Why the Automakers Won’t Make Fuel-Efficient Cars, Even as the Price of Being Bailed Out

Telling automakers to make more fuel-efficient cars as a condition of being bailed out is like telling Citigroup or any other big bank to issue more affordable loans to Main Street as a condition of being bailed out. It won’t happen. Conditions like these make the public feel better about using their tax dollars to bail out private firms, but they’re useless. Automakers, like the big banks, will do the minimum required, and you can bet their lawyers and lobbyists will find ever more clever ways of avoiding even that minimum. Without lots of buyers who want fuel-efficient cars, automakers won’t produce them, period. (Without credit-worthy borrows able and willing to pay the costs of bank loans, they won’t be issued, either.)

You might think that the recent memories of $5-a-gallon gas would transform nearly everyone into prospective buyers of hybrids that get more than 30 miles a gallon. Think again. Consumer memories are dreadfully short. With gas prices settling down to half that sum, buyers (to the extent they still exist in this recession) are moving back to SUVs and pickup trucks, which automakers are all too happy to provide given the larger profits that come with gas-guzzlers. We’re witnessing a repeat of what occurred immediately after the oil crises of the 1970s. As soon as cheap gas was readily available, consumers who had said they wanted fuel efficiency went back to their old ways — and so did the Big Three.

What to do? Short of a gas tax that would push prices back up to $5-a-gallon — something deemed politically impossible — the only way to get lots more fuel-efficient cars is to put the costs of the gas-guzzlers on to the automakers themselves, as part of a cap-and-trade system requiring the major sources of carbon-dioxide emissions to pay for them. This would give automakers a powerful incentive to make more fuel-efficient cars and price them far more attractively than the guzzlers, thereby attracting consumers to them.

But a conditional bailout that flies in the face of consumer demand won’t work.


Originally published at Robert Reich’s blog and reproduced here with the author’s permission.

13 Responses to "Why the Automakers Won’t Make Fuel-Efficient Cars, Even as the Price of Being Bailed Out"

  1. devils advocate   December 3, 2008 at 8:27 am

    disagree-80 million American baby boomers will buy only $10,000 cars fuel efficient carsthey only need a small economical car – no big family – no SUVing for themand no money left after their pension/savings have been Massacredthey can’t even afford to retire———-and everyone else is worried about getting a pink slipconsumers now want to consume less and save more

    • Anonymous   December 5, 2008 at 10:55 pm

      Yes that is a good price $10,000 but where can I get one?What we have available now is no where near what it takes for me to agree with its economy and environmental behavior.I would pay closer to $20,000 for a compact size car with normal traveling range and 60 mpg’s. Like a clean diesel VW that is available in Europe. Yes I think that car does cost a little more than that. Maybe I can omit some of the options to get the price down and call it a yugo.

      • Anonymous   February 28, 2009 at 11:48 am

        Where can you get a far more fuel-efficient car? Have you ever searched the internet using “100 mpg car”? Try this and eventually you should find a car called the “Loremo” which will supposedly be offered in Europe by its German manufacturer. US voters need to pressure their representatives to force US auto mfg’s to make this kind of super fuel-efficient car. Otherwise, since politicians, US auto mfg’s, and the oil industry, are allin bed together, no change will ever happen.

  2. Guest   December 3, 2008 at 8:41 am

    well, the answer is right in the article Why the Automakers Won’t Make Fuel-Efficient Cars — it is politically impossible (to raise the gas price to $5 via taxes)Europe has demonstrated that this approach works very well, the people there have responded in force by demanding and buying some of the smallest and most frugal cars in the world, much more economical than anywhere in the developing world. All because it was not politically impossible to tax gasoline until it’s $8/gallon.

  3. htdrifter   December 3, 2008 at 10:07 am

    In the late 50s – early 60s the same thing happened. When fuel prices dropped back no one wanted economy cars. Ditto the 70s.People claim they want economy but they don’t buy it. High mileage cars are a niche market. High taxes would work but that is political suicide. The cost for inefficient vehicles will have to be increased at the manufacturing level. I would like to see a fuel tax based on vehicle weight but that is probably impractical.People don’t buy what they need they buy what they want and charge it. I see a lot of boomers improving their houses with remodeling, additions, swimming pools, etc. Those are wants not needs.

