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Detroit Bets Its Future on Washington

shikha.dalmia@reason.org (Shikha Dalmia) info@reason.org (Henry Payne) — Sat, 24 Jan 2009 00:00:00 EST

The Wall Street Journal

The curtain comes down this week on the 2009 Detroit International Auto Show -- and with it likely on the American auto industry as we know it. This might turn out to be a watershed year when some of the industry's big players permanently shift gears from serving ordinary car buyers to serving the grand designs of central planners. The only other time that the industry subordinated its customers to the government was World War II. Then it had no choice. This time the industry, particularly General Motors, is desperately "retooling" itself to make Washington's environmental and industrial policy priorities a vital part of its business revival plan.

By accepting government welfare, GM rejected the chance to transform itself into a worthy competitor to foreign manufacturers. That would have required making too many hard decisions, such as confronting unions, cutting legacy costs, and slashing dealerships under a Chapter 11 filing.

Parading green technologies has been something of a ritual at the auto show, even before Leonardo DiCaprio made the Toyota Prius a status symbol. Prius might be a money loser (despite selling a million cars, analysts still believe Toyota sells each one at a loss) -- but the prevailing industry wisdom is that the halo effect hybrids produce is important for other reasons, including gaining a foothold in an elite market segment. Whatever the plausibility of this line of thinking previously, one would think that after being forced to rattle their tin cup in Washington, they would be slashing their extravagant PR schemes and rededicating resources toward products with a proven market.

Instead, auto makers did the opposite at this show -- downplaying displays of bread-and-butter cars to make room for the largest display of experimental green vehicles ever, particularly cash-guzzling electric vehicles. Ford announced it would bring an electric car to the market by 2011. Chrysler, bleeding so much red ink that it gave away 35% of its equity stake to Fiat for free last week, unveiled three new electrics. And GM -- the clear winner of the electric horse-race -- rolled out its latest Chevrolet Volt, while also announcing that marketing this $40,000 plug-in with its "extended" driving range of 40 miles by next year is a top priority. The company is planning to build a $30 million battery factory in Michigan -- instead of outsourcing production to Asian makers.

Yet until recently, GM was protesting Washington's green mandates. Vice Chairman Bob Lutz called global warming a "total crock" and declared that hybrids made "no economic sense." This week, asked by a reporter how a cash-strapped company could afford to build a battery factory, Mr. Lutz responded: "We can't, but we're doing it anyway. It's one of the pieces of our future that we absolutely have to do."

Why? A study last week by the Boston Consulting Group found that extended-range, all-electric vehicles like the Volt will account for no more than 5% of the North American market by 2020 (assuming last year's peak oil prices and $7,500 in tax credits for electric car buyers). Hybrids, around for almost a decade, today command less than 2% of the market. But GM is not counting on market success for its comeback. It has neither the cash reserves nor the brilliant product line needed for that in a down economy, when sales are expected to be 40% lower than two years ago (the lowest volume since the 1973 Arab oil embargo).

GM is counting on the government to stay alive. It could potentially recover all of its investment in the new battery facility from a $335 million state program to bring green jobs to Michigan. This will allow it to impress Pelosi and Co. and perhaps extract more federal taxpayer money. For example, the $825 billion bag of goodies -- otherwise known as the stimulus package -- that Congress is working on contains $11 billion for electricity infrastructure needed for the wide-scale adoption of electric cars, as well as $2 billion in loans to build "advanced vehicles and battery systems."

But the biggest payoff could come in March, when GM's newfound green priorities might set the stage for another round of multibillion-dollar bailouts.

No one believes that simply putting cars like the Volt on the market will induce consumers to trade in their SUVs, especially with gas under $2. Not even GM. "With fuel prices declining, government mandates that auto makers build highly fuel-efficient cars will be no more effective than combating obesity by forcing clothing manufacturers to make only small sizes," Mr. Lutz quipped last week. "It puts us in the industry in the position where we are at war with the customer."

Instead, once the Volt and its sister electrics pile up in showrooms, the government will face this choice: Admit failure and abandon its investments in electrics -- or blame the failure on insufficient intervention and redouble efforts to push electric cars. GM is betting that with Democrats in control of both the White House and Congress, Washington will move toward more assistance for auto makers and mandates, such as gas taxes, on consumers.

Republicans, too, are jumping on the fuel-economy bandwagon in the name of energy independence. Sen. Bob Corker of Tennessee -- who led the effort to torpedo the auto bailout last year -- is a big believer in this cause and was excited by the fuel-efficient cars he saw at the auto show. He said in an interview that some kind of a regime to lower carbon emissions will be imposed in the next 12 to 18 months. "That will go a long way toward aligning the choices of car buyers with national energy priorities," he said.

The Volt is calculated to position GM as the chief partner in Washington's emerging green industrial policy. This might keep it in business -- but the price will be paid by taxpayers and the car-buying public.

