The EPA announced yesterday that new regulations mandating fuel efficiency standards for heavy trucks will cost vehicle buyers $8 billion, but that will be paid for in fuel savings over a year or two.
Oh. Sounds like the mandate is quite unnecessary then, no? With numbers like that, consumers will demand high efficiency vehicles with or without the EPA. Unless, of course, the EPA is, umm….lying.
Lying is of course the least of their sins. It’s one thing to argue that we need to conserve fuel. It’s quite another to argue that politicians and bureaucrats are the people best equipped to decide how we should conserve fuel. A gas tax encourages people to conserve fuel in the most efficient ways they can think of. A flurry of arbitrary top-down regulations serves no plausible purpose beyond transferring power to the politicians who routinely sell exceptions to the highest bidders. Of course, what did you expect from the people who thought it was a good idea for the government to actually run a car company?
It’s a sobering fact that the EPA still has a budget, 10 months after the reformers rode into town. Won’t somebody please lock these guys’ doors and turn off their lights?
Could it not just be that the EPA are telling the truth but that businesses have their own version of hyperbolic discounting? I know that where I work everything is governed by THIS YEAR’s budget, and to spend more this year to save next year isn’t an option for most departments.
Not saying you’re wrong, but the conclusion as presented above doesn’t follow the facts as presented.
If we accept as a given that gas taxes are impossible from a political perspective, isn’t it plausible that a mandate is more efficient than the status quo?
Just for context, the USA consumed about 150 billion litres of transport diesel fuel in 2005, at about $1/L. Thus the $8 billion is about 5% of fuel costs.
There have been fuel standards for cars for decades, justified because individuals do not rationalise the costs over several years, but focus on the purchase price. It is also impossible for an individual to make a “rational” descision on something as complex as an automobile because we cannot possibly evaluate all the variables. There is also no guarantee that the small number of car makers will accurately match what the people actually want – or will want in the future. Buying a car is highly emotive, and manufacturers will want to grab a hold of that emotion – this is not acheived through fuel efficiency.
Trucks have been exempt because it is assumed that the commercial discision makers have accountants, and are able to “crunch the numbers” and come to a rational choice. This is clearly not completely true for a great many light trucks, vans and large SUV’s, and for many owner-operators and small firms, for example. Even here, the purchase is likely to be based on more hard-headed factors than for an automobile.
The objective is to reduce fuel use with as little impact on costs as possible. A tax is probably the best way to reduce fuel use. It is simple, unavoidable, transparent, equal, enforceable. It allows for any fuel saving strategy to be implimented, such as driver training, choice of vehicle, logistical efficiency, or by transporting less stuff. In what way could a directed fuel efficiency regulation lead to better outcome than a simple tax? It could be that there was some breakdown in the feedback between purchaser and manufacturer. Some way in which the purchaser would want more efficient vehicles, but this is not provided by the manufacturers. Or some way in which the purchaser makes a choice that is not affected only by the financial factors. I am not convinced that the market is actually as efficient as it could be. The numbers of companies producing large trucks is nowhere near sufficient for a “perfect” free market. The small buyers do not have the resources to make a fully rational choice, and the manufacturers have a lot of sales people forging relationships with descision makers in large companies, and it is not because they like their company (although they may do). The fact is that there are considerable distortions in the market, so it is at least possible that a directed efficiency regulation could have a better outcome than a fuel tax.
I believe there is a more practical reason why the fuel tax is not used – it is unavoidable, transparent, equal, enforceable. The party imposing it would lose the next election and they cannot easily use exemptions as trade offs or to favor prefered companies or lobby groups. In the dirty world of politics, fuel efficiency standards are possible, whereas a fuel tax may not be.
Or basically – what Mike said.
Mike (and Harold):
If we accept that gas taxes are impossible from a political perspective, then it’s plausible that a mandate is more efficient than the status quo. However, it’s considerably less plausible that the EPA could know this, and even less plausible that the mandate would be adminstered with efficiency (as opposed to political favoritism) as its goal.
I’d like to hear more about this.
Yes, externalities mean that private actors will behave sub-optimally from a social perspective. Yes, government will behave sub-optimally from a social perspective. How do you conclude which path produces the more optimal solution?
