August 31, 2005
CAFE standards and gas taxes
I’ve been watching the lefty blogs over the last few days, and there seems to be disagreement. They all, of course, agree that reduced oil consumption is a positive thing, and that it is the job of the government to solve it. We’ve already moved far away from my position, but I’m sure that’s no shock to you.
It starts with Bradford Plumer. Brad brings up a scenario where high gas taxes would be a better punishment for undesirable behavior. Matt Yglesias concurs.
Brad:
Say you have two families, the Smiths and the Browns. The Browns own a big honking SUV, but drive it rarely, and usually bike to work or take the public transit. The Smiths drive a little wiener of a car, but take it everywhere—the supermarket, the neighbors, down the driveway to the mailbox. Obviously you want to penalize the Smiths’ behavior, not the Browns. Stricter CAFE standards for big vehicles wouldn’t do that. We want to decrease total oil consumption, right? So just tax that. Yeah it would be regressive, but means-tested rebates could ease the pain.
Matthew:
If you want to reduce gasoline consumption, what you want to do is tax gasoline consumption, not inefficient engines. CAFE is appealing because the tax it imposes is “invisible,” and legislators can pretend they’re voting to encourage the production of more efficient cars. In the real world, however, it doesn’t work that way, and someone needs to pay the piper either way. A much better way of reducing consumption would just be to tax it straightforwardly with higher gasoline taxes. The revenue could then be used for a progressive tax cut. Most crudely, the government could simply add up all the revenue from the higher tax, divide by the American population, and then mail a check to everyone at the end of the year, giving each family that share. That would be a net transfer of wealth away from families that use more gas than average to families that use less — a clear and simple way of creating an incentive for people to use less fuel.
So the solution to the problem is punitive tax rates, that strangle the economy and create a whole new government bureaucracy to administer these “rebates”. Like the Guinness commercial says, brilliant!
Ezra Klein and Kevin Drum poke a few holes in their napkin-sketched plans.
Ezra:
First, gas taxes are a very direct way of influencing fuel consumption, but it’s not clear that, at attainable rates, they actually do influence fuel consumption. Raising the tax by the small, incremental amounts that could (and by could, I mean in a hypothetical world where this was somehow a viable policy option) pass would likely do little to stem consumption. That’s because, as it turns out, gas hasn’t even been near the top price folks are willing to pay. Most simply bear the burden, preferring to pay more rather than disrupt their lifestyle. The place gas taxes make a difference is, in the end, among the poor, but if we put in rebates like Brad is suggesting, it won’t affect them all. I’d like to have a gas tax because I’m all for the added revenue, but it’s not going to do much against consumption. If you can afford an Expedition, you can nearly always afford more at the pump.
On the other hand, 93% of Americans support an increase in CAFE standards. That doesn’t make it easy — the auto industry is a powerful lobby. But they’re going to fight a gas tax too, so I’d rather our politicians be battling back with an overwhelmingly popular proposal rather than running into industry opposition while carrying a bill Americans will stone them for passing.
Kevin:
So CAFE does what it was designed to do. What’s more, CAFE is almost certainly more effective than gas taxes at reducing gasoline consumption. During the period from 1979-1982, for example, gasoline prices doubled and CAFE standards were rising. The result was a 15% drop in oil consumption worldwide and a drop of about 20% in the United States.
Compare that to 1999-2005: gasoline prices have more than doubled, but gasoline consumption has continued to rise. In fact, it’s been rising faster than it did during the 80s and 90s. These two periods aren’t strictly comparable (the first one included an oil shock that had a significant psychological impact, while the more recent rise has been slower and steadier), but it’s still clear that gasoline demand is pretty inelastic: higher prices by themselves appear to have only a modest impact on gasoline consumption. To make a serious dent in gasoline consumption we’d probably have to increase gas taxes on the order of $2-3 per gallon. That’s a mighty blunt instrument.
Well, if your only goal is reducing fuel consumption, I have to say the latter two are correct. It’s much more likely that you will reduce fuel consumption by forcing automakers to adopt higher fuel regulations than by any reachable tax rates. To really affect consumption in a big manner in this country would require much higher tax rates, and with a population as spread out as we have in the USA, would end up drastically harming poor rural folks, who are forced to drive long distances regardless of the fuel economy of the car they have.