  4. Vic   December 3, 2008 at 10:42 am

    Tax the car at the point of sale based on EPA mileage. A 50/mpg car, no surcharge tax, 10/mpg pick a number, say $10,000 surcharge tax. This would be on a graded scale, and implemented on a time frame, of say, 4 years to give the industry and consumers time to adjust. It would apply to imports as well. Use the tax money for infrastructure (railroads) or technology for better fuel economy. Even use the money to create an incentive for greater mileage, i.e. rebates for cars over 50/mpg

  5. Guest   December 3, 2008 at 11:21 am

    Agree with the article and most comments. But all seem to have completly ignored the importance of Mass Transportation System. One of the main reasons (IMHO) folks in Europe are satisfied with smaller cars is because 1) Cars are still considered luxury items and 2) The Mass Transit system is excellent. You can travel from one country to another by rail. Try doing that from Point A in NJ to Point B in NJ without having to go to NYC first!!!Just blaming consumers and Big 3 automakers will not solve the problem. Atleast in the large metro areas like NYC, SFO, LA, etc make mass transit convenient and accessible and then perhaps implement tolls for people who still prefer cars when a viable mass transit solution is available. Use that toll money to improve roads.

  6. Anonymous   December 3, 2008 at 11:31 am

    The average American who will endure any hardship when the message is preserving liberty. What seems like a chilling wind against our pursuit of happiness is a chance to deepen our understanding of what liberty and the pursuit of happiness means. We must disenthrall ourselves. We must grasp the core of what is, think anew, and act anew.Wise political, business, labor, and community leaders will see that this is neither time for pettiness nor personal significance. This is not a time to spoon division and self-interest but a time to return to the core. We hunker down. We face stiff winds. We show compassion. No more pork and earmarks when we have quite simply asked for strait forward solutions. When the tide goes out, we will see who is standing naked. It is a time for the humility of statesmen.Policy is intended to have a range results that arise from a range of behavior and action. Our car culture goes way back. It was facilitated with policy. Financing and specialized planning policy for infrastructure and development coupled with zoning laws created the post WWII suburbs, highway systems, industrial complexes, shopping malls, commercial districts, and even sports complexes. No wonder the inner urban cities withered for nearly 30 years and down towns of small towns have become home to only the bravest of retail entrepreneurs. We have what we have and it isn’t half bad, for most.When policy says you will get financing if you build your home on a 90’x75’ lot in a residential part of a suburb, if you plant a tree in the yard, then that is what you will get. Then society will get a lot of those. Moreover, you and plenty of others will drive to work, to the mall, to school, to church, and kids will sit playing video games waiting for Mom to drive them to the athletic fields. All in all, we are pretty fortunate but policy has shaped our behavior and it takes real will for action to move separately from the current.The same is true with our cars. As communities would likely develop differently if there were different tradeoffs, we would likely buy and happily drive more fuel efficient and environmentally friendly cars, or take trains, if the right tradeoffs were there. Companies would develop competing energy systems and infrastructure if the tradeoffs were there.Cap and trade starts with the notion that some costs are externalized but ought to be assigned or traded to allocate those costs to where they belong. A fine idea if it can be done without political contortions. Where does one draw the line? Is virgin development a bigger carbon cost than infill? Are towns layed out in such a way that nearly every excusion from home means getting in a car not an effect of policy? Where do we assign the cost?One externality in my mind is national defense, an item equal to 5% of GDP. What part of that becomes less pressing if we were energy independent or at least could easily switch to such a mode? Why not reduce income taxes and put the price to the pump? Surely, if there are economists smart enough to figure how to allocate cap and trade, them there are economists smart enough to figure how to work this tradeoff. The current income tax system has a very small number of people paying the bulk of the taxes. Without raising taxes put the cost to where the Btu’s are consumed – homes, cars, transport systems and businesses. If someone else, unseen, is paying a big chunk of what it takes to keep us driving gas-guzzlers or living in large, complex homes or spread out communities how would we expect different behavior or action that requires a huge cost to value imbalance?If we can figure the price point tradeoffs and give various new energy and transportation resources, including domestic oil, gas and coal, say, five to seven years to ramp then we would be well on our way to assigning costs to where they belong, creating opportunity, independence, security and a better community and legacy. If we are smart enough to invent an alphabet soup of financial vehicles we ought to be able to find a mechanism to work the fluctuating cost of energy as it relates to assigned costs and a functioning economy.It is not capitalism and republican democracy that is the problem. When milk is free, hogs get slopped with it. We have faced tougher times. Disenthrall ourselves. Find our core. Face into the wind. Act anew.