More narrowly, what motivates government actors? And why would higher efficiency standards fulfill that motivation? As far as I can tell, the political forces arrayed against higher standards vastly exceed the forces favoring it. That suggests to me that the EPA is acting on some basis other than political expediency.
@Harold ” so it is at least possible that a directed efficiency regulation could have a better outcome than a fuel tax.”
Well yes, it is hypothetically possible. However it is very unlikely. It would require the regulators to have a better idea of what is good for all the people, than the people themselves do. The market doesn’t have to be what you call “perfect” (which it probably never is), it just has to be better than what the regulators can come up with.
If we assume that the people in the market don’t think so much about the issue, and thus make an inferior decision, while the regulators thoroughly plan the regulation so that it fits well for all people, it is possible that the regulators might come up with a better decision. However, then they will have spend a lot of resources deciding the issue, which may not have been worth it.
Economically I see no reason to expect that the regulators can do a better job given the factors you state. The only cases I can think of where this possibility seems likely, is if it involves a tragedy of the commons type of issue. (Such as overall fuel use possibly does, but not the subquestion of how the method used to adjust it.)
Nobody really – very good point – if they are doing this, and it is unpopular, and it is not very effective, then why are they doing it?
Jonaton: “It would require the regulators to have a better idea of what is good for all the people, than the people themselves do” I think this is not quite so unlikely as you perhaps do. People are very deluded, and are very bad at making descisions rationally. In the case of personal automobiles, I think it very likely that efficiency standards are for the overall benefit of us all. I am not quite so sure for commercial vehicles.
Harold wrote: “People are very deluded, and are very bad at making descisions rationally. ” Unless they are bureaucrats of course. But the genius of prices – and a gas tax is part of the price you pay for gas — is that it leads you to make more rational decisions even if you are “very deluded.” Even deluded people respond to incentives. For example if Harold received a mild shock every time he posted to this board he’d post less.
Is everybody here arguing for increased gas tax? That counts a mild shock. Keep this up and I will probably post less!
I think we are getting some issues mixed up here. The “greater good” argument is different than the “I’m going to force you to make more money” argument. Greater good is undefinable and therefore easier to muck up with some rationalizations. For EPA to come out and claim it knows better how to profitably run trucking companies is another matter all together.
Like Steven L., I don’t buy it for one second.
Even as far as top-down regulations go, CAFE standards are extremely ugly: when people get better mileage they drive more, which increases traffic accidents (and fatalities), congestion, and even some emissions, like NOx and carbon monoxide. This policy trades one externality for several larger ones.
Contrary to what some commentators are saying, if it’s not politically feasible for the government to enact a fuel tax (or cap & trade), CAFE is not a worthwhile second-best. Taking all externalities into consideration, cost-benefit analyses of CAFE come up extremely negative.
For more info, Andrew Kleit has done some great research on CAFE. Here’s one of his papers on the subject: http://www.freepatentsonline.com/article/Economic-Inquiry/115635786.html
I will attempt to dig up the NPR interview if you require details but the gist was that they had on a representative from the trucking industry who have been pushing EPA for this. The trucking industry rep said that they (the industry) have been trying for 25 years to get better fuel mileage but the truck manufacturers have not made improvements.
One can reason about how and why this came about, but if your premise is that this is arbitrary regulation thought up by government bureacrats I believe you may be incorrect in this case.
I seem to be unable to edit my comment, so here’s the URL for the story I heard: http://www.npr.org/2011/08/09/139274763/truck-industry-welcomes-new-fuel-regulations
Dunno if it affects your basic argument – I get that you’re opposed to all government regulations of everything – but there it is.
@Alan W: I have been trying to get improvements in cars for a while too. I have repeatedly asked automakers for better fuel efficiency. Plus better safety, better styling, longer warranties, fancier sound systems, good cupholders and above all lower prices. I mean, I want all those things, just don’t raise the price you captitalist rat-bastards. I won’t pay.
I have a serious question for Alex W. Is it really that significant that a lobby group would oppose a tax which would fall directly on its members?
Jevons paradox anyone? Politicians don’t seem to get that either.
When I updated my AC compressor at my home to a more efficient unit, I took the increase in efficiency as an improvement to my lifestyle by cranking the thermostat down a couple degrees instead of conserving energy.
“There have been fuel standards for cars for decades, justified because individuals do not rationalise the costs over several years, but focus on the purchase price.”
