Market based incentives

As part of outsourcing economic criticism in these hard times, I quote from the WSJ’s Joseph White this morning on the value of market-based incentives rather than micromanagement:

Can Uncle Sam Sell Hybrids?
… President Barack Obama said during his press conference last week that just because the government could hold shares in GM and Chrysler doesn't mean he intends to micromanage their affairs. Then he added, "I'm not an auto engineer, I don't know how to create [an] affordable, well-designed plug-in hybrid. But I know that if the Japanese can design [an] affordable, well-designed hybrid, then doggone it, the American people should be able to do the same. So my job is to ask the auto industry: Why is it you guys can't do this?"

GM and Chrysler's new management teams will likely treat this question as something more than a suggestion. …

Total small-car sales are down 33% for the year … Demand for hybrid vehicles is in the doldrums. … At $2 a gallon for regular unleaded, the most-enthusiastic purchasers of hybrids are governments and corporations eager to wear green.

As for plug-in hybrids, the costs remain daunting for major car makers on both sides of the Pacific. …

The Chevy Volt, GM's plug-in, won't go on sale until late 2010. But whether that car will be "affordable" at an estimated $40,000 depends on who you are. The Obama administration's automotive task force delivered its opinion of the Volt in blunt terms in a March 30 report: "... while the Chevy Volt holds promise, it will likely be too expensive to be commercially successful in the short-term."…

Around the world, other governments aren't shy about pushing consumers toward certain choices. … Europe uses high fuel taxes and other means to push consumers to pay higher prices for smaller vehicles. …

U.S. car makers have lobbied for higher gas taxes as the simplest way to push consumers into high-mileage cars. The Obama administration is betting on a different approach: Leave gas taxes alone, and instead invest government money in advanced battery development, offer tax breaks of up to $7,500 on hybrids and mandate tougher mileage standards to force car makers to use new fuel-saving technology. Washington now has a big financial stake in getting this right, or billions in public money plowed into Chrysler and GM could be vulnerable to energy markets.

This is probably why Mr. Obama sounded so sincere when he said, "I don't want to run auto companies."

Since taxes and other government policies change behavior, the most effective economic policies are those that are consistent, predictable and easy to understand. Smart people can draft more clever policies, but that doesn’t mean they’re more effective ones.