Corporate Average Fuel Economy Standards #1

In today's Wall Street Journal reporter Karen Lundgaarde ("Bush Gets Ready to Overhaul Vehicle Fuel-Economy Rules", page A2; link below for WSJ subscribers) says the Bush administration is evaluating a range of alternatives to "overhaul the nation's three-decade-old fuel-economy rules." Jeffrey Runge, administrator of the National Highway Traffic Safety Administration (NHTSA), said yesterday that this action "will save billions of gallons of gasoline per year and will be fair to the industry." The apparent objective of overhauling CAFE is to reduce U.S. oil imports.

Each of these claims deserves careful analysis.

REDUCED GASOLINE CONSUMPTION

The most efficient (and effective) means of reducing gasoline consumption is to raise consumer prices. In the very short run, consumers just pay more for gasoline. However, as high prices persist, they reduce their vehicle miles traveled by combining trips, foregoing some travel, and perhaps commuting by carpool or public transportation. In the long run they purchase more fuel efficient vehicles, which ususally means smaller, more lightweight cars. Lundgaarde's article attributes recent huge declines in SUV sales to high fuel prices, suggesting that the "long run" is well underway. Ironically, fuel-efficient driving (e.g., abiding by Interstate highway speed limits) appears to be only a last resort despite the fact that it improves fuel economy substantially for most vehicles. Consumer behavior thus suggests that interest in fuel economy is limited.

In any case, tightening regulatory standards on automobile and truck manufacturers is among the least efficient means of reducing gasoline consumption. First, it takes many years to materialize in the showroom and more than a decade to work its way through the fleet. Tightening CAFE will make vehicles more expensive, causing consumers to hold onto older vehicles longer. This delays the effective turnover of the fleet and reduces any gains in fuel economy tighter CAFE standards otherwise would achieve.

Second, tighter CAFE standards are virtually assured of forcing consumers to buy new cars that they won't like. Even if regulators could brilliantly design new CAFE standards that precisely reflect consumer preferences on average, only a small fraction of consumers are average consumers.

Third, CAFE standards always have unintended consequences. Previous rounds led manufacturers to make cars smaller and lighter, and hence less safe. Thousands of annual highway fatalities are attributable to CAFE standards.

The absence of any economic rationale does not take away CAFE's huge political advantages over gasoline taxes. CAFE enables policymakers and regulators to avoid bearing responsibility for the consequences. Public ire will be directed at manufacturers instead, as they struggle to market vehicles that few consumers want to buy. If policymakers simply increased gas taxes, however, the public would know exactly who was responsible for their misery. (Indeed, if they were to just leave current conditions alone they could achieve the effect of high gasoline taxes while forcing oil companies to bear the blame.)

CHANGES IN FUEL ECONOMY STANDARDS WILL BE "FAIR"

Fairness is in the eye of the beholder. In the automobile business, it's usually code language for rules that benefit U.S. manufacturers and the expense of imports. Globalization of the industry in recent years makes it less obvious what impacts various alternative schemes would have on different companies. Lundgaarde's article points out that Detroit manufacturers prefer uniform percentage increases in fleet fuel economy but Honda and Toyota do not. The higher your current fleet average fuel economy is, the harder it would be to achieve any uniform percentage increase. NHTSA Administrator Runge admits that this poses a challenge:

"That's why we have to be really innovative and really smart," Dr. Runge said. "Some of the smartest people in the country are working on this."

NHTSA will need the smartest people in the country to accomplish the impossible. A fair prediction is that they will come up with something that everyone hates, and judge it a success on that basis.

Lundgaarde's article says nothing about whether NHTSA also intends to craft new CAFE rules that are fair to consumers. For example, previous CAFE rounds destroyed the family station wagon as a viable automobile and gave us the minivan and, ironically, the SUV--both of which are "light trucks" under CAFE that can meet less demanding standards.

REDUCING OIL IMPORTS

CAFE will have a negligible effect on oil imports for several reasons. First, as outlined above, it will take years to redesign vehicles to meet the new standards and another decade to roll over the U.S. vehicle fleet. Even a Draconian new CAFE standard (for which there is negligible political support) won't have any measurable effect on oil consumption for a long time.

