President Obama heads to Ohio today (see: crucial electoral state) to tour a Crystler plant and most likely speak about American ingenuity and innovation. This will coincide nicely with the release of a government jobs report, which will probably show that the official unemployment rate is still hovering around 9%, with a possible increase, in light of this week’s lackluster report showing 38,000 jobs added in May. The President will talk about U.S. manufacturing and job creation through out innovating the competition, blah blah, all things Crystler should be commended for.
The bigger story behind Crystler, however, is that just three years ago it was included in the American car manufacturers who were facing insolvency. Detroit, also known as the Big Three, were deep in the red after decades of mismanagement. They were producing cars which really had no market. U.S. autos were viewed as low quality vehicles, and faced the unfortunate dichotomy of being perceived as more expensive than imports from Japan, with not nearly the craftsmanship of imports from Germany.
In 2009, a young President Obama took the controversial step to put these companies through government sponsored bankruptcy, as well as buy large portions of automotive stock. This gave the Big Three time to retool and again become competitive in the automotive manufacturing field. To GM’s credit, they are now inching into the black, posting consecutive quarterly profits and rebounding from years of losses.
Politico is carrying a story today suggesting that the Obama Administration and the Big Three are on a collision course, as the President looks to raise fuel standards on American cars. Already, in 2009, the President signed a rule that raised fuel economy standards to 35.5 miles per gallon by 2016. The new plans could raise standards for cars and light-duty trucks to as high as 62 mpg by 2025. Obviously, car manufacturers are reacting negatively to this initiative. Their argument, ostensibly, is that a market system in which consumers have free choices and limited resources, higher gas prices will push people to choose cars with higher MPG, thus gradually eliminating demand for other, lower MPG cars and trucks.
There are two things that this argument fails to account for, one is national and short-term and the other is international and long-term.
First, this argument assumes rationality on the part of the consumer. However, evidence would suggest that American consumers tend to be short-sighted. Every time there is a period of high gas prices Americans clamor for higher MPG cars and slightly alter consumption habits (see: 2006, 7, 8). Once crude oil drops below a certain dollar level, gas is off the immediate concerns list and Americans are much more willing to entertain vehicles with lower fuel standards. Cars with higher fuel standards or cars with alternate engines, like the Toyota Prius or Chevy Volt, are often more expensive than their gas-guzzling counterparts. The rational consumer would clearly take the upfront cost increase in favor of long-term savings through inevitable high gas prices, but the average American consumer rarely demonstrates that foresight (evidenced through Volt and Prius sales).
Only 10-15 years ago, there was much less concern for fuel standards. My first car was a 1998 Dodge Durango which cruised at 9 miles to the gallon. While there has been an increase in fuel standards over time, these are not the result of market initiatives, but economic strategy.
The second thing that this market incentives strategy fails to account for is the larger role that gas and oil play in global politics. America is very much invested in the world, for all kinds of reasons, one of which is clearly to promote our interests. Unfortunately, one of our core interests for 40-plus years has been the safeguarding of low-cost crude oil production in the Middle East and North Africa. It is not possible to overemphasize how oil constrains U.S. action in the region. It is one of the largest reasons for our close relationships to partners who do not share our ideological visions for the world, and it is one of the reasons for our unfortunate problems in facing global terrorism.
The U.S., and the world, therefore cannot afford to wait for the American consumer to wise up to the fact that cheap gas is never going to be the future. It is over. The only way we can reasonably conduct ourselves and prepare for a future with limited resources, is to pressure manufacturers to raise fuel standards and invest in alternate energy engines.
Thomas Friedman, who I am not a personal fan of, writes about this all the time in his weekly NYT columns. I disagree with a lot of his arguments, but I am not an idealist. Rather, realists must recognize that if you want the U.S. to stop wasting blood and treasure in places like Libya, Iraq, Saudi Arabia, than you must change the habits of oil consumption in the United States. And the Big Three, who only exist today because of the Obama administration, must stop delaying.