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US cars: are higher prices the answer?

April 8, 1981



If you think you understand how the economic laws of supply and demand work, consider this: When the US auto industry posted its rebate program in early March, sales flourished. Then, when the industry reduced its cash-discount program, sales plummeted 17 percent. So what does industry leader General Motors do? It boostsm its price an overall average $351 per unit, or 3.5 percent , the fourth price hike on GM's 1981 model year cars. Every GM car will thus go up in cost by at least $100.

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It does make one wonder whatever happened to the old free-market system.

The new GM rate hike, coming at a time when the industry is pressuring Washington to reduce Japanese imports, raises troubling questions about the ability of Detroit to show the leadership needed to restore its competitive primacy in the face of major challenges from overseas competitors -- and from a car-buying public shopping for the most fuel-efficient car at the best price.

That the industry is in trouble need hardly be recounted here. Suffice it to note that for at least 18 months now Detroit manufacturers have been economically pummeled, losing $4.2 billion in 1980 alone. While some car analysts believe that industry-giant GM will show a profit for the first quarter of 1981, the other auto manufacturers may well post losses.

For that reason the new deregulatory steps just announced by the Reagan administration should help ease some pressures on the industry as it goes forward with its multibillion-dollar retooling plans to convert from large to small cars. But the deregulatory steps (which will save the industry $1.4 billion in capital costs over the next five years) will not by themselves sell cars. Nor will they solve many of the deeper problems of the industry, including high wage scales and management costs in some firms.

The administration proposes easing or scrapping some 34 safety and air-quality regulations. This adds up to the first significant pullback from increasing regulation of the industry over the past decade and signals the Reagan administration's intent to let market forces, rather than the federal government, guide Detroit in its response to competition.

However, if the administration and Congress press ahead with deregulation, Detroit cannot logically at the same time ask for import restraints. In other words, the industry should accept federal regulation, which will ensure the fuel efficiency and other safety and emission standards necessary for Detroit to compete worldwide. Or, alternatively, it should compete head on with imports and let market competition bring about better fuel efficiency and higher safety standards. Otherwise, the public is left victim to repeated price increases, without assurance that US cars are ever changed to meet optimum fuel and emission standards.

While it would be unwise for the US to retreat from enforcement of its overall emission and mileage standards, the basic thrust of the newly announced regulatory pullbacks seem reasonable. They include, for example, eliminating stringent emission standards that would have applied to all cars by 1984 but are specifically designed for exhaust emissions for cars in high altitude areas. The savings from scrapping the regulation, which would require congressional approval, are reckoned at $1.3 billion over five years.There may be more question, however, about scrapping or modifying bumper-crash worthiness or passive restraint standards. Would any short-term savings be lost in higher accident and insurance costs? As far as passive restraint systems are concerned , while there are technical problems still to be resolved with the air bag, there is little dispute about the effectiveness of shoulder straps and other belt-harness mechanisms. The harness on some Volkswagen models, for example, runs around $80, hardly exorbitant when safety is considered.

On the other hand, will drivers deactivate restraint systems? And changing bumper standards (to make them lighter) could save fuel.

In justifying their recent price hikes, GM officials say that they will be required to raise $40 billion through 1984 to retool their plants. Also, that they posted a loss in 1980 and that they have recently slashed their dividend to stockholders. Surely the nation's premier US automaker must be enabled to earn the profits necessary to ensure its future well-being. But in the end it is not the accumulation of mere dollars that will enable the industry to survive -- but whether it can put its labor and management house in order and turn out a well-built, price-competitive car. That, after all, was how Henry Ford himself did it, and he was the one who set the US industry on course. Getting back on course is now Detroit's real challenge.