In their recent Wall Street Journal op-ed (“Don’t Drink CAFE Kool-Aid” September 6), General Motors consultants Robert Crandall and Hal Singer wrote about pending legislation to increase the gas mileage of cars and light-trucks. They made a true statement: "There is virtually no opposition to this form of regulation. Not even from a Republican president.”
Crandall and Singer attack the University of Michigan Transportation Research Institute (UMTRI) study, which I conducted as flaunting elementary economic principles. If the market wants more fuel-efficient vehicles, the market will demand them, they presume. Forcing automakers to build them, they reason, will not generate the sales, profits and market share my analysis predicts. What Crandall and Singer don’t say is that their “elementary economic principles” assume the auto industry is economically efficient. That is, their products are exactly what consumers want, and that the sales and prices are what the automakers expected them to be when they designed the vehicles. We all know this isn’t the case. The market is working, but it is working by forcing Detroit to lower prices on the cars and trucks they can’t sell. In June alone, the former Big Three spent over $2 billion in incentives and discounts on their fuel inefficient SUVs and trucks. And still they are losing customers in droves.
As a GM economist for nine years, I worked with my colleagues to support product-planning teams by “interpreting” consumer surveys. If consumers said they would pay $600 for one more mile per gallon on a particular GM model, we would drop that to $200, telling the team that “rational economic consumers” could not value fuel economy more than that. Despite millions of dollars worth of surveys in which American car-buyers consistently expressed their desire for better fuel economy, Detroit’s product planners ignored their customers and listened instead to economists who told them what they wanted to hear—“people don’t really care about fuel economy.” This was a common practice throughout Detroit.
And what are the results? Decades of unrelenting share losses to rivals with more fuel efficient fleets; billions of dollars of “consumer incentives” annually to keep selling gas guzzlers as the price of gasoline rose; collapse of already weak resale values; and a “generation” of gas guzzling behemoths that will crowd our highways, pollute our air, and weaken our national security for years.