CAFE Economics

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.

More Hybrid News...


    This article dose not even begin to address the tens of thousands of consumers who CRAVE plug-in all-electric vehicles.

  • Stefan

    Due to market pressure, it looks like Detroit ran out of tactics to sell these gas-guzzling cars while Toyota is selling gas-sipping cars. I guess the United Auto Worker Union is going to get even much less than what they want.

    Well, on the bright side, these auto makers are at least building hybrid SUVs, that should bring them up. I say that because sales of SUVs have flatened recently, not declined. So that means the next best alternative is a hybrid SUV, not a Prius, for some. Also, it is a clever tactic to put the technology where it needs to be the most.

  • ETM

    Toyota stradles the fence with Hybrids in one hand and SUVs and trucks in the other. Do you think they are selling the trucks at a loss?

  • Stan Smart

    Jusdt returned from 10 days in AZ. Never seen so many Prius

    Detroit automakers talk to themselves and hardly ever get out in the “real world”

    I grew up in Detroit in the
    60’s & ’70’s and what McManus says is true. This is a sure sign of companies that are on the downside of “mature”.

    They only hear what they want to hear…

  • Steven B

    Toyota is kind of a usurper of the ‘green’ reputation. Honda is the most fuel effiecient auto maker in the United States. The Prius is the king of a niche market, nothing more. Technological marvel it is, it is not the end-all-be-all of fuel efficiency. I support GM in what appears to be a turnaround. They seem to be moving towards making the cars Americans want, and I support them in the development of the Volt. There are a number of naysayers out there about the Volt and E-flex, but I’m not one of them, and I hope that they are the first major automaker to produce a mass-market plug-in hybrid. I just find it sad that it is taking them so long to do it considering the progress they made with EV1 years ago. I hope that 10 years from now that majority of new car sales are range-extending electric cars with flex-fuel generators. And I hope that Toyota joins the party, instead of continuing to flaunt early 2000’s technology.

  • CM

    Typical GM will give lip service to this very sexy design and then never deliver. Also, if this vehicle does make it to production, it does not look to be a vehicle that will have wide appeal especially to families that need Camry-like function.

    GM also targets 2010 or so for the availability for this car when they already had and destroyed the EV1. For those that want to debate the small points of technology, the plain reality is that Toyota already has proven technology in the marketplace; GM is does not. They need to save the money they are wasting marketing a non-existant vehicle and use it to ensure that this car is a successful alternative to Toyota.

  • Free Markets for Gasoline too

    I completely understand and support the argument for free, efficient markets to drive the production of more fuel efficient autos. However, markets for gasoline are much less efficient than those for autos. Raw materials are controlled by a cartel, and governments subsidizes gasoline prices through tax breaks to oil companies and the lack of direct taxation to account for the impact to foreign policy and the environment. If we want the markets to work (and I’m confident they will) fund defense and environmental programs throug substantial gas taxes. That’s not a platform likely to win an election in today’s political climate, but a simple gas tax would empower consumers to demand more fuel efficient cars, decrease dependence on foreign oil, and open up more options in foreign policy.

  • 4Eversteam

    The point here is the dysfunctional nature of the Detroit makers, not that oil markets or autos are cartels, not that Toyota is good at what it does (it is). The Executives and the lackeys that do their planning have no idea what the real world wants, as one reader already suggests above. The fact that they see share erosion for decades and do nothing effective about it indicates just how stupid and foolish they really are. I reckon these executives to be idiot savants as a class – refined, polished, articulate, but absolutely dumb in what matters – product and customer trends. Like sports scores and statisitcs, automotive sales results do not lie and are an absolutely stark measure of success or failure.

  • Pablo

    While Detroit is doing their wishful thinking I bought Prius 15 month ago and do not regret. Next time I will buy plug-in.

    Unfortunately GM workers are loosing their jobs, while their bosses ere arrogantly refusing to learn a lesson and do homework.

  • Van

    So the GM analyists lied to GM management and GM built the wrong vehicles which now will not sell without incentives. And this somehow supports the failed CAFE standards? Right. The mileage under the CAFE rules has decreased since 1986, not increased. People were buying SUV’s because it was the “in” thing, not realizing they were putting their fellow drives of smaller fuel efficient cars at risk.

    I do not see any reason why GM could not build the Volt, the safe battery exists (A123 chemistry) the production facilities apparently exist in China, and the all the components are proven and in existence. Not only will this vehicle get better than 50 MPG overall, and it will “burn” domestic energy and take the “demand” pressure off imported oil. But for now we sit and wait for the spring of 2011, with drool hanging from the corner of our collective mouths.

  • AP

    Judging by the tone of the majority of the comments on this site, viewers are more interested in panning their least favorite manufacturers (domestic, naturally) rather than being open-minded about technology and the misguided efforts of government.

    CAFE is a failed policy, unless you consider the birth of the SUV as a commuter car a success. CAFE requirements only deal with the initial design of a vehicle, not its use. The combination of more lax CAFE standards for trucks (a reasonable idea, considering farm and construction use) and cheap fuel in the late eighties and nineties made fuel economy a low priority. CAFE and cheap fuel made the SUV the new replacement for the large family car. Japanese manufacturers also enlarged their vehicles, more so than the domestics, and in many cases domestics got better mileage for the same sized vehicle.

    If the government were really interested in reducing fuel consumption, they would put a higher tax on fuel. CAFE wouldn’t even be necessary, because all manufacturers would tailor their vehicles to the consumer demand for more fuel efficiency, as they do in Europe, Japan, etc. Currently, buying a fuel-efficient vehicle isn’t a financial necessity for most. It’s a way to make a statement or to ease your conscience. To make a meaningful
    difference, lower fuel consumption has to make a larger financial impact on the owner.

    Reducing fuel consumption is important, for national security reasons alone. Doing so by increasing the fuel tax would put the manufacturers and consumers on the same page. Doing so by increasing CAFE will produce vehicles that not everybody can justify buying, given the possibility that fuel prices might drop (don’t laugh, America has more than once said that would never happen, but it did).

    If fuel prices stay where they are, mandating higher efficiency vehicles will have a major impact: on miles driven. Since it’s cheaper to do so, people will commute further, go on more joy rides, carpool less, etc. Traffic will become more congested. We will need to build and maintain more highway lanes with about the same fuel tax revenue.

    On the other hand, a higher fuel tax would reduce consumption, not only in new cars but in existing ones. It would encourage the average Joe to buy a new, more fuel-efficient vehicle, rather than saving the car payment but burning more fuel.

    So let’s think about this logically, and keep the name-calling and emotion out of it. It’s one thing to have a grudge against a certain manufacturer, but to be blind to the faults of the others, and to ignore the failures of CAFE is close-minded.

    CAFE hasn’t worked, and never will (on its own), it’s just a “feel-good” law. A higher fuel tax would work. Not everything the Americans do is wrong. Not everything the Japanese do is right.