President Barack Obama will announce plans on Tuesday for a national fuel-economy and greenhouse-gas standard for automobiles in an effort to give more certainty to car companies as they struggle for survival.
The plan marks the first time there has been a nationwide standard for emissions of greenhouse gasses, and it will require an average mileage standard of 39 miles per gallon for cars and 30 mpg for trucks by 2016.

That’s a dramatic increase from current levels – the White House says the average fuel efficiency for the current model year is just 25 mpg.

- Politico

Interesting proposal, right? I mean, who doesn’t want cars with better fuel efficiency? As it turns out – this is a surprisingly relevant question to be asking. If the majority of people want more fuel efficient cars, why aren’t the auto-makers selling them? In fact, let’s try to answer this question, by first answering several other foundational questions about this proposal. the idea here is simply to think beyond stage one of, “Better Fuel Economy – by Government Mandate.”

First, Economist Thomas Sowell’s big three ‘Must answer’ questions concerning any proposal:

1) Who pays for it?

Mostly, you – the consumer. Of course, the car companies and auto workers will also suffer, as the cost to produce their vehicles is driven up arbitrarily, rather than by market demand. They will have no choice but to raise the prices of their cars, trim back weight and features, and/or take even bigger losses on each car sold. If that seems like a raw deal, it is likely that we all will also be paying (as we currently are) to keep the auto companies in business, if these fuel efficient cars don’t sell.

2) How much will it cost?

The senior administration official said the new standards will add an expected $600 to the cost of an average car, but the White House hopes that increase will be recouped through lower gas costs. The economic models used by the administration required a guess of the price of gas in the year 2016. The figure they used was $3.50 a gallon.

-Politico

Government guessing the price of gas in 2016? This should immediately raise flags, given that last year alone, fuel prices rose to $4.00+ in the summer, and then fell to $2.50 or so, and are now rising again. How the government can possibly make this prediction 7 years into the future with any certainty should be laughable.

Regarding the cost, $600 is the conservative guess by the way. The Washington Post mentioned $1,300 on average, per car.

And let’s not forget the increase in loss-of-life due to lighter, less safe vehicles on the road. (See crash tests below)

3) Will it work?

Well – that’s the real question, now isn’t it? I am not exactly optimistic.

Sure, brand new cars will be required to meet better fuel economy standards by 2016. However, will the auto makers be able to survive, and become profitable again selling them? Only if there is a sufficient demand by auto buyers to cover the required increase in production costs that the auto makers will be forced to shoulder.

Similarly, considering the environmental goals: does creating and buying more vehicles, and disposing of current ones, really achieve a lowering of environmental impact?

Let’s also re-visit my question at the top: Who doesn’t want cars with better fuel efficiency? Apparently, you don’t. Perhaps a better way to frame this question may be – why haven’t more fuel efficient cars been made? The answer is actually so unremarkably boring and simple that most people skip over it, favoring instead vastly more complicated theories, and or corporate conspiracies.

The answer is Price.

Behind all that wild theories, the laws behind the efficient allocation of scarce resources that have alternate uses* (commonly called: economics) still march on, like an unstoppable rebel force.

The basic economic fact is that the market (at current fuel prices) cannot bear the increase in automobile prices (due to higher fuel efficient cars) in a way that would be profitable for auto makers. If it could have, you can bet the automakers would have already jumped on the possibility, as they did briefly last summer when the price of oil peaked (At the time, ‘Green’ cars and Hybrids like the Toyota Prius were all the rage, as were car ads that emphasized M.P.G.). Note that when the price of oil increased, the market responded, and consumers suddenly valued the higher priced Eco-Cars. No government mandate required.

Also, there is the Cost.

Increased fuel efficiency comes with a trade-off, or cost for the consumer: reduced safety. When the consumer considers the value in a vehicle, safety is usually a critical concern. It appears that at current fuel prices, consumers value vehicle safety, over fuel efficiency. And the trade-off for fuel efficiency vs. safety is huge. For instance, here is a Toyota Yaris and a Toyota Camry (note that a Camry is not a big vehicle) in your standard drift-across-the-yellow-line test:

Owned by a Camry!

And here’s the same test for a Honda Fit vs. a Honda Accord (also, not a large vehicle)

Are you going to put your kids in that?

This is the very real cost trade-off that consumers face when they go to purchase a vehicle. The reason that more fuel efficient cars don’t sell is that, at current gas prices, consumers would rather trade the extra cash, for their own life and safety, rather than a couple more miles-per-gallon. If gas prices were to rise again, consumers would automatically and incrementally start placing more value on fuel efficiency.

Central Planning vs. The Free Market

In the end, the heart of this issue illustrates the classic clash of two opposing views over the very real way economic factors function. Namely, that the will of a handful of elected officials can out-smart the will of millions upon millions of consumer, and producer choices.