Dingell Bells

info@reason.org (Henry Payne) shikha.dalmia@reason.org (Shikha Dalmia) — Mon, 31 Dec 2007 14:58:00 EST

The Weekly Standard

Representative John Dingell, the powerful Michigan Democrat, prevented fellow Democrats from slaughtering Detroit auto companies during the recent battle in Congress over the energy bill. But this may be Dingell's--and the Big Three's--last stand as the green revolution overtakes the proletarian revolution among the priorities of the Democratic party.

In the new era, it is American car consumers who will suffer collateral damage--while victory over climate change will remain elusive.

The cornerstone of the energy bill signed Wednesday by President Bush is the raising of so-called Corporate Average Fuel Economy (CAFE) standards to mandate a 40 percent increase in auto fuel efficiency by 2020. First conceived in the wake of the 1970s oil embargo (at a time when global cooling hype was at its peak), CAFE sought to reduce America's "dependence" on foreign oil. But since passage in 1975 the policy has had the opposite effect as better fuel economy made it cheaper for Americans to drive more, increasing U.S. auto fuel consumption 20 percent and imported oil's share of the U.S. market from 35 percent to 59 percent.

Despite CAFE's failure, Washington has opted for the program's biggest expansion in 30 years. Global-warming fever, rising gas prices, and Detroit's declining economic importance conspired to make this CAFE's moment. Though Republican presidents have historically stood against tougher regulations, in this case the Bush administration actually initiated the increase. Desperate to prove his Iraq adventure was not motivated by a lust for oil, President Bush has made curing America's "oil addiction" a domestic policy priority.

But the biggest push for CAFE came from within the Democratic party. Democratic circles once regarded foreign cars as a treasonous assault on American workers. Now, however, Detroit's once iconic carmakers have become environmentally incorrect. Indeed, congressmen Ed Markey (D-Mass.) and Greg Walden (R-Ore.) publicly bragged about owning Toyota hybrids during a recent hearing of the House Select Committee for Energy Independence and Global Warming.

Given this backdrop, Detroit's goal this time was not to dodge stricter CAFE standards--but to minimize their damage. In this the automakers succeeded rather well, thanks to octogenarian John Dingell's unflinching advocacy.

For starters, Dingell not only reinstated the ethanol loophole the Senate bill had scrapped--but he actually expanded it to include other alternative fuels such as biodiesels. The loophole gives automakers fuel economy credits for building vehicles that can run on alternative fuels--whether consumers fill them with these fuels or not. Dingell also bought the industry new efficiency credits. For example, if a company achieved more than the mandated 40 percent increase in fuel economy for its smaller-vehicle fleet, it could apply the balance to its SUVs. And the industry kept differential fuel economy standards for cars and light trucks--instead of requiring that trucks meet the same stringent standards as cars, as the Senate bill, under pressure from environmental groups, had mandated.

But Dingell's special gift to Detroit was his success in forcing a radical overhaul of CAFE standards that is far more favorable to them than their Asian competitors. The original CAFE standards set a fixed standard of 27.5 mpg for cars and 20 mpg for trucks. This amounted to a doubling of fuel economy and disproportionately affected Detroit, which manufactured a fuller range of vehicles than Japanese auto companies, with their specialization in fuel-efficient compact cars.

The new CAFE standards do not set absolute gas-mileage requirements for vehicles. Rather, they require every company to increase its fuel efficiency by 40 percent. This will effectively hold Japanese carmakers to a higher fuel economy standard given that their vehicles get better gas mileage to begin with. Thus, a spokesman for the Alliance of Automobile Manufacturers, Charles Territo, notes that the 40 percent increase will likely translate into an overall 32 mpg for Chrysler vehicles but 38 mpg for Honda.

The Bush administration estimates the new standards will cost the industry $85 billion. Though they may cost Japanese carmakers more, American carmakers will still have a harder time complying given their worse financial situation. But both will have to divert research dollars from cars that consumers prefer.

A recent Consumer Reports survey found that 70 percent of buyers want more fuel-efficient vehicles--but only 50 percent are willing to sacrifice size and performance in that quest. This market reality is why, even as engine efficiency improved 1.5 percent annually for the last 20 years, automakers have channeled those gains not toward better gas mileage but toward greater horsepower. v

The net effect of the new CAFE standards therefore will be to thwart consumer desire as carmakers are forced to overhaul their product lines to emphasize either smaller cars or large hybrid-engine vehicles that, on average, cost $5,000 more than the nonhybrid versions. Jesse Toprak, an auto analyst with Edmunds.com, maintains the 35 mpg mandate is so onerous that large, gas-powered SUVs might well go the way of the dinosaur--despite their popularity and superior safety record.