Second, consumers will adapt. If they are forced to save fuel by driving econoboxes, they will drive more miles because the marginal cost of driving declined. (In contrast, a high gas tax increases the marginal cost of driving and makes additional fuel consumption more financially painful.)

Third, the quantity of oil imported will only increase as the price of crude declines from current levels. Oil is cheaper to produce in Saudi Arabia and elsewhere, so as prices fall these sources will dominate world production yet again. High world prices diversify supply; low prices do not.

The policy merit of reducing oil imports has always been a bit dubious, usually rooted in national security considerations. Fair enough. But it is logically obscure how "energy independence" aids long run national security, and it cannot be accomplished in the short run anyway. Thus, if long run national security concerns dominate, then it seems more logical to keep domestic oil off the market and use up foreign oil first.

UNINTENDED BUT FULLY PREDICTABLE CONSEQUENCES OF TIGHTER CAFE REGULATIONS

The scholarly literature on CAFE is clear. It kills. The most cost-effective way to reduce fule consumption has always been to reduce size and weight. Forcing families to buy smaller, lighter weight cars compels them to bear added risks of injury and death. Romantic public policy preferences do not repeal the laws of physics.

The government can prevent this only by prohibiting manufacturers from complying by reducing size and weight. Assuming that rules could be devised to impose this constraint, it means the resulting CAFE standards would be even more expensive to meet, raising the cost of new vehicles even more, and adding additional delay to fleet turnover. Protecting consumers from increased rates of injury and death requires reducing CAFE's effectivnesss or raising its costs.

REGULATORY ANALYSIS

The public deserves a credible, complete, balanced and objective analysis of the benefits and costs of any proposed changes in CAFE. Such an analysis is currently required by presidential Executive order 12,866, and specific policy statements made by OMB. Given the Bush administration's apparent support for strengthening CAFE, it is not clear that it intends to hold NHTSA accountable for preparing such an analysis. It is even less clear that the administration will insist on rigorous independent, external peer review of NHTSA's analysis to ensure that it is, in fact, a credible, complete, balanced and objective portrayal of the likely consequences of new CAFE regulations. (The administration issued a government-wide policy on peer review in December 2004, but exempted regulatory impact analyses from these requirements.)

Thus, the public is wise to be deeply skeptical (if not reflexively distrusting) of any and all CAFE proposals, except perhaps a proposed repeal of the statute.


WSJ link: http://online.wsj.com/article/0,,SB111629671592335445,00.html?mod=politics%5Fprimary%5Fhs

Commentary: "From Spin City to Fat City"

Daniel Henninger's May 6 Wall Street Journal column (link above for WSJ subscribers) discusses the peculiar saga of how the science of obesity was drowned in politics -- and by the scientists themselves. He writes:

This is a case study in how public policy gets formulated in a highly advanced, highly educated and not least, highly neurotic society.

It is also an example of how peer review is an insufficient tool for discerning the quality of scientific information that will be used to set public policy.

FEDERAL PEER REVIEW

Regulatory Checkbook has followed the recent history of obesity politics in the context of the Office of Management Budget’s recent efforts to improve the quality and quantity of scientific peer review performed by federal agencies. OMB’'s authority rests in the Information Quality Act, which authorized it to issue government-wide guidelines requiring federal agencies to meet certain minimum standards for all information they disseminate, and rather stringent standards for information deemed “influential.”

OMB issued a proposed Bulletin on Peer Review in August 2003. Peer review is the standard tool used by scholars to rank research proposals for funding and allocate scarce pages in scholarly journals. Dr. John D. Graham, Administrator of OMB’s Office of Information and Regulatory Affairs, is himself a former professor and widely known to believe that peer review is an effective tool for discerning quality. Thus it was not a surprise that he would propose this Bulletin to improve the quality and effectiveness of so-called “pre-dissemination review” procedures which OMB’s Information Quality Guidelines had required every agency to adopt.

Many agencies had only pretended to adopt effective pre-dissemination procedures. Often they merely asserted that their existing internal systemswere adequate to ensure that inaccurate or biased information was not disseminated in the first place. Were that so, of course, Congress would not have enacted the law and OMB’s Information Quality Guidelines would have been superfluous.

