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For more than fifty years, fuel economy standards have promised to reduce gasoline use and make cars more efficient. But the results tell a different story. In this Grumpy Economist rant, Hoover Institution senior fellow John Cochrane explains how well-intentioned regulations distorted incentives, encouraged bigger vehicles, and failed to deliver meaningful energy savings.
Rather than raising gas prices transparently, policymakers relied on complex rules, exemptions, and credits that protected automakers and masked real costs from voters. The solution, he argues, is if policy makers want Americans to use less gas, they should be honest to voters and persuade them to support a gas tax.
Transcript
Hi, I’m John Cochrane, senior fellow here at the Hoover Institution. Welcome to my weekly rant.
Today, I want to talk about fuel economy standards. On December 3rd, President Trump announced a relaxation of the fuel economy standards.
And earlier he announced that the fine for violating them was going to be zero. Brilliant way to get around regulation. There’s nothing to bring out the grumpy and grumpy like silly energy policy.
How did 50 years of fuel economy standards go by and Americans drive these huge cars and trucks?
Here’s the story. Back in the 1970s, there was an oil crisis. Remember Jimmy Carter sweaters, 55 miles an hour, less gas?
What do you do if you want Americans to use less gas? Well, the obvious one is put on a gas tax, something like a dollar a gallon.
What will people do? They’ll drive less. They’ll move closer to work. They’ll carpool.
The most fuel efficient car on the road is a Chevy Suburban with all of the seats full. They buy more fuel efficient cars. Car makers would make more fuel efficient cars or just sell in the US the fuel efficient cars that they sell in the rest of the world.
Raise gas prices? Ha! We’ll never win another election if we do that. Voters will be really mad.
So, what they did instead is they put in a fleet fuel economy average. Each car maker had to make sure that the average fuel economy of the entire fleet that they sold was above a certain number.
They could buy and sell credits. Tesla, for example, made a lot of money over the years selling fuel economy credits to the other car makers.
Enter the car makers. The trouble is they make money from big cars and pickup trucks protected by a 25 percent tariff put in place in the 1960s over a chicken fraca with the European Union. Well, let’s not go down that road. They like to sell big cars and big pickup trucks.
That’s made worse by the fuel economy standards. If the companies are forced to make more compliance econo-boxes, they have to lower the price, people don’t want them because they’re not paying the gas tax, and so they make cheaper cars, people hate those, and the car makers lose even more money on it.
So, what did they do to keep the car makers happy? Different standards. Heavier cars and trucks got to have weaker fuel economy requirements than lighter ones. In fact, why do we see so many SUVs? Well, they got classified as trucks and so could qualify for the weaker fuel economy standards.
Presto magico, there’s no incentive to buy a smaller car. the one easiest thing we can do in order to use less gas.
Now, people say, “Oh, Americans don’t want smaller cars, but at what price?”
Incentives are always incentives. And the incentive to drive less, have the smaller car, move to work, carpool, and so forth are all missing by this fuel economy standard idea.
Why can’t we even buy the tiny cars that we sell abroad? President Trump noticed that on a recent trip to Japan. They have lots of cute tiny cars that don’t use a lot of energy. Why not? Well, you’re not allowed to sell them here.
How about Chinese electric cars, which are now pretty good and sell at half the price of American ones. Can’t sell those in the US either.
What are we after? Saving gas, affordability, saving the planet, or propping up legacy car makers and unions? You see where this went. Fifty years of fuel economy later, we’re driving around in huge cars with still suburban sprawl.
Don’t get me wrong, the Ford F-150 is an amazing truck, and to get it to go 20 miles a gallon is an amazing technical achievement. My 1972 Volkswagen bus got 20 miles a gallon, but that’s not going to save the planet.
Maybe the whole gas efficiency thing was pointless, but then it really was a waste.
As an economist, I’m not going to judge that, but just if you want to do something, do it efficiently.
What’s the lesson? Bad ideas last a long time. They build a bureaucracy, a constituency.
The environmentalists want a fig leaf that makes it look good even though it’s not doing a whole lot. And automakers love protecting profits.
As disruptive as Trump is, he can begin to reform. So, there’s the good news. But even Trump can’t get rid of it. He’s just softened it, and the Democrats are sure to bring them back.
Another lesson: respect the voter.
If you think that oil is more valuable than market prices show, maybe because of national security in the 1970s or because of climate in the 1980s and 90s, then be honest with the voters and get them to go along by voting for a higher gas tax.
Don’t pretend you’re an aristocracy who has to nudge the ignorant peasants. That disrespect is what’s led to the current populism.
Thanks for listening to my weekly rant and don’t forget to hit the subscribe button.
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.