Congressional plan for green Detroit could be financially fatal
We're from the government and we're here to help. Those words strike fear into the hearts of conservatives anywhere. Right now those words probably should be terrorizing those hoping for a loan deal for the Detroit automakers as well. Before and after Congress declined to provide quick passage to loan package until the carmakers put a forward a plan, many people wanted to attach strings to the deal requiring the three companies to transform their fleets with a green lineup.
To a large extent this was already in process before the situation turned into a full blown crisis this fall. Product plans at Ford and General Motors (nobody really knows what's happening at Chrysler) had already been completely revamped over the last 18 months as the price of fuel skyrocketed. Most of the future "gas guzzlers" had been canceled or put on hold while more efficient cars were fast tracked. The programs that were moving forward were meant to be both greener and profitable. All of this was being driven by the market, specifically high gas prices, not CAFE. So, what's a good proposal for Congress to implement? My thoughts are after the jump.
[Source: Detroit News]
Right now, politicians want to force things along even further with a mandated move to plug-in vehicles. While this holds great promise, it's not clear that GM, Ford or anyone else will actually be able to sell any of these vehicles at a price that is both affordable and profitable any time soon. There are plenty of companies that have appeared over the years trying to do just this. None have succeeded because the market was not ready, the technology was not ready and the business case didn't work. Even Tesla is struggling right now and where is Phoenix Motor Cars anyway?
If Congress tries to mandate a technological requirement to go along with the cash, they could end up hobbling the companies with a plan that they can't money with. That would negate any benefit of keeping the Big Three alive. Perhaps the solution is to stay out of the supply side of the equation, and stimulate demand for efficient cars. Do something to actually get credit flowing and provide a bridge loan.
Most importantly, Congress needs to show some back-bone and get fuel prices back up again. They missed a golden opportunity earlier this year to implement a tax system that would not have caused any additional pain by setting a floor price for oil or gas. This would allow them, when the price falls below the threshold, to tax it and maintain a minimum level. If Congress tries to do this now, they will actually have to raise the price rather than maintain it. No one will be happy with them for that. Still, in spite of that political pain, this is what Congress needs to do and it will ensure that all automakers have a reason to get more efficient, not just Detroit.
If fuel prices stay low and only Detroit is mandated to build green cars, the market will go to more affordable machines no matter what mileage they get. A price floor is not the politically expedient solution, but it is the right one. Ensure demand and a way for consumers to buy the vehicles are there and they will get built, both by Detroit and other automakers. They exist solely to fill demand.
Reader Comments (Page 1 of 1)
Microzen 4:05PM (11/30/2008)
I don't entirely buy this. If Detroit is losing money fast on dirty cars, why is it a bad idea to switch them to losing money on clean cars?
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Mike Z. 4:39PM (11/30/2008)
"They missed a golden opportunity earlier this year to implement a tax system that would not have caused any additional pain by setting a floor price for oil or gas. This would allow them, when the price falls below the threshold, to tax it and maintain a minimum level."
I know that some people, like Tom Friedman, have suggested this. However, it is likely to have massive unintended consequences.
First, prices will NEVER drip below the minimum. Period. If you sold something and the government said 'If you sell your product below $70, we'll tax the difference' you would sell it at a minimum of $70 forever--so basically it's a subsidy to the oil industry.
Second, by creating a price floor for oil, the government would increase the supply and consumption of oil--not reduce it. Oil companies would be guaranteed a higher marginal price per barrel than when prices could drop.
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GoodCheer 6:35PM (11/30/2008)
"Second, by creating a price floor for oil, the government would increase the supply and consumption of oil--not reduce it"
I'm not sure I follow you... how would a minimum price increase the consumption of oil? Wouldn't a high minimum pump price drive Americans to drive less and drive more efficient vehicles?
I certainly agree that it would subsidize the industry at some point in the chain.
All told, I'm much more in favor of a simple $/gal tax as currently exists (just more so).
Mike Z. 4:39PM (11/30/2008)
Also, isn't gas still >$8 a gallon in most of Europe. Isn't there a sufficient export market for these cars? If not, why?
It seems like if such high fuel prices cannot attract such cars over there, it seems unlike that it will here.
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Sam Abuelsamid 4:42PM (11/30/2008)
Those high fuel prices mean that Europeans already have access to and purchase high mileage vehicles that are produced locally. There is unlikely to be much of a market for exported cars from North America.
