The Trump administration’s recently proposed revisions to fuel economy standards leave current fleet standards in place, but end future increases and close off California’s ability to establish its own, higher fuel-efficiency mandates. The proposed changes could mark the beginning of the end for the peculiar, yet well-intentioned policy of fuel-economy-by-government mandate. Note that I merely say “the beginning of the end,” because it could take years and ultimately Supreme Court decisions to foreclose the nation’s dependence on the current regulatory plan.
The regulatory juggernaut began in 1975, in the wake of a powerfully disturbing Arab oil embargo. Not long after the 1973-74 embargo hit, the U.S. imposed fuel efficiency standards and simultaneously froze fuel prices. Regulators were, in a sense, attempting to mandate the kinds of cars and trucks consumers would have to buy if gas prices continued their meteoric rise.
The regulatory solution called for an odd-couple outcome: cheap gas and smaller cars. But when gas was cheap, consumers wanted larger cars.
Other countries were a bit more observant of human behavior. They forced fuel prices higher and also imposed tough efficiency standards. As a result, some of the most efficient small engines to be built emerged in Japan and Europe. In those parts of world, small cars and high-priced fuel formed a harmonious outcome.
America’s scheme worked well in 1979 when Iran cut its flow of oil. Lines at gas pumps got longer, people ran out of gas, and large sedans went to the back of the lot. But when gasoline prices headed south again, small cars just didn’t look all that appealing. While the small-fry hatchback sometimes sat unsold in dealer inventories, pickup trucks and eventually large SUVs, which just happened to have much less stringent fuel economy standards, became more popular.
In fact, thanks to our peculiar regulation, it wasn’t long before beautifully built SUVs became the toast of the town. It was not unusual to see a 200-pound man seat himself in a 3,500-pound, four-wheel-drive truck and cruise to a corner coffee shop for a six-ounce latte. Until, that is, more Middle East flare-ups and wars unhappily intervened and the gas-price yo-yo went the other way. Gasoline prices soared, fuel-sipping and hybrid vehicles flew off the car lots, and those big SUVs went in, out, and then back en vogue.
Meanwhile, we shifted our attention toward carbon emissions and the U.S. became one of the world’s leading petroleum producers.
America’s need to mandate efficient automobiles never had much to do with the auto industry’s inability to deliver them. In 1975, Volkswagen was producing cars in Westmoreland, Pa., that averaged 45 miles per gallon in the city and up to 53 on the highway. The problem was never about technology or engineering. The problem was that free people will choose what pleases them most, given the prices they must pay, necessarily what pleases government regulators.
All of this brings to mind Adam Smith’s 1759 warning about those who seek to regulate consumer behavior:
When it comes to conserving fuel and limiting pollution, we can and should seek to do better. But here’s the real lesson: Cheap, plentiful gas is more powerful than regulators seem to realize. This may indeed be the time to look at the problem with the benefit of hindsight, recognize that incentives matter, and determine if there is a more effective way to put a price on pollution, thereby matching environmental concern with freedom of choice.
Bruce Yandle is a contributor to the Washington Examiner‘s Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business & Behavioral Science. He developed the “Bootleggers and Baptists” political model.