If that’s true, then why did sales of economy vehicles rise substantially during the 1970s during the gas crisis? And why did sales of gas-guzzling SUVs jump during the low-gas-price 1990s?
Alan Wexelblat:
The trucking industry rep said that they (the industry) have been trying for 25 years to get better fuel mileage but the truck manufacturers have not made improvements.
What does this tell you about the cost of making those improvements?
Steve said: “What does this tell you about the cost of making those improvements?”
That if the cost of what you want is prohibitively high, you should beseech the government to force someone else to bear that cost while simultaneously proclaiming it’s for their own good.*
Or, if you lack the capacity to think, it tells you nothing.
*Since this legislation won’t suddenly reduce those costs, will the trucking industry lobbyists next ask for price ceilings? At least part of the cost of this is going to fall on them, and they’ve already demonstrated they don’t think the benefit is worth the cost. Maybe they only planned their strategy out 1 move ahead?
Tom
No disrespect but you missed the author’s point. Businesses don’t have their “own” discounting techniques to justify ways NOT to save money. That’s a business plan headed for bankruptcy. If there were a two year period in order to capture these so called savings I suspect businesses would be jumping out of their chairs at the chance.
I’m a little surprised that no one has mentioned the nasty unintended consequence of fuel standards.
The cheapest way to comply with increases in fuel standards is to make vehicles lighter. That has the unfortunate consequence of making vehicles more dangerous.
Mark Jacobsen estimated that for every mpg fuel standards are raised, 149 more traffic fatalities occur.
It seems to me that CAFE does not allow a company to specialize in large vehicles. That seems very bad to me for a few reasons.
JLA:
Being hit by a heavy vehicle is much more dangerous than being hit by a light vehicle, so if the aggregate weight of vehicles falls, the average person on the road might safer (although the people in the lighter cars are much worse off).
See this study profiled at the Freakonomics blog:
http://www.freakonomics.com/2011/07/29/killer-cars-an-extra-1000-pounds-increases-crash-fatalities-by-47/
An excerpt: “The data implies that a 1,000 pound increase in striking vehicle weight raises the probability of a fatality in the struck vehicle by 47%.”
There definitely are a number of unintended consequences associated with CAFE, but whether or not increased traffic fatalities due to vehicle weight is one of them isn’t entirely clear-cut.
Hi Paul,
I’m happy to admit that I’ve missed the author’s point but I can’t see (yet!) that I have. To me, he says
A The EPA says the cost of the new regulations will pay for themselves in savings over the next year or two
B If the cost of the new fuel efficiency pays for itself in savings over the next year or so then there is no need for the regulations as businesses will pay for the fuel efficiency to gain the savings
C Therefore the EPA is lying.
I’m taking issue with B – it relies on the idea that businesses act rationally. I’m saying that, actually, businesses (and individuals) aren’t very good at paying out now to save later down the line, particularly where businesses have distinct, yearly budgets and particularly where managers who make the decision to install the fuel efficiency measures may well not be around in two or three years when the benefits will be reaped (because by then the upfront cost has been repaid and future savings are a plus).
Again, I’m happy to be told I’m wrong, but where exactly have I fallen down?
(Of course, if B falls then C no longer follows. C never DID follow because there are other alternatives – for example that the EPA is putting in place ‘easy’ regulations that it knows the industry will adopt, but are beneficial to the businesses because of regulatory capture. That way the regulations look tough but actually are just in the businesses own interests. Plus the EPA administration has more to do, so can justify its own budget. So the EPA lying isn’t the only option.)
@Tom: You’re falling down in you in your issue with B.
You could see this empirically. Follow some firms, where there were decisions which would cost them immediately, but pay themselves back in 3 years, and then earn a large profit. Empirically, the firms would do this.
You can also convince yourself of the same thing without the data. If there is a choice to pay some amount now, for a large income increase in the future, and a firm doesn’t do this, the value of the firm would fall compared to other firms that do make this choice. The reason that the value of the firm will fall, is that some investors will realize that it is better to invest in another company, based on its predicted future revenue. This will make the stockholders unsatisfied with the manager, which is not good for the manager. Therefore the manager will try to make the good choice, even if it only pays off some years ahead.