But will this sacrifice curb climate change? Not really. John Christy, University of Alabama climatologist, maintains that even if the entire world adopted a fuel efficiency standard of 45 mpg, "the net effect would reduce projected warming by about 0.05 degrees Fahrenheit by 2100."

John Dingell bought time for U.S. automakers endangered by the quixotic crusades of climate warriors--but he won't live forever. Their fate will remain precarious, unless cooler heads--or cooler air--prevails.

This column first appeared in The Weekly Standard.

Midterm Election Silver Lining

info@reason.org (Henry Payne) shikha.dalmia@reason.org (Shikha Dalmia) — Wed, 22 Nov 2006 00:00:00 EST

Washington Times

While Election Day dealt a blow to Republican power in Washington, it breathed new life into a core conservative issue: equal opportunity. The stunning victory of Michigan's Proposal 2 — the ballot initiative banning racial preferences in government employment, education and contracts — has not commanded national headlines. Yet it will potentially trigger similar initiatives in other states and revive the cause of a colorblind society, proving one of this election's most momentous developments.

Jennifer Gratz, director of the Michigan Civil Rights Initiative (MCRI) which spearheaded the campaign, says Proposition 2's resounding victory is "a national wakeup call." Michigan's win also comes at the 10-year anniversary of a similar initiative in California, which has experienced none of the trauma predicted by opponents, but has benefited all groups in expected — and unexpected — ways.

Proposition 2's 16-point landslide is especially amazing given the Goliath-sized machinery it confronted in Michigan. Proposition 2 was a political orphan whose principal author, Ward Connerly — a black businessman who had successfully spearheaded the California effort in 1996 — was shunned by the entire political, business, academic and media establishment in Michigan.

That the initiative overcame such formidable opposition demonstrates the grass-roots power of the issue — as well as the disconnect of political elites. "Americans still take seriously the ideal of equal opportunity, even if their leaders don't," notes MCRI's Miss Gratz, who sued the University in Michigan right up to the Supreme Court when the university passed her over in favor of less qualified minority candidates.

Mr. Connerly now awaits the verdict of the Supreme Court in two related cases from Seattle, Washington and Louisville challenging school districts that assign students to schools with an eye toward maintaining a racial balance. Should the Supreme Court show a willingness to revisit its U-M ruling allowing public universities to give race some consideration in admissions, Mr. Connerly maintains he would re-evaluate the ballot route. If not, he is considering two dozen states including Oregon, Missouri and Illinois that might be good candidates for similar initiatives.

Mr. Connerly's crusade should be helped by the fact that, a decade after California passed Proposition 209 and embraced race-neutral policies, minority progress has advanced — not stopped — in that state.

Black and Hispanic admissions in elite colleges like UC Berkeley and UCLA have dropped, to be sure. But they have grown in less elite colleges where minorities are more able to compete. UC-Riverside and UC-Santa Cruz, for example, have seen significant jumps in black enrollment, with Riverside numbers alone up 240 percent. More importantly, minority graduation rates have grown.

At UC-San Diego, where minority admissions dropped somewhat after Proposition 209, graduation rates have nearly doubled for blacks and Hispanics. At the same time, white and Asian graduation rates have remained the same. "This is almost certainly due largely to the reduction of preferences," notes UCLA law professor Richard Sander, a longtime civil rights activist who has studied affirmative action in higher ed. "The five and six-year grad rates for minorities get pretty close to the white rates [within five points], which of course means that differences in academic performance have also narrowed a lot." Compare this to the University of Michigan where minority grad rates lag by 17 points.

"If we looked at actual BAs produced, rather than entering freshmen, the post-209 numbers for blacks and Hispanics would look even better," adds Mr. Sander. This should be of interest to American corporations -- many of whom have jumped on the preferences bandwagon — who worry that affirmative action bans cost them talent. In fact, as California vividly illustrates, racial preferences have been a barrier to qualified graduates.

Another positive result of Proposition 209 has been its effect on academic outreach to the poor. Freed of the shackles of race-driven admissions, a study by the Pacific Legal Foundation's Eryn Hadley found elite schools have refocused resources on preparing "K-12 students for college life. The UC system now offers many race-neutral programs for individual students who are disadvantaged or attend low performing schools."

Furthermore, the seats vacated by minorities in Berkeley and UCLA did not result in lily white campuses, as Proposition 209's opponents had predicted. Rather, the biggest portion went to Asian-Americans.

It is impossible to predict all the adjustments that race-neutral policies might trigger in each state Mr. Connerly targets. In Michigan, for instance, along with Asians, one might expect Arab American numbers to rise at U-M, given that the state is home to one of the largest Arab populations outside the Middle East.

But for now the political elites of both parties face this stark choice: They can continue to scoff at the cause of racial neutrality and alienate the grass-roots — or do an about-turn and reconnect with voters. Either way, Proposition 2's success has shown, the movement for a colorblind society will march forward.

