Wednesday, January 11, 2006
US industrial policy for cars and oil.
The US has protected the marketplace for US-built automobiles by tipping the scales to favor low efficiency vehicles and low efficiency driving patterns. This has been a voluntary policy, relying on the US consumer's choices, but the end result has been the same: the US has the lowest efficiency fleet of automobiles anywhere in the world.
Does fleet efficiency matter? I think it will increasingly matter in a world where developing economies, particularly in China, India, and the rest of Asia, consume a growing portion of world oil output. Potential demand will continue to rise at a faster rate than potential supply as long as fossil fuels are the primary fuel for transportation. Thus, real prices for fuel will continue to rise; and eventually, this has to work to the competitive disadvantage of low-efficiency nations, which will have a higher cost structure built in to a core component of the economy.
How has US policy encouraged low efficiency vehicles and driving patterns? Without comment, here are a couple ways.
- National fuel efficiency standards are different for "trucks" than for "cars". This policy seems innocent enough, since trucks traditionally have been work vehicles intended for carrying heavy loads, but in practice, the US auto industry has shifted its production to build vehicles that are classified as "trucks" but which appeal to general consumers. In effect, this has been an industrial policy that helped US-based manufacturers temporarily ward off foreign competition. OK, In practice, this reliance on protecting the traditional US car market has left US manufacturers poorly positioned in new technologies, such as hybrids, and only slowed the downfall of the US auto industry rather than positioning the industry for future global growth
- Middle East policy and tax policies oriented towards cheap and plentiful oil rather than towards efficient use of oil.
The auto companies are teetering on the edge of insolvency, with the primary blame put on failed pension planning and resulting "unfunded liabilities", and the suggested remedy of cutting benefits, this leveraged by negotiations in which current employees are pitted against current or near-retirees. It's really too bad unions didn't require that fiduciary responsibility for following through on pension obligations were separated from the companies way back when, rather than letting the companies remain responsibile for coughing up deferred compensation half a century after incurring the obligation; if this had been done, companies could never have gotten away with raiding pension surplusses in the good years, and they wouldn't be in a position now to force negotiations about cutting benefits promised decades ago.
But that's all a divergence from the point of this post. The point is, the US has been engaged in a defacto industrial policy that has given a wobbly crutch to US auto manufacturers that has given a modest assist for the past 25 years, but which has left the US manufacturers poorly positioned for global competitiveness, and which has left the US with a low-efficiency transportation installed base .. including both low efficiency cars, as well as poorly conceived housing infrastructure based on the idea of cheap energy. This low efficiency is likely to become a bigger and bigger problem for international competitiveness, as well as likely becoming a political problem as competition heats up for fossil fuel supplies.
Maybe when and if the US auto industry comes to congress seeking a bailout, it's time to get the industry and the nation better positioned for the future, by abandoning the existing de-facto industrial policies that support low efficiency vehicles?
Does fleet efficiency matter? I think it will increasingly matter in a world where developing economies, particularly in China, India, and the rest of Asia, consume a growing portion of world oil output. Potential demand will continue to rise at a faster rate than potential supply as long as fossil fuels are the primary fuel for transportation. Thus, real prices for fuel will continue to rise; and eventually, this has to work to the competitive disadvantage of low-efficiency nations, which will have a higher cost structure built in to a core component of the economy.
How has US policy encouraged low efficiency vehicles and driving patterns? Without comment, here are a couple ways.
- National fuel efficiency standards are different for "trucks" than for "cars". This policy seems innocent enough, since trucks traditionally have been work vehicles intended for carrying heavy loads, but in practice, the US auto industry has shifted its production to build vehicles that are classified as "trucks" but which appeal to general consumers. In effect, this has been an industrial policy that helped US-based manufacturers temporarily ward off foreign competition. OK,
- Middle East policy and tax policies oriented towards cheap and plentiful oil rather than towards efficient use of oil.
The auto companies are teetering on the edge of insolvency, with the primary blame put on failed pension planning and resulting "unfunded liabilities", and the suggested remedy of cutting benefits, this leveraged by negotiations in which current employees are pitted against current or near-retirees. It's really too bad unions didn't require that fiduciary responsibility for following through on pension obligations were separated from the companies way back when, rather than letting the companies remain responsibile for coughing up deferred compensation half a century after incurring the obligation; if this had been done, companies could never have gotten away with raiding pension surplusses in the good years, and they wouldn't be in a position now to force negotiations about cutting benefits promised decades ago.
But that's all a divergence from the point of this post. The point is, the US has been engaged in a defacto industrial policy that has given a wobbly crutch to US auto manufacturers that has given a modest assist for the past 25 years, but which has left the US manufacturers poorly positioned for global competitiveness, and which has left the US with a low-efficiency transportation installed base .. including both low efficiency cars, as well as poorly conceived housing infrastructure based on the idea of cheap energy. This low efficiency is likely to become a bigger and bigger problem for international competitiveness, as well as likely becoming a political problem as competition heats up for fossil fuel supplies.
Maybe when and if the US auto industry comes to congress seeking a bailout, it's time to get the industry and the nation better positioned for the future, by abandoning the existing de-facto industrial policies that support low efficiency vehicles?