Regulatory Checkbook provided public comments on the proposed Bulletin, as did 186 others — an extraordinary amount of interest in an obscure guidance document proposed by an agency that is equally obscure outside the Beltway. In our comments we discussed a number of legal, philosophical and technical issues raised by the proposed Bulletin. In general, we found the proposed language extremely helpful – especially OMB’s desire that scientific peer review stick to scientific issues and refrain from trying to resolve policy disputes under the guise of “science”.

We were concerned, however, that the proposed language permitted agencies too much discretion and control over their peer review programs, which to be effective needed to be genuinely external and independent, and rigorous in the intensity of effort:

OMB's language seems inadequate, however, to deal with agencies and institutions that have active peer review programs but routinely ask reviewers to address policy matters or impose policy-driven constraints on scientific review. An obvious and commonplace example is an agency request that peer reviewers opine as to whether the agency’s interpretation of the science is reasonable given a litany of so-called science policy defaults. As indicated below, one way to assist these agencies in making their peer review practices more compliant with the policy-neutrality criterion is to modify the Bulletin such that persuasive evidence of noncompliance is sufficient grounds for challenging the adequacyof pre-dissemination peer review. (p. 2)

Under pressure from opponents, OMB relented and re-proposed a substantially weaker version in April 2004 and belatedly agreed to accept another round of public comments. This time, 57
more comments were submitted including Regulatory Checkbook’s comments. As expected, those who thought the original draft was too demanding and burdensome liked the weaker revised version; those like Regulatory Checkbook who thought the original version ought to have been more stringent were deeply disappointed; and those who opposed the entire enterprise continued to vigorously do so. OMB issued a final Bulletin in December 2004 that closely tracked the weak April 2004 version.

THE CASE OF OBESITY

Because of our concern that weak peer review requirements would not achieve OMB’s legitimate objectives, Regulatory Checkbook has been on the lookout for examples that would illustrate our point, if not completely prove it. In November 2004 a spate of news accounts appeared suggesting that peer review had failed, and failed rather badly, with respect to the scientific issue of the extent to which obesity resulted in reduced life expectancy. Most disconcertingly,this failure occurred within the most highly respected federal agency:

We summarized our concerns in a letter to OMB dated December 16, 2004 (copies available on request).

The recent incident in question involves certain studies disseminated bythe Centers for Disease Control (CDC) concerning the relative mortality risks posed by obesity. These studies are clearly influential, as they are intended to reallocate the funding, research and public health priorities of the federal government and to significantly alter the behavior of individuals, households, firms and other institutions. Based on publicly available information and news reports, which of course are necessarily incomplete and may not be entirely accurate, it appears that CDC’s extensive pre-dissemination review procedures failed even though vigorous peer review is a core feature of these procedures and its commitment to peer review is perhaps the strongest among all agenciesof the federal government.

In addition to CDC’s failure, OMB’s reliance on peer review by scholarly journals proved to fail as well. One of the world’s most highly respected medical journals failed to perform the quality assurance role that Dr. Grahamexpected of it. We wrote:

This incident also seriously undermines OMB's long-standing deference to the presumptive objectivity of scientific information published in peer reviewed journals. The critical scientific paper supporting policy and programmatic positions of both CDC and its parent Department of Health and Human Services was peer reviewed and published by the Journal of the American Medical Association (JAMA), one of the top medical journals in the world. Many peer reviewed journals have missions that are ideological or otherwise contrary to the statutory information quality standard of objectivity such that affected persons could be able to rebut, with little difficulty, the presumption that peer review by these journals was justified. However, there are a few scientific and professional journals whose peer review procedures would have been expected to easily fulfill OMB’s expectations as an effective non-governmental arbiter of objectivity such that affected persons would have an extremely difficult job mounting a successful rebuttal. JAMA is clearly one such journal, but it appears that its peer reviewers and editors were unable to detect the errors discovered and apparently acknowledged by CDC. Indeed, the very mechanism by which these errors were detected and publicized suggests that peer review can inhibit or prevent, rather than enhance, the achievement of a high level of informationquality in federal information dissemination. (p. 3)

* Mokdad AH, Marks JS, Stroup DF, Gerberding JL (2004). "Actual Causes of Death in the United States, 2000," 291:JAMA 1238-1245.