In this case, The President has decided that fuel efficiency and eco-friendliness are the highest values, regardless of other concerns and costs. The intent of the idea may be noble, and certainly makes for exceptionally good political capital. However, in the end, the will of the consumer, the will of the auto makers, and even the stability of the auto worker’s employment, is traded in the name of eco-friendly cars.

And don’t get me wrong. This isn’t necessarily a knock on Obama. Many politicians jump at the opportunity to score political capital, without thinking beyond stage one. I’m fairly certain that McCain would have been on board with an idea similar to this.

In my opinion, the basic economic mechanisms of the free market, such as Price, Cost, and Supply and Demand, will force the creation of fuel efficient vehicles, and alternate fuel vehicles, when it actually makes economic sense – and without the mandate of any governing body.

Unfortunately, with the current central planning approach, we will have no choice but to bear the hidden costs.

You can read some other perspectives on this issue at: Politico, Time, The Washington Post, Hot Air, Michelle Malkin, The Heritage Foundation, and Steve Milloy’s Blog – just to start.

*The definition of economics, as explained in Basic Economics, by Economist Thomas Sowell

People who like the tax-free status of their company health benefits could be asked to ante up. Money in the pot: more than $700 billion over 10 years.

Treasure the tax benefits from your health savings account? Some experts say the accounts encourage “excess consumption” of health services…

…

“I know that there is some controversy around doing so,” Baucus said. “But the current tax exclusion is not perfect. It is regressive. It often leads people to buy more health coverage than they need.”

Hang on a minute! Did Senate Finance Committee Chairman Max Baucus just admit to an economic reality? Namely, that demand for health care services goes up when the cost is low? It will be interesting to see if this economic truth finds its way further into political rhetoric.

Low perceived cost, and who really pays for employee benefits

Whether he intended to or not, Baucus is making a very valid point. Because health insurance is often provided by employers, individuals (employees) are far less likely to consider actual medical care costs. Just ask how many people with employee provided benefits run a price comparison around town before seeking out medical care? I certainly don’t.

Also, since the employer usually chooses the insurance package – it is likely that some employees may be getting more insurance than they actually would choose to receive otherwise. The problem is that employees don’t realize they are paying for their own insurance coverage, even though it appears their employer is.

This is again, a simple economic reality. Hiring an employee is a cost to the employer. That cost includes the employee salary, PTO, and any benefits package offered, among other things. Thus, employee salary is likely reduced as a factor of the total employee cost, including the employer provided benefit package. Therefore, employees essentially agree to lower pay – and receive greater benefits, even though they may not perceive it this way.

The false perception that employee benefits are, “free,” has economic ramifications. Back to Baucus’ point: Employees with employer provided health insurance are less likely to consider the actual cost of the health insurance and medical expenses received, which results in higher demand for health care services. Higher demand drives up health care prices, as well as driving up the price of health care insurance. ”Excess consumption,” is just a symptom of the perception of low cost. We would see the same phenomenon if health care prices were artificially driven down through government action.

Which brings us to the next logical conclusion:

Universal Health Care will create much higher demand for health care

Take the current, ”Excess consumption,” and multiply it by some arbitrary huge number, like, say…oh…let’s be conservative with $1.85 trillion. Since everyone will be covered under a government program - no-one will think about the cost of medical expenses, because it will be perceived as, “free”. This will obviously create a huge increase in, “Excessive consumption,” which will further drive up the real cost of medical care. The rising costs will then be paid by the government, who is really you – the taxpayer.

So in a universal coverage program, how will the government combat the increase in demand and cost?

Rationing, and much higher taxes.

The government will have no other option but to place limits on health care usage through bureaucracy. This isn’t because the government has bad intentions, but simply because, regardless of the public’s perception of cost, the real economics of medical service will still be in effect. The government will be paying the bill the public doesn’t see. As price goes down, demand goes up. Government will have no choice but to ration medical care and radically hike taxes, or the nation will face shortages and/or bankruptcy as real medical costs skyrocket.

This probably seems too simplistic, but this isn’t just some crazy theory. We already see this happening in Canada and the U.K. In a way – we even see it here in the U.S. with employee provided health insurance, as Baucus pointed out.

Of course, none of the economic factors really matter here because the notion that “everyone should have health care” is excellent political capital. How can you possibly run against “health care for everyone”, without appearing like an uncaring jerk? Thus, I doubt Baucus will make this logical progression when he talks about universal medical care.

Similar to demographic facts, economic realities are always depressing wet blankets thrown on any nice sounding, “fix all,” political vision. As economist, and former Marxist, Thomas Sowell said:

“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.“

Will the economic reality Chairman Max Baucus stumbled into find it’s way into discussions of universal health care?

One can only hope.