Another week, another trip. This time to Washington DC to speak at a SAE conference tied to the Washington DC auto show.
I have been asked for recommendations on how to craft effective policy to reach the President’s clean air goals.
It is a distinctly Washingtonian type of topic—where the answer to everything is assumed to be enlightened policy. Putting this aside, it seems to me that a good place to start would be to look at—and learn from—the mistakes of the past.
Think back for a moment to the Sixties and Seventies and the wave of regulation that washed over the auto industry. Safety, environmental and fuel economy rules pushed and prodded vehicle designers and engineers in sometimes conflicting directions.
When crafting these regulations, regulators paid scant attention as to what was technologically feasible. The domestic automakers howled that they couldn’t meet that mandate, but were ignored.
In the end, the automakers did meet the requirements of regulation. Their earlier claims that it couldn’t be done cost them decades of credibility; something that haunts them even today.
They did meet the regulations, but the automakers were not entirely wrong. The required trade-offs resulted in a generation of what were often truly awful vehicles.
To be fair, well-intended regulations were not the only cause. Executives with a good sense of finance, but no feel for automobiles certainly helped.
The pace of regulatory introduction slowed in the Eighties, but wasn’t until the Nineties that vehicles from the domestic automakers started to slowly regain a competitive footing.
Let’s look at Cadillac for example. 1978 saw their best year ever. But over the next few years, Cadillac brought to market a 350 cc diesel engine (sourced from Oldsmobile) that could be counted on for a meager 30,000 miles. The 1980 Cadillac V-8 used an advanced computer (for its day) that mysteriously would shut down the engine. In 1981 we saw the introduction of the 8-6-4 cylinder deactivation system. Technology that is commonplace today, but back then was not ready for commercial use. It was replaced in 1982 with the HT4100 Power System, a powertrain with a flakey transmission and a “pavement shredding” 135 hp V-8.
Even worse than this series of not-ready-for-prime-time technologies, post oil embargo America was returning to its love of larger vehicles. But Cadillac continued to downsize. First with a very thinly disguised Chevy Cavalier, the Cimarron, then with the Deville series and finally the Eldorado/Seville platform. Mercedes and BMW couldn’t have scripted things better.
Last week, the President, in his op ed piece in the WSJ called CAFE an example of regulation that worked.
Yes, vehicles have become more efficient. Was this because of CAFE? For the sake of discussion, let’s say yes. On that 2 dimensional scale, CAFE worked. But it also forced automakers to build vehicles that the market did not want. These must then be sold at a loss, creating a dynamic in which small cars are subsidized in order to earn the CAFE credits needed to sell large vehicles at a profit.
Taken as a whole, the impact of policy and regulation—although well intended—can be seen to have contributed to the massive reputational damage and financial instability that finally ended in a couple of notable bankruptcies. (One reason I am reluctantly supportive of the auto bailouts is that the trouble the automakers found themselves in was not entirely of their own making.)
There are two lessons from all this:
1/ Regulation should acknowledge the limits of current technology.
2/ Regulation should not ignore the consumer.
I have pointed out some of the unexpected outcomes of policy. But there is an even bigger issue to consider. In a society that putatively values freedom, shouldn’t regulation be a last resort? Rather than direct regulation, wouldn’t it be better if the playing filed were tilted slightly towards the desired ends, while still preserving individuals' freedoms?
Take the environment, for example. The issue is that when consumers make choices today, they do not take into account what economist call “externalities." Specifically, the price of fuel includes exploration, drilling, refinement, transportation, storage and retailing, but not the cost of cleaning up pollution.
This brings us back to the idea of a fuel tax I raised last year. Raise the price of gas and the playing field tilts. Consumers will start making free choices that also help save fuel and improve the environment.
No increases in CAFE required.