I recently pulled into a store parking lot and noticed a woman with only a small bag of groceries heading to her car. She slipped behind the steering wheel of a 5,000-pound SUV, quickly cranked the turbocharged 200-horsepower engine, and drove away. Recognizing an engineering masterpiece that had evolved in a highly regulated world, I couldn't help but think about the front-row seat I had to the events that accidentally spurred the rise of these vehicles. As the White House moves to subsidize the domestic manufacture of electric vehicles and their batteries, and as it writes regulations calling for tougher fuel economy standards, it's worth remembering how we got to this point.
The White House has promised that this will all have a positive impact on global climate change and save us money when fueling our SUVs. Hopefully that's true, but no one in government is systematically keeping score and reporting. The industry has become so overloaded with subsidies and regulations that it's hard to tell what policies, if any, would reduce production costs and save consumers money, let alone help solve climate change.
Back in 1977, as a senior economist on President Jimmy Carter's Council on Wage and Price Stability, I participated in Department of Transportation (DOT) proceedings that set the first fuel economy standards for the U.S. fleet. What transpired is a great example of what can happen when federal regulations become completely entangled with a major economic sector. The forces at play help to explain why a woman happily drives a 5,000-pound SUV to transport 10 pounds of groceries.
I can assure readers that no one in those proceedings thought the Ford F-150 pickup, beginning in 1982, would top the all-vehicle bestseller list for 41 consecutive years. And we could have never guessed that truck-like SUVs would become vehicles of choice for U.S. consumers. We couldn't have; SUVs did not exist at the time.
We expected just the reverse. Cars would get smaller, we thought. Fuel economy would rise, and large, weighty vehicles would be a thing of the past, primarily because of the regulations being put in place.
The move to regulate fuel economy came about a few years earlier, following the 1973–74 Arab embargo that suddenly ended the flow of oil from OPEC nations. In the face of skyrocketing oil prices, Congress froze gasoline prices to protect American consumers from pocketbook shock. Then came the hard part. Elected officials sought to require U.S. automakers to build the smaller, more economical cars that unquestionably would have been built had gasoline prices been allowed to rise freely. Yet the fuel economy standards hit passenger sedans hard while leaving light trucks, which were not seen as passenger vehicles, almost untouched.
As the fuel economy standards began to bite consumers, they found that trucks provided comfort and safety no longer available in the downsized sedans. Truck sales surged, and in 1990, Ford placed a four-door body on a Ranger truck frame and introduced the Ford Explorer, a passenger vehicle that satisfied the government's truck definition. This inspired an explosion of similar SUV production across the industry. Trucks became beautiful, expensive, and highly desirable.
All the while, the fuel economy standard for trucks remained less strict than for sedans. To make things even better for U.S. producers, almost-prohibitive tariffs on European light trucks were extended to the rest of the world. Many foreign producers eventually jumped the tariff wall and built trucks and cars here, but the home-grown industry enjoyed an early advantage.
Over the years, regulatory priorities changed. America became the world's leading oil producer. Old fuel efficiency worries were bolstered by concerns about smog, emissions, and climate change. Electric vehicles became the politically hoped-for solution.
But instead of overhauling the aging fuel efficiency apparatus—perhaps even moving to a straightforward tax on carbon emissions—politicians added more ornaments to the fuel economy Christmas tree. It now includes requirements for producers of too many gasoline-powered vehicles to subsidize those that make electric cars. Today's DOT-proposed fuel economy regulations can only be met by a significantly enlarged electric fleet. These are accompanied by proposed emission regulations by the Environmental Protection Agency.
Now we're left with a maze of regulations and rules that I doubt anyone can fully explain. The industrial organization that results is so opaque that no one can tell what anything really costs when factoring for the credits, subsidies, or tax breaks paid for or enjoyed by all involved.
Perhaps it's time to start anew.
Why not wipe the slate clean, support carbon and other offset markets to reduce undesirable emissions, and let the chips fall where they may? It may take time, but customers and automakers can respond more effectively than the regulatory state has. We should be able to learn from the 46 countries already using market forces, along with an unbiased analysis of the whole thing. This suggests calling on the Joint Economic Committee to organize a study and publish the findings. Perhaps the National Bureau of Economic Research could become involved.
It's time we better understand why ordinary people are driving extraordinary trucks to fetch a loaf of bread and milk from the market. And if it's time to go electric, we'll know what not to do.
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