However, increased CAFE standards are no free lunch either. People looking to reduce fuel economy have two options: purchase a very small, low-powered compact car, or an expensive hybrid. I hate to say it, but to have a modestly-sized or large car, that is peppy to drive, will be too expensive if it has all the technologies to reduce gas mileage. Despite what Ezra thinks, it’s not just “there for the taking.”
And it’s not as if this is a serious hardship on the auto industry — the technology is there, they’ve just been pushing it into more powerful cares rather than more efficient ones. We can change that, and it’s be good for the country if we did.
There is something missing from the whole analysis: any consideration of a goal beyond using less fuel. Across both sides of the debate, they’re more than willing to punish behavior or force people into small, underperforming cars to acheive their singular goal. There are several other factors involved: cost of initial purchase, cost of maintenance, reliability, and overall satisfaction of the consumer.
Why don’t more consumers purchase small, light, fuel-efficient vehicles? Because at the current cost of gasoline, they don’t want an 1800-lb, 85 horsepower go-kart that does 0-60 in 12 seconds and will get them killed in an altercation with anything larger than another go-kart. At the same time, if they’re looking at something like an Accord, which can be purchased in 225hp hybrid (37 hwy/29 city), or 165hp standard engine (34 hwy/26 city), you’d think the Hybrid might edge it out on power. But since it’s $12K more expensive than the cheapest version of the Accord Sedan, it would take a lot of mileage to make up that 12 large.
One of the commenters to Ezra’s post hits the nail on the head. He notes that automakers are involved in another horsepower war. Even the Japanese automakers are joining in, but nothing comes close to a 350-hp Dodge Charger for under $30K. The Left has no problem forcing the people who want to buy these autos to be punished for their individualism, but I (obviously) think that’s the wrong way to go. If it is worth it to them to pay $2.50/gallon for the ability to roast the tires in a hooligan-esque fashion, I’m all for it. I don’t think that he should be punished by anything but the market. But Dodge is creating these cars as a response to demand, not to drive demand. If you want to make cars which use less fuel, you need to understand that consumers don’t want to give up size and power to get there.
What the left doesn’t understand is that sometimes government action is not always the way to solve problems. With gas prices increasing, more and more individuals are making that choice to move to smaller cars or hybrids. Hybrids, of course, were a response to the market, which demanded greater fuel efficiency without resorting to 1800-lb death traps. They were not the action of government. And as gas prices rise, consumers are going to demand greater and greater fuel efficiency. The hybrid is no longer limited to the tiny Toyota Prius. They’re being found in the Honda Accord, Lexus sedans and SUV’s, and the Ford Escape. The market is already working to solve this problem. CAFE standards won’t fix this, because the cars automakers create to meet CAFE standards are cars nobody actually wants to buy.
The solution to reducing fuel usage is not to artificially increase the cost of fuel through taxation or to artificially increase the cost of automobiles through CAFE standards. It may make legislators feel warm and fuzzy to legislate an effect that is already happening without their input. Then, they can take credit without actually having done any real work. All legislation really does, whether it’s banning smoking in public places, or attempting to hamper carbuyers through limiting choices to small, unsafe cars, is to force everyone into the little box that fits most people, and only pisses off a few. Legislation that creates a box that doesn’t fit enough people is repealed or ignored. All that successful politicians are really good at is figuring out how big to make the box to make some people happy, but not piss too many off.
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Dude, you’re as out of touch as Yglesias. Sorry to see that you haven’t grown out of your “free market trumps all” Ayn Rand fantasies, CAFE standards do work. And as far as “peppy cars”, well, you might look up the definition of words like “sacrifice” and concepts like “common good” to see why some bozo’s preference for 400 horsepower 5000 pound behemoths really doesn’t mean a whole lot to the rest of us here on planet earth. If these tanks weren’t roaming the roads, driving more sensible cars would be much safer, yes? Yes!
Mr. Warbiany: I couldn’t trackback either (to my It’s the Economy followup: http://stonecity.blogspot.com/2005/08/its-economy.html ). And TPMCafe doesn’t even pretend to have trackbacks. Does that make them an echo chamber?
