apply here. If I want a good fuel-efficient compact, I have an abundance of reasonable options from which to choose. With Detroit getting its act together (finally), there are even a few more than there used to be. CAFE has nothing to do with that — the consumer’s fear of $4+ gas has everything to do with it.

      • 0 avatar

        Mr. Neidermeyer –

        You say you can’t use “… “the market” as an excuse to oppose an outcome you don’t like …”

        But you took a look at consumer behavior (an “outcome”) and decided the market was broken. And therefore, government must step in and fix it.

        Are you sure that the market is broken? Or is it just an outcome you don’t like?

      • 0 avatar

        No, what I’m saying is that markets generally make the best/most equitable equitable decisions when they are working correctly

        I would append this with …and only in short-term and only when the costs are not externalized. The market is very good at short-term, supply/demand stuff where the impact is immediate; it’s not so good at strategy, and very poor when the impact of it’s actions can be put off indefinitely. There’s a demonstrable track record of misery.

        This is perfectly ok, as central planning absolutely sucks at the reverse: it can’t deal with the short term at all well, and it’s track record at trying is as bad or worse.

        This is the (theoretical) point of CAFE and similar interventions: to force the market to deal with externalities and work towards something that’s more sustainable and useful.

      • 0 avatar

        I suppose the headline here should have been “how CAFE can help the market function,” as I admit the link between impending CAFE increases and improved fuel-efficient options isn’t clearly made in this piece. The main purpose of the piece was to explore the chicken-and-egg dynamic of demand and supply and point out that something has to motivate the supply-side to offer choice, as its motivations for doing so independently are weak. Whether CAFE, an economic downturn, or the desire for green PR (see the Prius and Volt) creates that motivation can clearly vary from case-to-case, but (for all its many flaws) CAFE can provide that motivation whereas business-as-usual struggles to.

        And yes, this is all about the market mechanics for me. Whether or not improving fuel economy is intrinsically good for the country is not a debate I particularly want to get into… although based on the obvious desire of many commenters to debate outcomes rather than mechanics, I’m in the minority on that point. But I’ve learned the hard way that abstract political debates tend to go nowhere, and only by constraining discussion to the possible can the debate move past partisan trench warfare and yield meaningful results. This basic principle, not any intrinsic love for CAFE or even fuel economy as a policy goal, is what has led me to write a series of relatively pro-CAFE pieces.

        I could write all day long about why CAFE is stupid and why a gas tax would be better or even why no regulation at all of fuel economy could be a good thing, but none of these options are even close to being on the table. Given that there’s political momentum for fuel economy regulation and none for a gas tax, I’m simply trying to debunk what I see as irrational fears about a policy that is going to pass no matter how angry I or anyone else here gets about it. Yes, CAFE sucks in a lot of ways but I see too many folks out there trying to damn it before they even understand it… which is where the need for some truth comes in.

        Anyway, I certainly don’t expect (or even want) everyone to agree with me. I’m trying to provoke debate, but I’m also trying to do it in a way that motivates people to learn more and really understand the policy. My only problem with this lively debate is the contingent that refuses to take the risk of engaging in it and prefers to take the issue personally (you’re trying to take my truck!). These folks aren’t learning anything and they aren’t teaching anything… and a debate like this is a terrible thing to waste.

      • 0 avatar

        The main purpose of the piece was to explore the chicken-and-egg dynamic of demand and supply

        There’s no chicken-egg issue. It starts with demand. If you want to change the appearance of the fleet, then you need to start with the drivers of demand.

        I’m simply trying to debunk what I see as irrational fears about a policy that is going to pass no matter how angry I or anyone else here gets about it.

        If Detroit is smart, they’ll make their small cars competitive. They seem to be poised to do that, not because of CAFE but because their CEO’s and large chunks of their upper management have been replaced.

        That being said, I don’t think that it’s irrational to point out that those who profit from selling gas guzzlers in high volume (most notably Detroit) are affected by CAFE more than are those who don’t (Honda, Hyundai, etc.). That’s just a matter of arithmetic.

        Some may be partisan about this — that happens on internet forums. But for those of us who focus on the business angle, the issue is one of numbers. And since the numbers don’t work, they’ll be replaced by loopholes and gimmicks, many of which are fairly silly.