Details of the obesity controversy are found in Regulatory Checkbook's letter:

• CDC researchers reviewed existing epidemiological studies and mortality data reported to CDC for the year 2000, and concluded that 400,000 fatalities per year were attributable to obesity, an increase of one-third since 1990and less than 10 percent below the number attributable to tobacco.
• CDC scientists suggesting that obesity is an “epidemic” public health problem; after it was published by JAMA, CDC promoted the study and offeredspecific policy conclusions based on it.
• CDC Director Julie Gerberding was a co-author of this study and Department of Health and Human Services Secretary Tommy Thompson was a strong advocatefor policies combating obesity.
• the study (but allied with CDC's anti-tobacco camp) gave the story to a Wall Street Journal reporter. They implied that CDC's peer review procedures were skewed because of Dr. Gerberding's prominence, or because of a strong, high-level policy-level commitment to elevate the relative importance of obesity as apublic health hazard.
  
• According to press accounts in November 2004, CDC and its researcher-authors admitted to having overstated the number of annual fatalities from obesity by at least 80,000 cases. Instead of a 33% increase in deaths from obesity between 1990 and 2000, the ten-year increase now appears to be no greaterthan 7% before increases in the U.S. population were taken into account.
  
• Scientists both within and outside CDC said that the methods the authors used to estimate deaths from obesity were upwardly biased when compared to the methods used to estimate deaths from tobacco, did not account for genetic factors, and thus implied that deaths from overweight and obesity are behavioral. Other scientists said they were “puzzled” by the authors’ statistical methods.
  

On May 6 Science (access by subscription) published a news article titled "A Heavyweight Battle over CDC?'s Obesity Forecasts." The article discusses the 2004 paper that started the controversy (400,000 premature deaths per year); the 2004 article authors?' formal revised estimate in response to the controversy (365,000), less than the 80,000 overestimate hinted at in November 2004; and a new estimate by CDC epidemiologist Katherine Flegal and colleagues from the National Cancer Institute (112,000) published April 20 by JAMA. The importance of this new estimate is highlighted in an editorial by David Mark accompanying the Flegal et al. paper:

The study by Flegal et al is likely to generate interest because it provides an estimate for deaths attributable to obesity that appears to strongly contradict prior estimates published in JAMA. Flegal et al estimate that there were about 112 000 obesity-attributable deaths in the United States in 2000, far lower than the 414 000 estimated by Mokdad et al for the same year and the 280 000 estimated by Allison et al. for 1991. The magnitude of the differences cries out for explanation of the reasons behind these differences. Some might wonder: If well-intentioned efforts to calculate this number can result in such widelyvarying estimates, is it worth trying to do at all?

One possible explanation, which Dr. Mark does not appear to have even contemplated, is that the demands of public policy advocacy on behalf of obesity prevention interfere with scientific objectivity in the estimation of the magnitude of the problem. If Flegal and colleagues are right, no obesity epidemic exists.

The absence of an epidemic could be politically problematic. A number of high-profile individuals and institutions, in addition to CDC's Dr. Gerberding and DHHS' Secretary Thompson, have hitched themselves to the fact that an obesity epidemic exists. For example, California Governor Schwarzenegger is promoting an Obesity Initiative that followed the Governor's Summit on the Prevention of Obesity. As the website promoting the Summit states:

Governor Schwarzenegger understands that obesity has become a nationwide epidemic and that California has not been spared.

The obesity case offers important lessons for those who believe peer review is The Solution to the problem of ensuring that scientific information disseminated by federal agencies meets established standards for utility, integrityand objectivity:

• However rigorous CDC's or DHHS' internal peer review procedures might be in general, they could not be reasonably be expected to be effective in any case where the authors are prominent or the science an integral part ofthe agency's public policy advocacy. The problem is vastly greater for other federal agencies lacking CDC's stellar reputation for rigorous peer review.