Mr. Berry: It sounds like you are unhappy with the idea that rich people can afford things that poor people can’t. Before you get too exercised about the “common good”, you might bear in mind that the common good has proven to be better served by greedy people working for what they want, than by well-meaning people deciding what the common good requires.
To the proprietor: great previews!
sac·ri·fice ( P ) Pronunciation Key (skr-fs)
n.
1. a) The act of offering something to a deity in propitiation or homage, especially the ritual slaughter of an animal or a person. b) A victim offered in this way.
2. a) Forfeiture of something highly valued for the sake of one considered to have a greater value or claim. b) Something so forfeited.
3. a) Relinquishment of something at less than its presumed value. b) Something so relinquished.
—————————-
I can only assume you’re talking about #2. So you’re talking about forfeiting something of great value (personal autonomy, freedom of exchange, individual liberty), for the sake of something that has a greater claim, i.e. the “common good”. Not only that, it is your subjective view of what the “common good” is. So what you’re really asking is that someone sacrifices their own freedom in accordance with your wishes. Or, more accurately, the “collective” wishes of the “majority”.
I’m assuming you came through one of the trackbacks to the liberal blogs I linked, so how, may I ask, is this any different from the conservatives being against gay marriage? They seem to think the “common good” trumps the right of some people to determine who they would like to marry. And the majority in this country is behind them on it, too! They think that if those silly gays get married, it will be damaging to the “common good”, and thus must sacrifice.
The way I see it, some bozo who wants to buy a 400-hp muscle car, while it might not be the best choice for the rest of us, does not directly violate anybody’s rights. I may not like it, and in fact, I may argue to that person’s face that they’re going to spend boatloads of money on gas, and they could spend their money more wisely, and that their choice is not “socially responsible”. But I think as long as there are no direct violations of rights, I cannot coerce that person into not buying that car.
CAFE standards may reduce fuel consumption, but in doing so, they cause a lot of unintended consequences and reduce the choice of consumers and businesses to provide people with the vehicles that they want to buy. I realize you have no problem with that, but remember what’s going to happen when the “majority” decides *YOUR* behavior is undesirable. You’ll cry and moan and whine at the “oppression”. Good luck!
“Hybrids, of course, were a response to the market, which demanded greater fuel efficiency without resorting to 1800-lb death traps. They were not the action of government.”
Actually, a lot of the original demand for hybrdis WASN’T the result of ‘the market’ – it was the result of emissions standards in California which were amended to allow partial credit for ’somewhat electric vehicles’. Look it up. And a big chunk of the rest of the initial demand was non-economic too; people wanting to reduce their fuel consumption for moral, not economic, reasons.
Gas taxes work a hell of a lot better than CAFE – Europe shows that. And rural people who have to drive a ton of miles, well, at some point we have to ask if we can continue to subsidize their lifestyle or need to get them to pay the full cost. Hell, dump farm subsidies and I’ll be willing to help them out with the cost of their fuel.
“Moral” desire to reduce fuel consumption is just a part of the market as any other reason. The reason most people hadn’t jumped on the bandwagon before now? Hybrids were unproven technology (from a reliability standpoint), restricted to very small vehicles, and cost a fortune. Only rich people could afford them. Now, we have the benefit of some economies of scale, the cost adder for hybrid is getting smaller, and they’re going into more mainstream cars. And last time I checked, you could still buy Hummer, Excursion, or Yukon in California. Special exemptions may have been created, but don’t necessarily drive manufacturers down to that point.
And only a liberal would say that we need to raise taxes, and we can’t “subsidize the lifestyle” of those who don’t want to pay them. A subsidy is giving people money to perform or avoid a behavior. Not punitively taxing a behavior is not a subsidy for that behavior. I guess to a liberal, we’re “subsidizing the income” of rich people. After all, we could charge them 80% income tax rates, but we’re only charging them 36%. How much longer can we continue to subsidize their behavior?!?!
(As an aside, I’m all for dumping farm subsidies too.)
Brad,
The subsidy comments from others refer to the fact that we subsidize suburbia through road-building, the property tax regime, etc. If we paid for all the costs of just road maintenance and construction via the gas tax, further rises might be less justifiable, but we don’t. Not even close.
As for the regressive nature of the gas tax: http://mdahmus.thebaba.com/blog/archives/000188.html