Sunday, December 18, 2016

You don't have to think that markets function perfectly--whatever that means--to think that they function well and, at least, better than government (CAFE standards edition)

See Henderson on Oge's CAFE by David Henderson of EconLog.
"In the next few years, companies that sell cars and light trucks in the United States will have to comply with increasingly stringent federal regulations on fuel economy. The government's regulations call for a required average of 54.5 miles per gallon on new cars and trucks by 2025. The requirement will vary with the size of the car or truck, so each company will face a different required fuel economy average that varies with the size-mix of its sales. This is after the Obama administration had already raised the overall required average to 34.1 mpg for 2016.
How did such a large increase in required fuel economy happen? Margo Oge, former director of the Office of Transportation and Air Quality in the U.S. Environmental Protection Agency, tells the story in her book, Driving the Future. Oge had a large role in designing these regulations and negotiating for them within the Obama administration and with the auto makers, both foreign and domestic. Her book helps readers understand how this extreme regulatory requirement came about.
These are two of the opening three paragraphs of David R. Henderson, "Centrally Planning Fuel Economy," Regulation, Winter 2016-2017. Another excerpt:

It's not as if she had no discussions with economists; she did, in both the George W. Bush and Obama administrations. She tells of one interaction with Michael Greenstone, chief economist on the Obama White House's Council of Economic Advisers. In her telling, she had reported a finding that the higher price of the more fuel-efficient car would be more than offset by the saving in fuel expenditures. Greenstone challenged her. She quotes him as saying, "The consumer won't fully value these fuel economy benefits, so we should discount them by 50 to 80 percent." Oge doesn't say why he believed this. So I called him at the University of Chicago, where he is an economics professor, and asked him. He explained to me that if car buyers were not already demanding cars that had the fuel efficiency she was trying to achieve, it must be because there were other negatives besides the higher upfront price of the car. Those negatives might be the cars' performance, esthetics, safety, or other features.
Oge writes, "Academics like Greenstone would still worry that we are messing with the magic of the market." He explained to me that consumers know what they want better than central planners do. Summarizing her interaction with Greenstone, Oge writes, "The idea that the market functions perfectly is a powerful political and theoretical obstacle to fuel economy regulations." The idea that economists think that the market functions perfectly is a caricature that many non-economists share. You don't have to think that markets function perfectly--whatever that means--to think that they function well and, at least, better than government.

If one sentence crystallizes the problems caused by Oge's lack of understanding of economics, it is this one, written about the then-freshly formed Obama administration: "There will be others, even within the new administration, who are ideologically opposed to the regulations--as is almost inevitable in any room filled with Washington lawyers and academic economists." She, in short, sees economists--even ones in the Obama administration--as being ideologically opposed to regulation rather than being opposed because of their understanding of both markets and regulation.

Later in the review, I talk about how James Woolsey failed to understand the economics of price controls and how this colored the views of someone who went on to become President Clinton's director of the CIA."

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