• Conventional methods of peer review failed to ensure that OMB's quality standards were met. The usual model for peer review is to appoint an ostensibly unbiased panel of distinguished scientists. That is presumably what both CDC and JAMA did, but to no avail. Independent experts who volunteer their services have limited interest in detecting error, yet that is what OMB demands peer review to accomplish. In this case, it was a highly motivated and scientifically competent scientists employed by an internal agency competitor (CDC's Office on Smoking and Health) who originally detected the error and forced both CDC and the authors to come clean. Even now, both CDC and Mokdad and colleagueshave offered only the barest of admissions.


• Relying on peer review unwittingly retards advancements in information quality -- a result exactly opposite of OMB's intent. OMB's Peer Review Bulletin confers an undeserved presumption of objectivity to scientific information that has been internally peer reviewed and published in a scholarly journal, especially a journal such as JAMA. Once this presumption of objectivity hasbeen obtained it is virtually impossible to rebut.

We will post again on the specific issues raised by the news article at a laterdate. For now, the problem remains that current peer review procedures, particularlythe fatally flawed version adopted as federal policy by OMB, are wholly inadequateto the task. Once science has become a weapon in the pursuit of public policyagendas, it is intensely vulnerable to various forms of corruption sometimesobvious but usually subtle. Conventional peer review methods practiced in academiamay be helpful, but they cannot be relied upon to discern objective scientificresearch from that which is driven by political or policy objectives.

The Benefits and Costs of Federal Regulation

WHAT?

On March 23, 2005, the federal Office of Management and Budget (OMB) published a Federal Register notice of its latest draft report to Congress on the benefits and costs of federal regulation. The notice followed a March 9 press release touting the Administration's report "Regulatory Reform of the U.S. Manufacturing Sector." The full draft report to Congress is here.

These reports are widely used by the Administration, Congress, and myriad interest groups to advance their respective policy agendas. As we become aware of them, we will update this post to include relevant links to other websites. Readers are encouraged to send links.

WHO?

OMB is the staff office within the White House that is responsible for managing the federal budget and overseeing its vast array of regulatory activities. This draft report was prepared by OMB's Office of Information and Regulatory Affairs (OIRA), but it represents the position of OMB generally on regulatory issues.

OIRA has a small political leadership and about 50 professional civil service staff members who work for the president irrespective of which political party is in power. OMB as a whole is about 10 times as large, with similar ratios of political appointees and career staff.

OIRA implements the White House's centralized regulatory oversight program. Centralized oversight was established by President Reagan via Executive order 12,291 (February 17, 1981) and modified by President Clinton via Executive order 12,866 (October 4, 1993). As the federal government's regulatory overseer, OIRA has broad and deep expertise concerning the consequences (both good and ill) of federal regulation.

WHY?

OMB is required to issue this report annually by the "Regulatory Right-to-Know Act" (Section 624 of the Treasury and General Government Appropriations Act, 2001). Congress established this requirement in the apparent hope that OIRA would generate an independent and objective accounting of the consequences of federal regulatory activity.

OIRA's many previous reports have complied at best with the letter but never with the spirit of this law. OIRA has generally suppressed the special knowledge gleaned from reviewing draft proposed and final regulations prior to publication, in deference to the views of the Executive branch departments and agencies it oversees. There are a number of reasons for this, including:

• Presidents (of both parties) generally do not like to display their administration's dirty laundry in public. OIRA staff work for the president; their advice is confidential and properly exempt from public disclosure. Thus, even when OIRA officials or professional staff vigorously disagree, it is extremely unusual for the Office to publicly contradict the views expressed by Executive branch departments and agencies over which the president has Constitutional (if not always actual) authority.
• Congress failed to write the law in a way that achieves its stated purposes. The law did not require OIRA to disclose its own views, and it is not clear how the law could have been written to do so. Neither was the law written to provide OIRA the tools to evaluate the relative quality of agencies' benefit-cost analyses against analyses prepared by others.

We will be examining the draft report to discern any instance in which OMB may be subtly telegraphing views at odds with the agencies it supervises.

