Submitted by CARPE DIEM

Lesson Two: Market forces, not government regulation, provide the most effective impetus for higher gas mileage. America’s Corporate Average Fuel Economy (CAFE) law — the latest version of which requires car companies to average 35 mpg across their model lineups by 2020 — provides posturing for politicians and comfort for their more-gullible followers who believe in free lunches. But CAFE, which first became law in 1975, didn’t prevent the SUV boom in the 1990s that environmental groups so disdain.

During that boom both consumers and car companies were reacting to market forces, not CAFE. For consumers, the market force was cheap gasoline. For auto makers it was profits, which are more substantial on SUVs than they are on fuel-efficient small cars. In fact, GM, Ford and Chrysler gravitated toward SUVs because they couldn’t make any money on regular cars.

This sorry situation might change now. Thanks to the new contracts with the UAW — that allow the companies to hire new workers for lower wages and to buy their way out of lifetime health-care guarantees to legions of retirees — the Detroit Three finally might find profits in the smaller, fuel-efficient vehicles that more Americans now want. Likewise, market forces are spurring research on alternative engine technologies that could produce a breakthrough in five to 15 years.

CAFE is unnecessary at best and damaging at worst. The regulatory costs might wipe out much of Detroit’s savings from the new labor agreements.

~WSJ Editorial by former WSJ Detroit bureau chief Paul Ingrassia

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