Derek 8:44PM (11/30/2008)
The Europen market has not taken to hybrid cars like the US market. With the wide variety of diesel and manual transmission options in Europe, plus smaller cars overall, things like the Prius really aren't that much better than other options.
nads 5:04PM (11/30/2008)
So, Sam Abuelsamid, thinks we should federally mandate higher profit margins for the oil companies, while giving the automakers a blank check with no requirements to actually build a more sustainable business plan or address our current oil-dependence thats caused an energy crisis and threatened our economy. We should trust the car companies to do whats right, even though they've consistently done exactly the opposite.
And what companies have tried over the years to mass market plugins in the US??? The EV1 wasn't even mass produced, they were individually custom-built which raised costs astronomically. So show us these examples. There aren't any. The cost to build a car company is astronomical and the only companies that are capable of mass marketing such vehichles (the major automakers) haven't, purely for short-term profits. This guy just made something up to shore up his flawed analysis.
This "analysis" also suggests that because oil might get cheap, the car makers shouldn't be mandated to build more expensive and economical vehicles....ITS EXACTLY THIS THINKING THAT GOT DETROIT TO THE BRINK OF BANKRUPTCY. What you're saying, Sam, is the automakers should wait till the price of oil become unbearable (or make it unbearable with taxes) again before they commit to building better cars?? Uh, and when oil prices do inevitably go back up, wouldn't that put them behind the curve, with a bunch of inefficient cars nobody wants or can afford to fill up? Just like where they're at today? ABG needs to let this blogger go.
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Sam Abuelsamid 5:43PM (11/30/2008)
The problem with your "thinking" is that mandating more expensive and economical vehicles will do nothing to guarantee that consumers will buy them. American consumers have consistently shown a preference for buying the biggest most powerful vehicles they can afford, regulations be damned. If you look at fuel prices and efficient vehicles, there has always been a direct correlation. If fuel prices are kept high, consumers will demand more efficient vehicles and they will get built regardless of mandates.
Look at the example of Europe. The EU has never mandated any specific type of vehicle or efficiency level. The very fact that fuel prices are high, has created the demand. I'm not saying we should give anyone a blank check. But the method of defining a technology is foolish and will backfire.
Richard 7:49PM (11/30/2008)
Sam is right, and Europe is the proof. So is the recent drop in gasoline consumption due to high price. How on earth can you NOT see that? Have you been living under a rock? Or do you not pay attention at the pump? Let do basic math. If you are complaining about the cost of gasoline at $4.00/gallon and you don't complain so much at $2.00/gallon, that's a 50% reduction is cost of gasoline, right? Well, my friend, if your car get 15mpg and you trade your car for one that gets 30mpg, and you're paying $4.00/gallon, you effectively have halved your expense. But this won't happen if the real cost of gasoline is $2.00 or less. There is no natural incentive to purchase a more efficient car because you can afford the gasoline to power your current car. Sam and I have preached this very simple concept all along. Auto mfr won't sell a more efficient car in the US unless gasoline prices shoot up to spur demand for them. The 90's was proof of that! GM and Ford have very efficient cars in Europe, as does several other car mfr that don't sell in the US. Why? Partly because of US auto lobby instilled regulations protecting US companies. Another reason is that demand for smaller, more efficient cars was down due to low price of fuel. If the US government can gets it dumb ass in gear and tax fuel, we could have these cars in the show room lickedy split. Taxing by the way, doesn't support the oil companies. It drives demand down, and last I heard taxes we kept by the feds, not the oil companies. High fuel taxes lowers demand for oil which in turn return more taxes. Taxes that can be used to fund battery research, road maintenance, and help bailouts. It's the best solution. In the end more efficient cars save consumers money despite the higher cost of gasoline.
nads 9:46PM (11/30/2008)
"The problem with your "thinking" is that mandating more expensive and economical vehicles will do nothing to guarantee that consumers will buy them."
Then the obvious solutions would be to guarantee a market by mandating such vehicles for all government fleets and significant, deep incentives for consumers. The government mandates a major realignment of the auto-industry toward plugins and highly efficient cars, and fully subsidizes it with loans, fleet investments, and significant rebates that make them cost-competitive with anything else on the market. That sounds like an actual plan for long term viability.
Your "proposal" is to raise taxes on taxpayers while giving taxpayer money to the automakers and just hope the automakers will do whats right instead of going for quick short-term profits..