      • 0 avatar

        I think pch101 nailed it again here. The reason Detroit is worried about CAFE is that they sell the most trucks. Nissan sells very few. Toyota has a plant that they build for trucks that was running well below capacity so it moved other vehicles into it. Honda, Hyundai, Kia, VW, etc, aren’t players in this market. It doesn’t matter to them. That is why this is a Detroit issue. They sell the most trucks, by miles.

        If big trucks MPG can’t be met (which is probably going to be pretty hard), smaller trucks and smaller engines will be used, or prices will go sky high (only talking about big trucks here on prices). Again, the concern for Detroit is obvious. It is a market that they dominate. Why wouldn’t they be concerned about this?

        Honestly, the biggest benefactor to CAFE might be Toyota and Nissan so that they could sell more trucks into this space. Since they don’t sell much now, they might be able to get a bigger foothold from Detroits problems here. They are likely going to have credits from EVs and hybrids that will help them greatly and allow their trucks to be lower than CAFE standards. Does Detroit want to give up the last segment it dominates to Toyota and Nissan? If CAFE does this, then it has failed. CAFE shouldn’t be effecting the market like this at all.

        Now, Detroit has made great progress on its cars. It still needs time to better its reputation and make its cars even better. It needs to win back much of the smaller car segment it lost. The Cruze, Focus, and Fiesta are great starts. The new Sonic needs to do well too. If Detroit doesn’t improve here more, it should be obvious that it is over for all of Detroit.

      • 0 avatar

        Whoa, you’re the first person to use the term “free market” that I actually respect. +1.

  • avatar

    I have to agree with pch101 and others are on this. This is a graph to show how gas prices effect what is purchased. People who want the performance of a big V8 should be allowed to do so. They are also going to pay for it at the pump. What is the problem with this?

    I also disagree very much with the points about CAFE effecting what is available to consumers during the period of this graph.

    The CAFE standard for cars changed to 30.2 MPG in 2011. Before then, it was 27.5. It has been 27.5 since 1990. Please explain to me how 20 years of the same fuel efficiency of cars made a difference in what is available today in cars.

    During this same time frame, between 1990 and 2011, trucks MPG went from 20.2 to 24.1. Trucks are more efficient, so, I guess that helped those big Detroit 3 who made all of those gas guzzlers more efficient.

    Relying on CAFE to give the consumer more options is the wrong way to go. The competition in the open market and gas prices have increased efficiency of what is available today. Also, look at what some manufactures have done in configuration options. Usually, the top model trim of a vehicle had an engine with larger displacement. A few years ago, many manufactures allowed the smaller engine in the top trims because of gas prices. This had nothing to do with CAFE.

    CAFE opened up the market to SUVs. Since SUVs exist, station wagons, a much more efficient means of transportation, have become virtually non existent in the US. So, if you by creating a new market for consumers with gas guzzlers, then yes, CAFE has given consumers more choices.

    • 0 avatar

      “CAFE opened up the market to SUVs. Since SUVs exist, station wagons, a much more efficient means of transportation, have become virtually non existent in the US. So, if you by creating a new market for consumers with gas guzzlers, then yes, CAFE has given consumers more choices.”

      Even worse, the way CAFE has separate rules for “cars” and “trucks” has given car makers a reason NOT to offer wagons in the US that are offered elsewhere. This is because wagons get counted as cars, and therefore don’t help improve the truck MPG average for CAFE. CUVs get counted as trucks, so selling a CUV with decent mileage allows a mfr to sell another high profit low MPG truck without penalty. The result is we get a less efficient CUV replacing what might have been a wagon if it were offered, and another low MPG truck sold without penalty, because of silly CAFE rules which were probably insisted on by lobbyists. My suggestion is to figure out a way to define “truck” to include wagons, too (base it on max cargo capacity?), so we can start having a wider choice of wagons again. Write your congressmen!

  • avatar
    DC Bruce

    I admit I don’t follow your argument. In the US, gasoline prices went up to nosebleed levels, then there was a record-busting (post WW2) recession and now gas prices are back up almost to the same nosebleed levels.

    So consumers’ interest in fuel-efficient cars is because of CAFE?

    We’ve seen this movie before . . . in 1974 when fuel prices just about doubled overnight. Detroit’s small car offerings were pretty pathetic, but there was Japan and Germany (VW, Fiat) to take up the slack.

    For most, non-enthusiast buyers, size is a positive feature of a car (until it gets as big as a Suburban). A bigger car is more comfortable, can carry more people and more stuff. Until the car gets so big that it’s cumbersome to handle, there’s no reason not to have a bigger car (apart from fuel economy, of course). Since most people live in the suburbs, not cities, there is no car that’s “too big.”

