I’ve written about this before, but after today’s news, and because so many of us in rural America depend on our trucks and SUVs I wanted to cover it again. Today it was announced that the CEO of GM would be thrown out and replaced. It was made clear by our president that this was not punitive, but I fear that many people (especially some of our legislators) still want to blame all of this on automakers not producing the kinds of cars that Americans want to drive. This is ridiculous. Americans love their trucks and SUVs and the Big Three have made them well. I fear that certain interested parties want to use this crisis as an opportunity to punish America for all of the 4x4s, suburbans and hummers that we have been driving these past few years, and set up a regulatory apparatus that will limit their production in the future. Already, short-sighted government interventions have lead to major problems in the auto industry.
Issue #1 Short Sighted Fuel Economy Standards
As I have said before (harmful and deadly – see this link from the American Enterprise Institute) fuel economy standards have forced automakers to make a lot of small fuel efficient cars that no one wants to buy. Resources that could have went into the costly engineering problem of developing more fuel efficient TRUCKS and SUV’s over time have hastily been funneled to meet immediate regulatory demands. Further, automakers not only had to waste resources building these low quality cars that no one wants to drive, but they had to absorb heavy losses because they don’t sell. Were it not for the regulatory requirements imposed ‘yesterday’ it is likely that we would have more fuel efficient options in TRUCKS & SUVs for the higher gas prices ‘today.’
Issue #2 Short Sighted Regulatory Requirements in Energy Production
From 1988-1992 environmental compliance costs went from an annual 560 million to 2.69 billion (400% increase).Return on investment dropped 42% per year between 1996 and 2001. With reduced ROI, refining capacity is severely limited, and the profitability of expansion is greatly reduced. Due to these low returns and stringent environmental restrictions we have not built a refinery since 1976, and we have to refine nearly 20 different types of gasoline to meet these standards.( which lead to ‘regional’ price spikes like never before experienced) The cost to oil companies of complying with these types of regulations is nearly $10 billion per year.
We got by with this for a few years, but as the world economy grew and along with it demand, we have not been able to keep up. In a normal market economy, scarce resources lead to increased prices which provide incentives for bringing more supply to the market or alternatives via substitution or technological change. The artificial restrictions on supply have led to upward pressures on prices that we have not been able to compensate for through technological change.
Issue # 3 Short Sighted Interventions in Financial Markets
Making matters worse, government interventions in the financial markets ( through the federal reserve and public private partnerships like Freddie and Fannie) lead to a housing boom and bust. Once real estate and financial markets started taking a downturn, speculators fled to commodities driving up the cost of already scarce fuel. This lead to the massive price spikes which killed SUV sales. The job losses and financial losses in the economy as a whole due to the financial collapse delivered a final blow to the auto industry.
The car companies will not have a viable business model again until they can get back to producing and selling the cars that most Americans want,( Trucks and SUVs) and Americans can afford the fuel required to drive them. Due to numerous short sighted governemnt interventions, Americans no longer find it viable to purchase the cars they have revealed such a strong preference for over the last few decades and automakers no longer find it profitable. These government interventions have certainly upset the business model for the Big Three, and more interventions will not likely be successful.
So maybe the government bears a huge part of the blame, and should be responsible for more bailouts. No matter what they do, lets hope they seriously consider changing the short sighted regulatory policies that led to these problems, instead of trying to change the auto industry that has served its consumers so well in the past.
Matt Bogard, Economic Sense
Matt Bogard, Economic Sense