Nevermind that we are in an economic crisis and those high oil prices were responsible for drastically raising inflation & exasperating the situation, lets punish the American people (and reward the oil industry with GUARANTEED higher profit margins) for the automakers lack of foresight. Your plan only makes since if (a) you have stocks in the oil companies, or (b) plan on short selling GM stocks after they rise again and collapse after the next inevitable oil-price shock reveals they again chose quick profits over long-term viability.
The EU *cannot* be compared to the US because we lack their heavy investment in mass transit, and our working population is widely dispersed between cities, suburbs, and exhuberbs. Raise the price of gas artificially and you'll strain the livehoods of people who have to travel an hour each way to work everyday. The result will be more foreclosures and less consumer demand as people will have to chose between buying what they need or want and driving to work everyday.
Your idea for this crisis is to give the automakers taxpayer money with no strings attached, and shift the burden for more efficient vehicles onto the consumer through higher taxes. Well, how will people buy cars you admit would be more expensive if they are struggling under the burden of high fuel costs? They will barely be able to afford them, even if the automakers decided (no mandates, remember) make them. Higher gas prices is not a viable long-term solution to the automakers problems. Again, you must have some oil stocks or be planning major short selling in the future to be giving this kind of advice.
GoodCheer 9:03AM (12/01/2008)
"Your idea for this crisis is to give the automakers taxpayer money with no strings attached"
Where in Sams post does it indicate this? I must have missed it. The only thing he wrote that mentioned money for the car makers was:
"Do something to actually get credit flowing and provide a bridge loan."
The other two problem I have with you post is that it is technology forcing, and highly revenue negative for the government. What if something better comes along that does not qualify for your
"significant, deep incentives for consumers"
...maybe because of poor wording in the legislation or maybe because it does not follow the mold of the automobile.
If buying gas is expensive, than any device that accomplishes the transportation needs of the populous can fill the market.
By being revenue negative, your plan is simply NOT a long term solution. If taxpayer money is going to car buyers to buy particular cars, taxes will have to be raised somewhere else. The costs to society associated with people driving cars are a) those associated with emissions and b) those associated with maintaining the roadways. Both of those are very closely tied to how much fuel you consume.
If you feel like these taxes are "punishing the American people", I would say rather that they are punishing the people who buy a lot of gas. If you wish to avoid that punishment, drive less, driver a smaller car, or take public transportation.
Furthermore, this is a non-distortionary tax. It is a financial burden directly associated with costs to society. If revenues from that tax are high, then it can be used to offset other (distortionary) taxes like income taxes or business taxes.
John Banister 7:48PM (11/30/2008)
I think that the government could provide benefit by requiring a lot of vehicles with 100% electric drive trains to be produced, even if they're somewhat less efficient on the highway at first. This is an aspect of vehicle design and construction that could benefit a lot from the economy, research and competition that accompany large scale industry-wide production. Once the vehicle's engine becomes a generator set, I think it's a lot easier to be flexible about keeping the vehicles produced up to date with advances in technology because it's easier to change the part of the vehicle that supplies the electricity and the part that consumes the electricity independantly of one another. Our nation will benefit in the long run if automakers jump into this with both feet, and being able to tell their investors "the government made us" will help them to do that.
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jharlan 11:22PM (11/30/2008)
Bad idea. Price floors or ceilings never work. If you want to serve only one term and go down in history as a failure, go ahead and try something stupid like a price floor on fuel! It's just another form of property confiscation by raising taxes in a worsening economy. What the government needs to learn is to live within their income like everyone else and let the market allocate resources..
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Throwback 8:35PM (11/30/2008)
If I am running an oil company I would ensure that my refined gas price stays above the federal mandate. Why would I sell gas to retailers for less? that is the problem with a price floor. What some of you want is a gas tax period, which has as much chance of passing congress as a balanced budget. The last thing we need in this economy is higher prices for gas, home heating oil and all the things shipped via a truck. If the government wants fuel efficient cars, they should create a sliding scale of tax credits based on the combined mpg of cars.
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Randy C. 9:41PM (11/30/2008)
Detroit's auto makers big problem is they stuck with the Internal Combustion Engine (ICE) to long. This is in spite of the fact that the ICE has a fatal flaw, it requires large amounts of an imported fuel. Fuel that is coming from countries that are becoming more and more unfriendly. This dedication to the ICE was motivated by the 3 P's, profit, profit and more profit not anything that would help the US economic and political situation.