Steve: it tells me that the manufacturers didn’t listen to their customers, or calculated (correctly) that those customers were stuck with no market alternatives. In a situation of clear unmet demand what does market theory say? Remember that the complaint is not “they made more efficient trucks but those were too expensive” nor “they made more efficient trucks but those did not justify the extra purchase costs in terms of lifetime saved efficiency.” The complaint is that the industry (effectively an oligopoly) was not responding to market demands. In a non-free situation it seems reasonable to me (and compatible with your theories as imperfectly as I understand them) for the dissatisfied but trapped customers to employ an external coercive force (government regulation).
Alan Wexelblat:
In a situation of clear unmet demand what does market theory say?
What does market theory say about my clear unmet demand for a personal rocket car?
Thanks, Jonatan.
I suppose I just disagree that that is the way that markets work. You see them as working rationally, that investors will look closely at the decisions a business makes and scrutinise it deeply. I doubt that this truly happens.
I would assume that investors will see that the company who will make less of a profit this year (because of the upfront cost) and so will look at other companies. This discourages the upfront cost because even though in the long-term it puts the business at a disadvantage, in the short-term it makes it appear less attractive to investors.
I’d love to agree that investors understand companies and look for long term investments to pay off, but I’m afraid I don’t believe that accurately reflects the world in which we live. If we lived in a perfect market world, there would be much less for regulators to do; I see this as correcting a market failure, much as it seems Alan does (without putting words into his mouth).
The link that Alan posted says that the manufacturers asked for this regulation. They also say that their customers want it also. It does rather beg the question as to why the regulation is needed if everybody wants it.
Businesses generally use a higher discount rate than you might expect by looking at (abysmally low) interest rates. An internal ROR of 30% is common, which translates to a little over two years’ payback.
Also, as an aerospace engineer, I find it hard to believe that you can’t get decent fuel efficiency improvements when most big rigs have such boxy shapes facing the oncoming wind. It seems there’s a LOT of avoidable drag, and they should be able to get significant improvements just by slapping some cheap fairings on.
(fairing = exterior aerodynamic shaping device)
Tom: “I know that where I work everything is governed by THIS YEAR’s budget, and to spend more this year to save next year isn’t an option for most departments.”
I’m guessing from your comment that you work in a company where the concept of investment is unpopular. Even if that were true, I wouldn’t extapulate that to the larger economy.
Tom: For how many years did Amazon happily earn negative profits in anticipation of positive profits in the future? And for how long were investors perfectly patient with that? (The answers are large numbers, though I don’t have them at my fingertips.)
“Oh. Sounds like the mandate is quite unnecessary then, no? With numbers like that, consumers will demand high efficiency vehicles with or without the EPA.”
This is exactly the kind of lie that economists full of wishful denial tell, that makes me and much of the public distrust a large segment of economists.
The answer to your question, BTW, is “probably not.” To most people who aren’t economists in wishful denial, that answer is pretty obvious.
If you want more of the public to take your policy suggestions seriously, you might try examining why it is that you assume the wrong answer to questions such as this one, rather than trying to convince people that the right answer is false because you have such a good logical explanation for why the wrong answer must be true.
P.S. I am a consumer who would love to demand higher fuel efficiency vehicles, and I am very glad to have the EPAs help, because that’s the only way I’m likely to get them at a reasonable price anytime soon. I’d also like a higher gas tax, and agree that could be a superior solution – but I also don’t think it’s gonna happen until we already have higher efficiency vehicles at more reasonable prices, much as logic might suggest it’d be better to do things in the reverse order.
@ Cos, I may be missing the finer aspects of your argument. Please explain how an EPA mandate will get you greater efficiency at “more reasonable prices”. It would seem that car companies don’t like bringing to market features that consumers really want and they can provide at reasonable prices. It must be because they abhor the idea of taking customers away from their competitors.
Steve: Thanks for your reply. I still see a difference between investing in a new business where it’s perfectly normal to see a complete lack of profits for the first few years at least, and investing in an established business which has lower profits this year than last (because it’s investing those would-be-profits in something which will pay off in two to three years time).
I’m surprised that so many seem to be arguing against the idea that markets don’t always behave rationally, and that there can be an aversion to spending sums now to save later.
Over on Freakonomics, you can read about Rasing MPG Standards: the Second Best Solution to a Gas Tax Increase.