    So, let’s price out the cost of size with $3/gallon gas. If you drive 10,000 miles a year, the annual difference in your fuel bill between a 20 mpg average vehicle and a 30 mpg average vehicle is $500. If we’re talking about a serious gas hog (15 mpg average), then the difference is another $500.

    So, over the first owner’s life of the vehicle (let’s say 4 years), we’re talking a $2,000 difference between each vehicle class, which is a little more than the cost of the leather interior option on most American cars.

    I’d be willing to bet you that, given the choice, most Americans would choose the bigger car over the leather interior.

    And, in fact, if you look at the kinds of cars Detroit built in the 1960s and early 1970s, none of them were really small. The Pinto and the Vega were still substantially larger and more comfortable than the VW Beetle, the best-selling import at the time. There was just a limited U.S. market for that kind of car, and VW owned it.

    Likewise, after gasoline prices receeded in the mid-1980s, the American public stopped buying the little K-cars and move massively into buying big cars — only they were truck-based station wagons.

    So, apart from enthusiasts (who recognize the performance penalty associated with big cars) there is, in fact, no demand — anywhere — for small cars, apart from what is generated by regulatory diktat of one sort or other and really, really cheap cars that have to be small to be really, really cheap.

    That said, I recognize that cars have a huge externality that must be dealt with: air pollution. And I assume that even the cleanest engine will emit fewer pollutants per mile driving a lighter car than it will a heavier car. So, that’s my personal justification for CAFE, gasoline taxes (in excess of what’s required to pay for highway construction and maintenance), etc. They are all a proxy for limiting pollution by limiting fuel consumption.

    The problem with regulation is that the concept of diminishing returns doesn’t enter into the calculus. If some regulation is good, then more must be better. In the real world, I give you tire pressure monitoring systems as an example. Apart from ill-designed Ford Explorers of a couple of generations ago, is there any empirical evidence that shows a statistically significant loss of life as a the result of under-inflated tires? The TMPS adds cost to the vehicle and it adds cost to servicing any tire or wheel . . . and my guess is that it provides little to no benefit in terms of saving lives.

    • 0 avatar

      TPMS is probably a bad example to use here. While it does add cost, if used properly, it will help people save gas by keeping tires properly inflated. Since part of your argument about CAFE was cleaner air, burning less gas from properly inflated tires fits into that boat.

  • avatar
    Robert Schwartz

    An Inquiry Into The Nature And Causes Of The Wealth Of Nations;
    By Adam Smith, LL.D. and F.R.S. of London And Edinburgh:
    Formerly Professor of Moral Philosophy in the University Of Glasgow
    Edinburgh: 1776

    BOOK II. Of the Nature, Accumulation, and Employment Of Stock.

    CHAPTER III. Of the Accumulation of Capital, Or Of Productive and
    Unproductive Labour.

    But though the profusion of government must, undoubtedly, have retarded the natural progress of England towards wealth and improvement, it has not been able to stop it. The annual produce of its land and labour is, undoubtedly, much greater at present than it was either at the Restoration or at the Revolution. The capital, therefore, annually employed in cultivating this land, and in maintaining this labour, must likewise be much greater. In the midst of all the exactions of government, this capital has been silently and gradually accumulated by the private frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort to better their own condition. It is this effort, protected by law and allowed by liberty to exert itself in the manner that is most advantageous, which has maintained the progress of England towards opulence and improvement in almost all former times, and which, it is to be hoped, will do so in all future times. England, however, as it has never been blessed with a very parsimonious government, so parsimony has at no time been the characteristical virtue of its inhabitants. It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.

  • avatar

    And exactly how, other than the throwaway AN clause, do we know that CAFE 2016 is influencing buyers’ 2010-11 choices of product, automaker, and options? Methinks – at best – CAFE can perhaps influence choice of automaker as it compels certain makes to either (a) go try to steal some small car market share from the best companies in the world at making small vehicles, (b) jack up prices on their larger products to cool demand, or (c) pay some fines. As big a fan of economical vehicles as I am, it’s probably best for the auto market if the automakers choose (c). After all, it’s going to be a challenge to convince buyers to buy products they do not want from makers they do not respect. The overriding issue is right there in the AN item: what type of vehicle are buyers selecting? I don’t think it should matter one iota in a fuel economy regulation which manufacturer it is that makes said vehicles; what matters is the aggregate. Can anyone explain how is it better for total US fuel consumption if the market share of economical vehicles is precisely equal for every brand in the market? You’d think it would be better overall if every maker focused on optimizing products in the segments they know best.