Henry Payne is a free-lance writer and an editorial cartoonist at the Detroit News. Shikha Dalmia is a senior analyst at the Reason Foundation. An archive of her work is here and Reason's education research and commentary is here.

Education After Affirmative Action

shikha.dalmia@reason.org (Shikha Dalmia) info@reason.org (Henry Payne) — Tue, 07 Nov 2006 00:00:00 EST

San Francisco Examiner

Like California exactly 10 years ago, Michigan will vote Nov. 7 on a ballot initiative to ban racial preferences in government. Opponents fear the ban will diminish educational opportunities for blacks and Hispanics, leading to lily-white campuses, especially at the University of Michigan � the UC Berkeley of the Midwest.

But that is not the lesson of Prop 209 � the California initiative that ended racial preferences in government employment, education and contracting. In fact, a close look at data from the University of California system reveals a multi-hued picture in which all groups, on balance, have benefited in unintended and unexpected ways.

It is true that after Prop 209 went into effect, as opponents had predicted, black and Hispanic populations at California's two most elite universities � Berkeley and UCLA � dropped by nearly half and have never fully recovered. According to admissions data, between 1995 and 2004, black admissions to Berkeley dropped from 6.66 percent to 3.59 percent and Hispanics from 17 to 10.22 percent. UCLA reported similar drops.

Yet, despite these drops, the overall population of minority students across the University of California system has remained remarkably stable. This is because post-Prop 209, black and Hispanic students didn't give up on a higher education - they simply entered colleges for which they were more qualified. Indeed, schools such as UC Riverside and UC Santa Cruz have seen minority enrollments increase, with Riverside alone reporting a 240 percent increase in black admissions.

In effect, notes Rick Sander, a UCLA law professor who has studied affirmative action in higher education, Prop 209 led to massive reapportionment of students. "This has produced better students all around," he notes.

Four-year graduation rates for blacks at UC San Diego, for example, doubled from 26 percent in 1995 to 52 percent in 2001 � nearly on par with whites and Asians. Similarly, Mexican-American graduation rates are up from 27 percent in 1995 to 42 percent in 2001.

But Prop 209 has not only improved minority performance at colleges but also in high schools. Unable to rely on preferences to recruit minorities, universities have redoubled their efforts to prepare low-income students in school districts with low college participation rates, notes Eryn Hadley in the Brigham Young University Journal of Public Law. Among other things, they have started partnering with these schools to develop courses that better prepare students for college.

The upshot? Minority high-school graduation rates have risen post-Prop 209, reports Hadley.

But what about the spots vacated by blacks and Hispanics at the elite universities? At Berkeley , it turns out most have gone to Asians, whose enrollment has risen from 38 percent in 1995 to about 46 percent in 2004. At UCLA, they have been split between whites and Asians.

In both schools Asians represent more than 40 percent of the student population � even though they are only 12 percent of the state's general population. This means California 's elite colleges are the first among their national peers, thanks to Prop 209, to treat Asians fairly -- and not like the "new Jews."

Asians applying to elite schools don't benefit from minority preferences � because they are not regarded as under-represented. At the same time, The Wall Street Journal's Daniel Golden recently documented that since Asians are often first-generation immigrants, they don't qualify for legacy preferences either. The result is they lose out both to less qualified black and white students. They need to score at least 50 points higher than non-Asians on standardized tests just to be in the game.

Nor should this come as a surprise given that the admissions process in elite colleges has its genesis in the anti-Semitism of the 1930s. As Jerome Karabel wrote in the book "The Chosen: The Hidden History of Admission and Exclusion at Harvard, Yale, and Princeton," that's when Harvard, Yale and Princeton changed their admissions criteria, relying less on academic merit as measured by test scores and more on "character" traits as judged through recommendation letters and student essays in a naked attempt to diminish the number of Jews on campus. Now that system works against Asians.

It is likely that if Michigan follows California and Washington state in banning racial preferences next Tuesday, it will ignite a nation-wide trend. California 's experience suggests that this prospect should not be greeted with dread � but optimism. Exactly what adjustments race-neutral policies might trigger will depend, among other things, on the demographics of each state. Michigan, for instance, can confidently expect: black and Hispanic graduation rates -- currently lagging 17 percent behind whites and Asians -- to catch up; Asian student population at the University of Michigan to increase along with that of Arab-Americans given that Michigan is home to the biggest Arab-American population outside the Mid-East; and K-12 education might well improve for many low-income students.

As 10 years of California experience shows ending racial preferences will lead to a more just system that will produce what economists call "pareto-optimal outcomes" where all groups are better off � and none worse off.

Shikha Dalmia is a senior policy analyst at Reason Foundation, a free market think tank. Henry Payne is a freelance writer and an editorial cartoonist at the Detroit News. An archive of Dalmia's work is here and Reason's education research and commentary is here.