  7. Guest   December 3, 2008 at 3:16 pm

    Detroit is expandable; a casualty of the new world financial order. Don’t like it? No one expects you to. Who’s to blame? Many for sure, but plenty of blame is home grown. Start with the Detroit 3 management teams and their behemoth albatross around their neck, the UAW. The business model these “partners” have developed over decades is inefficient and destroying. The old guard is taking the proverbial ship down all the while shouting their historical epitaphs from a bygone era, such as “We gave enough!” Who you trying to convince folks? The world doesn’t care what you “gave up”. It cares if your companies are self sustaining in a highly competitive global market place.Let’s move on. Wall Street. Ekes! Talk about taking risk to pad your wallets. How many millionaires has Wall Street generated over the last decade, in leveraging financial instruments to the hilt in a spend, spend, credit frenzy environment. Yahoo! Lot’s of winners on Wall Street, vast amount of losers in the world. Enjoy the gains boys!The Government. Alan, or should I say Mr. Greenspan, you rascal you! How’s history going to view your tenure in setting up the Great Recession of 2008? You did it well my friend, you did it well. GWB… you ain’t worth commenting on.Alas, a silver lining. Times like this force us to live by what truly is important in life: God, family, health, and human compassion. Perhaps we are beyond our ravenous consumerism days. A deeper, more spiritual time of sense and sensibility may be dawning amongst the chaos of sudden economic shock.

  8. Detroiter   December 3, 2008 at 7:01 pm

    Fuel efficiency is not the sole parameter in vehicle design. The US government also requires safety devices (read “added costs”) like stability control, air bags and emissions controls. To protect the worker, you must also design the product for ease of assembly. Also figured in are costs related to insurability and serviceability. The entire system of trade-offs needs to be weighed against fickle consumers’ preferences which defy all logic. In the end, if the auto company gets it right and an accident occurs, some lawyer steps in and can sue the company for making a government-mandated “fuel-efficient” car. To top it off, there’s overcapacity in the industry and “undercapacity” in common folks’ ability to afford a new vehicle (they need jobs).

  9. AnnS   December 3, 2008 at 10:09 pm

    The median household income is around $48,000. The median priced fairly-efficent sedan such as one of the Saturns is around $21,000 – and the pretentions Prius is around $26,000. Face facts. Households can NOT AFFORD these prices. The average household needs a basic vehicle that doesn’t cost 50% of their gross income. That is exactly what the old Nova and Escorts were – basic, inexpensive, reliable transportation.Several years ago we looked at the Prius – not because I care about being politically correct and “green” but because I saw gas prices going up one day and I excell at being cheap. Aside from the fact that the Prius (or any sedan) is totally unsuitable for my needs (aka as a Service Dog who is 29″ at the shoulder and 117 lbs and who won’t fit!), the numbers didn’t work.I compared a Prius to a used Ford Escort wagon using the purchase price and fuel costs but not including the staggering replacement costs of the Prius batteries at $4800 -6000 a pop. Assumming $3.50 a gallon gas, I would have had to drive the Prius 1,000,000 miles to break even on the cost of it as compared to the Escort wagon – plus an another 60,000 miles for every time I had to replace the Prius batteries. It was $24,000+ for the Prius and $5000 for the Escort wagon. On an mpg basis, the little Escort wagon is gettin 30 mpg city and 33-34 mpg highway. Since I don’t drive in the city, the Prius’s better mileage there is even more insignificant. I would have had to be a financial idiot to have spent $20000 more just to get an additional 15 mpg in the city and 14 mpg on the highway -even at $3.50-$4 for gas. Recouping the $20,000 on fuel savings would have taken a very very very very long time.And the little Escort wagon is still going strong. In fact, I bought a second one. I don’t want electric doors, windows and seats; GPS (a printed map works even better and doesn’t send you donw a dirt track); DVD players; or all the other frou-frou crap – all of it is just more stuff to break down. It is a vehicle meant to go from Point A to Point B carrying people and stuff – it is NOT an entertainment center

  10. Anonymous   December 7, 2008 at 12:01 am

    I just looked at the websites to the Tata min air car, the Smartcar, and the mini cooper which will turn out an all-electric car soon. Let the Big 3 automakers die and bring in these cars. They are a little more than $10,000 up to $22,000. Somewhere around there.

  11. aerial view   December 8, 2008 at 7:42 pm

    Again too little too late for the automakers. Since they did not have the vision to plan for the future, even though they knew as far back as the 1970s about an oil crisis, they must fail, be reorganized and attempt to compete again but without taxpayer’s money! Of course, if we had any leadership and foresight from our govt, they could have put in place huge incentives for private and public research into the development and refinement of hybid and all electric vehicles. We can land a ship on Mars for pete’s sake, but we can’t come up with a decent electric vehicle. As far as cost to the public, give large tax rebates to those who are early adopters of the technology. Considering the positive effects on national security, wars, environment and energy independence, this country would have come out way ahead if it had followed this approach!