Most of the debate regarding the federal bailout of the American automobile companies misses what may be the most important issue — excessive government regulation. While there is plenty of blame to go around, including bad decisions by auto executives and unsustainable wage, benefit and work rule demands by unions, Congress is responsible for a large part of the plight of the Big Three. If Congress is really interested in helping the American automobile industry, eliminating the following regulations would be a good place to start:

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  • CAFE REGULATIONS — Fuel economy mandates passed by Congress this year will cost the automobile industry an estimated $83 billion to comply. Fuel economy mandates do not achieve the desired results because they run counter to customer preferences when fuel is relatively cheap and are altogether unnecessary when fuel is expensive. The auto companies are forced to spend huge sums of scarce capital to develop complex vehicles such as hybrids and electric autos when consumers may not be interested in paying the premium to purchase them. Recent volatility in fuel prices year underscores the problem. When gas was more than $4 per gallon last summer, customers shunned large vehicles such as SUVs in favor of smaller cars, regardless of CAFE standards. Auto companies are currently reporting increased interest in larger vehicles now that gas is below $2 per gallon. Indeed, sales of hybrid electric vehicles were fewer than 16,600 in November, a 50 percent decrease from the previous month, while overall demand for new cars decreased only 37 percent.

Fuel economy would increase if Congress repealed CAFE requirements and imposed a substantial increase in gasoline taxes. The gas tax increase could be made revenue neutral by cutting federal income taxes. This approach would allow the auto manufacturers to respond to market conditions rather than artificial government mandates.

  • STATE-MANDATED FUEL ECONOMY STANDARDS California and several other states have requested a waiver from the Environmental Protection Agency that would allow them to set their own tailpipe emission standards for carbon dioxide — in effect a fuel economy standard. The new CAFE regulations have already placed a huge financial burden on automakers. Allowing states to set their own fuel economy standards forces auto companies to either produce different vehicles for different states or only sell certain vehicles in states with more stringent fuel economy standards than the federal requirements. This costly requirement comes at a time when the American automakers can least afford it.
  • STATE AUTO DEALER FRANCHISE LAWS — Every state in the country has laws designed to protect existing auto dealer franchises. Auto dealer franchising laws were originally designed to protect dealers from unfair business practices of the large auto manufacturers. Much has changed in the U.S. car market since 1945 when the first of those laws was passed. Foreign competition, large chain auto dealers and changing demographics have had a major impact on selling cars in the United States. These constraints make it difficult for automakers to close a dealership and all but impossible to market cars directly. The decision to shut down Oldsmobile in 2000 cost GM an estimated $1 billion. In most cases, it was cheaper for GM to buy out dealers than pay attorneys to fight potential lawsuits.
  • TWO FLEET RULE — The two fleet rule is a provision in the 1975 CAFE law requiring auto manufacturers to meet separate fuel economy standards for vehicles produced domestically compared to autos produced in other countries. The rule was originally designed to protect American jobs, making it more difficult for foreign auto makers to flood the U.S. market with small cars not made in this country. The two fleet rule, however, makes it difficult for U.S. automakers to move small car production to other countries and forces them to produce small cars at high-wage UAW factories.

If Congress is truly interested in helping save the Big Three, it should remove the regulatory burdens that have brought U.S. automakers to the brink of bankruptcy. Quite the opposite is happening. As a condition to receive taxpayer money, Congress is poised instead to increase the regulatory burden on U.S. carmakers, virtually ensuring their demise. It is hard to understand why U.S. automakers would accept such a bad deal just to buy a few more months before they are put out of business.


Russ Harding, a former director of the Michigan Department of Environmental Quality, is director of the Property Rights Network at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.

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