A decade ago the United States faced an energy situation that had the public clamoring for the federal government to ``do something.'' The Energy Policy and Conservation Act of 1975 was the quick response. One section of that law required new automobiles to meet certain corporate average fuel economy (CAFE) standards. Ten years later the energy situation has changed dramatically, but the CAFE ``leftovers'' remain unchanged. Though these regulations have been of dubious worth from the start, they have also been relatively harmless. But changing consumer preferences and stable gasoline prices now call CAFE in question.
The CAFE regulations are also an example of how government interference begets more government interference. In reaction to the dramatic increase in the price of oil imports, Washington placed controls on the price of domestic oil in 1975. Sensing that such action discourages conservation, lawmakers mandated greater fuel economy from new automobiles. A freely determined market price for gasoline would have produced far greater conservation than regulating only a small portion of the fuel users: new car owners.
The 1975 law requires manufacturers of more than 10,000 autos annually to meet average fuel efficiency standards for the cars they sell in a given model year. These standards were set for 1978 and selected other years, notably 27.5 miles per gallon (m.p.g.) in 1985. Congress also specified a fine of $5 per auto sold be levied for each tenth of a mile per gallon that the overall fleet average fell below CAFE standards.
Until recently, however, CAFE regulations have escaped public attention, because they have been irrelevant. In 1974, new autos averaged 14.2 miles per gallon. The 1985 models for General Motors, Ford, and Chrysler are expected to average 25.1, 25.9, and 27.5 m.p.g., respectively. Auto producers exceeded CAFE requirements in each year before 1983 primarily because the consumer -- rather than the federal government -- demanded fuel-efficient cars.
Another reason that CAFE regulations have not been big news is that ``voluntary'' export restraints by the Japanese from March 1981 to March 1985 helped the sales of domestic small cars. Had imports been available in greater quantities, American buyers might have bought fewer US subcompacts, thus making it much more difficult for domestic automakers to meet the standards. While quotas may be good news for auto manufacturers and their employees, they are bad news for the consumer. They resulted in auto prices some $1,300 higher for Japanese imports and $660 higher for domestic models in '84. Now that trade restraints have expired, meeting government standards will be more difficult.
How important are CAFE regulations in holding down oil consumption? William Niskanen, former member of the President's Council of Economic advisers, points out that autos account for only 30 percent of US oil consumption. New cars represent only 10 percent of the auto inventory. Thus, whether new cars average 27.5 m.p.g. or 25 m.p.g. makes less than a 0.3 percent difference in oil consumption. Furthermore, when oil prices were decontrolled in '81, the original justification for fuel economy standards was removed. Given how sensitive consumer preferences for fuel-efficient autos are to changes in gas prices, why does CAFE linger on?
One answer is that the regulations preserve employment in the US auto industry, at least for now. By forcing manufacturers to produce more small cars domestically (imports by US auto companies do not count in calculating average fuel efficiency), jobs are maintained. Buyers of intermediate and full-size cars pay for this unofficial jobs program, since low profitability on subcompacts is made up by higher prices for larger cars.
Then there are those who fear the rest of the world has overestimated, and thereby underpriced, oil supplies. The fact that these requirements result in only a minor difference in oil consumption is ignored.
If the fuel economy standards are not lowered or rescinded, buyers of Ford and GM products will suffer. If the two automakers elect to incur the CAFE fines and produce the large cars American consumers want, a 1986 Ford may well cost an average of $80 extra, while GM price increases could average $120. Another possibility is that the two producers will attempt to comply by reducing large-car production to increase average fuel economy. In that case, the consumer will pay dearly for the fewer large autos, while auto workers and stockholders will suffer from less production and less profit.
As gas prices have stabilized, consumers have begun to value size and comfort. This is good news for US automakers and their employees, since these manufacturers enjoy an advantage over imports in larger cars. CAFE, however, has turned this silver lining into a cloud. But in the final analysis, CAFE is a consumer issue. Rather than allowing an obsolete law to deny American consumers the opportunity to purchase a US-made automobile of their choice, it is time for Congress to throw out the CAFE ``leftovers''!
A former chairman of the Council of Economic Advisers, Murray Weidenbaum is now director of the Center for the Study of American Business at Washington University in St. Louis.