Unintended Consequences in Energy Policy

By Henderson, David R. | Freeman, March 2009 | Go to article overview

Unintended Consequences in Energy Policy


Henderson, David R., Freeman


On the first day of every economics class I teach I start with The Ten Pillars of Economic Wisdom. This is a list I have put together of the ten most important principles in economics. Pillar number six is, "Every action has unintended consequences; you can never do only one thing." U.S. energy policy illustrates this to tragic effect. Costly policies that have reduced economic freedom and had nasty economic consequences riddle the landscape.

Start with the Corporate Average Fuel Economy (CAFE) law, which requires each auto producer in the U.S. market to make fleets that aver- age at least 27.5 miles per gallon for cars and at least 20.7 mpg for trucks. (Former President Bush and Congress increased that to 35 mpg by 2020, with no lower standard for light trucks.) That law had the but totally predictable consequence of making cars less safe. The reason is that one relatively cheap way to fuel economy is to make cars lighter, and the lighter they are, other things being equal, the more dangerous they are to their occupants. In 1989 two economists, Robert Crandall of the Brookings Institution and John Graham of Harvard University's John F. Kennedy School, found that, adjusting for the downsizing of cars that would have occurred anyway, the CAFE laws would cause an extra 2,200 to 3,900 deaths over the life of a year car.

But the CAFE law is itself the result of another unintended consequence of government policy, namely price controls on oil and gasoline. President Nixon's economy-wide wage and price controls, imposed in 1971, did not cause much difficulty at first. But when the Organization of Petroleum Exporting Countries (OPEC) raised the world price of oil from about $3 a barrel to about $11 over a few months in late 1973, Nixon's price controllers refused to allow refiners to pass on the whole increase in the price of gasoline. The result was a massive shortage of gasoline, with long lines at the pump. Rather than remove the controls, Nixon had government officials start allocating the gasoline by various arbitrary criteria, a process the Ford and Carter administrations continued.

Government officials in the Ford administration and in Congress noticed that American car buyers were not buying as many high-fuel- economy cars as these officials thought they should. In other words, Americans were responding to the artificially low price of gaso- line by acting as if the price of gaso- line were low! Gee, what a surprise. Of course, instead of removing the price controls, Congress and Ford decided to regulate the fuel econ- omy of new cars - that's how we got CAFE. Like all regulations, this one bred its own lobby, featuring Ralph Nader and Clarence Ditlow. They had been, until that time, advocates of car safety. But they wanted enforced fuel economy even more.

That's not the end. One way the companies could meet their CAFE targets was by importing small, highfuel-economy cars from their foreign production facilities.The United Auto Workers union noticed this and lobbied for - and achieved - separate standards. Auto companies then had to hit the standard with their domestic production and, separately, with their imports. That caused the companies to produce more small cars at home rather than import even successful cars from abroad. According to William Niskanen, the chief economist at Ford in the late 1970s, Ford dropped its Fiesta in the late 1970s not despite, but because of, the car's potentially large market: Ford feared that its German-made Fiesta would "steal" sales from its U S. -made Escort, thus lowering its domestic CAFE average.

Moreover, even the increase in the world price of oil engineered by OPEC in late 1973 was in part the unintended consequence of U.S. energy policy. Why? Because OPEC had been formed in response to President Eisenhower's restrictions on oil imports.

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