    Quit trying to repeal the law of supply and demand, I like to tell my elected officials. Even without the goofy loopholes already in the regulation, this CAFE thing makes no sense at all for reducing fuel use. A gas tax (revenue neutral, please!), that would work. Perhaps mileage regulations by vehicle size category would also work. But Washington’s insistence on resurrecting a naive, failed Seventies approach is going to do nothing but water down quality and deliver some pretty impressive unintended consequences.

  • avatar

    Isn’t it just possible that increased output per cylinder has as much to do with this as CAFE does. At least when it comes to BMW (and increasingly MB & Audi, VW and even Cadillac), forced induction is making 6 the new 8, and 4 the new 6.

    I’d like to see a breakdown into HP brackets, rather than cylinder count brackets.

    • 0 avatar

      Yes, and no. Turbos can be tuned to deliver better CAFE numbers than higher displacement cars that make about the same power. But, super chargers… not as much.

      You will probably see turbos more to help with CAFE numbers instead of higher displacement (Hyundai doing it with the Sonata, no V6). But the N/A vehicles will remain as well, at least the smaller ones.

  • avatar

    The fact that we can debate the merits of CAFE with straight faces is a testament to just how accustomed we have become to big, bloated bureaucracies playing puppeteer with our lives.

    The earliest democratic governments were created to enforce basic personal security and property rights, and not much else. If our ancestors could see today’s plethora of social, cultural, economic, environmental and miscellaneous pet projects, they would surely guffaw at our financial predicament and wonder what took so long.

    • 0 avatar

      The earliest democratic governments were created to enforce basic personal security and property rights, and not much else.

      Fair’s fair, those early democracies didn’t have to deal with complexities involved with modern technology, millions (billions?) of people, hostile powers, instant communications and so forth.

      Heck, they didn’t have cars. Of course they didn’t have CAFE, clean air or traffic enforcement—the extent of transport-related pollution started and ended with “horse sh_t”.

      But yeah, sure, let’s step back the role of government to the level it was in 1777 and see how well it works for a high-tech country of three hundred million spread across several time zones that has to contend with the likes of modern China or Russia. I’m sure that “basic property rights” and a small, well-regulated militia is all you really need.

    • 0 avatar

      basic personal security and slavery don’t mix IMHO

    • 0 avatar


      Do you really believe that social engineers in 1777 couldn’t have come up with a zillion compelling reasons for big government? How about the American revolution? Infant mortality? Research into the exciting new technology of electricity?

      Our excuses might be different in 2011, but that doesn’t make them any better. Human logic does not improve with time; it only thinks it does.

  • avatar

    If the government wants mandates that improve consumer options and fuel consumption etc etc, then I’d propose something completely different: crash standards that dictate that heavy, tall, battering-ram vehicles don’t inflict such massive damage to short and lightweight ones. Right now, few consumers are willing to buy small 2400 pound cars because of fear (founded or not) of being smooshed to a pancake. Further, since current laws require each vehicle to protect its own occupants from battering-ram vehicles, even the small vehicles are (take your pick): very heavy, not very small, or very expensive.

    Other than that, I think Pch101 nailed it.

  • avatar

    Everyone when asked will say they want better fuel economy until you park a SmartCar in front of them and they realize what they’ll be stuck driving. If people want economy so badly they’d buy the cars that get the best economy and the market would force other automakers to build them. We don’t need big nanny telling us what to drive.

  • avatar

    Let’s remember a side effect of CAFE: it keeps the cost of the marginal mile driven (i.e., the cost of going one more mile once you already own the car) very low. You only need pennies’ worth of gas to drive a mile! So you’ll be perfectly happy to drive more miles.

    In short, forcing fuel economy up results in more driving. It’s why we have sprawling suburbs. People think nothing of hopping in the car to do the slightest errand, because operating cost is low.

    And the savings are, in part, illusory: if 50% higher fuel economy has you driving 25% further, the savings from your more efficient vehicle start getting eaten up.

    Schemes like CAFE sound smart, smart, smart until you start looking at the unintended consequences.

    • 0 avatar

      Maybe the solution for bored social engineers is to stop meddling with what people drive, and start meddling with where they live.

      Neither plan is sustainable, of course. But at least it’ll keep them away from our cars.

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