Detroit completely abandoned the small car and the alternative fueled car market. The only reason they had small cars in the inventory was to boost their CAFE numbers. So when the crunch came down they had absolutely nothing to stand on and it would take 5 years or more to create it. Detroit wouldn't even try to educate the public to reduce fuel consumption or why an electric car is a good choice.
Watch the film "Who Killed the Electric Car" to see the big 3's response to being forced to move into the future. And don't overlook a president that is a lying Detroit puppet. In 2003 Bush's administration joined a law suit GM brought against California to force the repeal of its Zero Emissions Mandate. Run the clock forward a few years and Bush is telling congress "America is addicted to oil" as if he no part in the removal of the cheapest and fastest solution to the oil addition problem, cars that didn't need oil aka electric cars.
So here we are with one of America's biggest industries on the brink of failure. They're asking me (through my congressman) to help them out. I'm not so sure that I want them bailed out with Detroit's attitudes toward the customer (me), the environment, the economy and relations with other countries. Pursue profit irregardless of how it makes things worse for everybody else.
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texmln 11:57PM (11/30/2008)
For a refresher on how successful centralized auto production planning might be, why don't you call Avtovaz, Gaz, and Zil and ask them how things were going, oh, say between 1917 and 1993.
Here's a great idea that will make absolutely EVERYONE happy. People buy the kind of car they desire, considering their budget, the cost of fuel, electricity, insurance, parking, etc., etc. Car companies then manufacture the kinds of cars people want to buy. Oil companies and power companies then provide the fuel and electricity to power the kinds of cars people are driving. Don't like Chevy Suburbans? Don't buy one. Can't haul cattle to market with a Smart Car? Don't buy one.
Can't stand seeing people free to make their own decisions? Feeling like you're smarter than everyone else? Think the government should make everyone live their lives the way YOU think is best? Move to North Korea, Venezuela, Cuba, or Iran. They have exactly what you need.
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Der Alte 12:26AM (12/01/2008)
Let the market do its work. Business will never learn so long as the government keeps bailing business out for its mistakes. The business community cries constantly for the government to stay out of its affairs. I say government should stay out, and that includes times when things go sour because too many in the business community were being stupid. Perhaps if big business realized nobody was going to be there to bail them out when they keep doing stupid things, they wouldn't keep doing stupid things like giving credit out willy nilly and signing on to expensive union contracts to build cars that are always one step behind the competition..
The Big Three have nobody to blame for their woes than themselves. There is no evidence that a bailout will make them run anymore like a sustainable, profitable business or lead to any better business practices. ONE of the big three could probably make a good go of things at the sacrifice of the other two. Chrysler should have died long ago. Perhaps both Ford and GM can co-exist with major changes and cutbacks to each. The big three have teetered on the edge of oblivion too many times and have shown too little change for it. The time of reckoning has come. Any government bailout, no matter how many shades of green you paint on it, will only propagate the current state of affairs which has shown itself as unsustainable for a very long time.
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Bill 7:31AM (12/01/2008)
Regulations have also harmed fuel economy here in the U.S.
You can't buy a small efficient diesel car even though the Big 3 make their engines here in the US. because of CARB.
European emission regulations are far behind the U.S. and only slowly catching up, so they will enjoy small efficient diesels while we are stuck with significantly more expensive gasoline-electric hybrids or plug-ins.
And forget plug-ins unless they are massively subsidized.
Realistically, in a recession, how many U.S. consumers will choose a $40,000 Volt instead of a $19,000 Insight?
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endependence 11:19AM (12/01/2008)
All of these comments back and forth and the premise of the article point out the need for global action to impose a "carbon tax".
Many Americans buy vehicles they don't need. Most of those large SUVs the Detroit 3 sold in the last decade never went off-road and seldom towed or hauled anything. Mostly, they were used as single occupant commuters. These were seen as fashionable, not functional.
While we can't legislate virtue, we can encourage actions that are in the public's best interests. Most of the Priuses and Civic Hybrids sold in the last several years were sold under conditions of relatively low gas prices. People were choosing these cars for reasons other than saving money on gas.
That is the kind of behavior the governement could encourage in those less inclined to "do the right thing" for the environment.
While a stairstepped carbon tax is being implemented, the government could provide vehicle purchase incentives to get more people to be early adopters.
It is obvious that $4.00 per gallon was a tipping point in the U.S. If consumers knew for a fact that gasoline was going to cost more next year than it does this year, the market would indeed be all that is needed to encourage efficiency.
Join our movement to achieve endependence = energy independence that ends dependence on polluting fuels.
http://endependence.info/declaration
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