In addition, we will be looking at other aspects of the draft report, including:

• Does the draft report adhere to OMB's own standards for information quality? In February 2002 OMB issued government-wide guidelines for information quality. Chapter III of the draft report discusses how well agencies have adhered to these guidelines. However, the Chapter appears to be silent with respect to OMB's own compliance.
• Which parts of the draft report present valid and reliable information, and which parts do not? A consistent pattern in previous reports has been undue emphasis on unreliable estimates of the aggregate benefits and costs of federal regulation. Aggregate estimates cannot be reliable if they are constructed from unreliable sources, nor are they useful if they have large gaps in coverage.
• What are the merits of OMB's specific suggestions for regulatory reform? In previous reports OMB has coyly refrained from offering specific suggestions for reform. The separate report on regulatory reforms for manufacturing clearly represents a significant departure from past practice. In addition, OMB has asked for public comment on a handful of specific procedural and analytical improvements, and we will offer our views on those as well.

WHERE?

Public comments on the draft report to Congress must be submitted to OMB by June 21, 2005. If you do not comment, your views will be ignored.

REGULATORY CHECKBOOK

We will be posting a series of comments as we prepare our public comments for submission to OMB. Readers are welcome to incorporate our views into their own public comments. Citations to our original work would be appreciated.

Welcome to Regulatory Checkbook

Welcome to RegCheck, a blog on regulatory issues sponsored by Regulatory Checkbook, a nonprofit and nonpartisan organization founded in 2001 whose mission is to enhance the quality of science and economic analysis used as the foundation for regulatory decision-making.

Unlike most public policy oriented nonprofits, Regulatory Checkbook does not engage in advocacy with respect to substantive public policy issues. Our advocacy is limited to:

• The use of unbiased scientific information, where unbiased means policy-neutral. Much of the scientific information used in regulatory decision-making has within it embedded and usually undisclosed public policy preferences. Information containing embedded policy preferences tends to lead to policy decisions that tilt in favor of those preferences.
• Technically correct economic analysis of the consequences of regulatory decisions, including the consequences of taking no action. Our framework is explicitly and unapologetically benefit-cost analysis properly applied, with rigor appropriate to the scale and scope of the consequences of regulatory decisions. By correct we mean free of material error in the application of fundamental concepts. We define a material error as one so great that, if corrected, it would alter a decision-maker's choice of alternative presuming that he or she is motivated to seek the greatest possible net social benefits.
• The use of information that meets appropriate data quality standards. Because there are no scholarly standards for information quality in these areas, we adhere generally to the government-wide guidelines established in 2002 by the federal Office of Management and Budget. OMB established a flexible regime in which the quality of information disseminated by federal agencies must satisfy standards of utility, integrity and objectivity that rise with the scale and scope of the information's significance.
• The use of peer review procedures appropriately designed for public policy applications. Traditional scholarly peer review is intended to achieve very limited purposes -- i.e., decide which grant proposals to fund and which scientific papers to publish. Fundamental "correctness" is not a criterion used in scholarly or academic peer review. Nevertheless, governments have borrowed these procedures for an altogether different purpose -- i.e., determining which inferences and conclusions drawn from vast scientific and economic literatures are "correct".
• The use of oversight procedures that (a) reward high-quality scientific data, economic analysis and logical reasoning, and (b) enhance the likelihood that material errors in science and economics will be detected and removed. Effective oversight requires, inter alia, broad public access to data, models and analytic methods so that appropriately trained professionals and scholars can reproduce (and perhaps improve upon) regulatory agency work products prior to their use in regulatory decision-making. Oversight procedures that deny public access to critical information or adequate review time inherently fail these tests of public accountability.

Regulatory Checkbook has produced a considerable amount of information on these topics, but little of it is widely available. I will be posting this archival information as time permits.

N. B. When we began conducting policy assessments and benefit-cost analyses in the 1970s, calculations were done by hand and statistical analyses required overnight use of a university's mainframe. An IBM Selectric was considered the ultimate in word processing capability. The best way to describe the changes that have occurred over the past 30 years may be to shamelessly borrow from economist Ben Stein, who said in Ferris Buehller's Day Off: "Wow."

This blog represents a controlled scientific experiment testing the hypothesis that old dogs cannot learn new tricks. In the great tradition of scientific method, we hope to falsify that hypothesis.