Auto Regulation: Slamming the Brakes on the Car Industry

President Obama took a victory lap to Michigan recently, extolling his administration’s resuscitation of the auto industry. He has much to celebrate; car makers are adding workers and paying back monies borrowed from the public. Meanwhile, however, in full regulatory fever, his counterparts in Congress are beavering away on a bill that will undoubtedly raise car prices and clip demand. Obama will likely sign this legislation. Not since Dr. Doolittle’s ‘Push-me-pull-you’ has an entity been at greater odds with itself than the Obama White House.

The rebound in car sales, like much of the economy, is tentative. Sales industry-wide are ahead 15 percent year-to-date, but were up only 5 percent since July 2009. This is in spite of $86 billion in bailouts of GM, Chrysler and Ally Financial (the former GMAC), Cash for Clunkers, the Warranty Commitment Program, the Supplier Support program, $41.5 billion in TALF backing for auto finance companies, loans from the Department of Energy to support electric cars or to reequip factories to produce more fuel-efficient cars, Recovery Act funding for battery makers and research monies for the Advanced Research Projects Agency. 

So this may not be the perfect time to burden the industry with the costly new rules contained in the proposed Motor Vehicle Safety Act of 2010 – our legislators’ response to the Toyota scandal. In the words of the New York Times, “the recall of millions of Toyota cars and trucks…has exposed unacceptable weaknesses in the regulatory system.” Well, really, the recall exposed flaws in Toyotas. Or did it?

Toyota recalled some 9 million cars in late 2009 and early 2010, paid a $16.4 million fine for failing to report safety issues promptly and issued an apology. But a recent piece in the Wall Street Journal quoted a just-retired National Highway Traffic Safety Administration (NHTSA) employee claiming that the Department of Transportation (DOT) had blocked the release of its preliminary investigation into the Toyota crashes. According to the former worker, the findings pointed to driver error – mainly hitting the wrong pedal – as the cause for most of the Toyota accidents reviewed. In the majority of 40 vehicles checked, the findings were not consistent with mechanical failure or some mysterious glitch in the electronics system. DOT and NHTSA officials presumably feared publishing a report favorable to Toyota, since both had been criticized by Congress for their supposedly lax oversight. A Transportation Department spokeswoman told the Journal that the department’s review of Toyota’s problems is continuing. 

So, without conclusive evidence that Toyota made faulty cars, or that the NHTSA didn’t appropriately respond to complaints, Congress is pushing ahead with its vast regulatory overhaul.  The proposed bill imposes many mandates on manufacturers and makes it more costly to break the rules. It requires, for instance, new brake override systems, redesigned pedals and mandated electronic control systems, which will have to be redesigned to meet as-yet undetermined requirements from the NHTSA.

Moreover, the bill sets new penalty limits for infractions of the rules, with different versions raising the top fee to $200 or $300 million from the current $15 million cap. It would make a company executive personally liable for failures to report safety problems. Congress apparently doesn’t believe that having its reputation and sales clobbered by bad publicity and safety concerns was enough of a deterrent to Toyota’s management. If only they had faced bigger fines!

This revved up safety monitoring comes at a price. The Congressional Budget Office puts the cost to the government of the Senate version of the bill at $761 million between 2011 and 2015. (The House bill would cost $876 million.) It estimates the tab to the auto industry at more than $141 million per year. The actual amount remains unknown since many of the rules – such as safety standards for the configuration of gear shift controls and push-button ignition systems – have yet to be specified.  Without a doubt, the bill’s costs will be passed along to consumers.

Naturally, safe cars are a good idea, and reporting of problems should be taken seriously. However, some perspective is useful. First, according to the Auto Alliance, traffic fatalities in the U.S. last year were at the lowest level since reporting began in 1954, even though the number of licensed drivers has doubled and the number of miles driven annually has more than quadrupled. The widespread use of airbags and seat belts, as well as changes in speed limits and a crackdown on drunk driving reduced 2008 traffic deaths to 37,261, from  about 41,500 a decade earlier.  The number of people said to have been killed over the past ten years because of Toyota’s sudden acceleration problem is “as many as 89,” according to the NHTSA. This figure comes from complaints and lawsuits, and bounced considerably after Toyota issued its monster recall amidst much damaging publicity. 

Professor Paul Fischbeck of Carnegie Mellon, who specializes in risk assessment, called Transportation Secretary LaHood’s advice early on to leave the car in the garage and walk poor advice. “Walking a mile is 19 times or 1,900 percent more dangerous than driving a mile in a recalled Toyota,” Fischbeck said.

The cost/benefit appeal of the big new safety bill is questionable. The timing of the bill is certainly is not good. The recovery of the auto industry is important to the country’s economic health; costly new regulations will not help. But maybe Congress isn’t so foolish after all. The continuing bad publicity about Toyota has given GM, aka Government Motors, a real leg up. GM posted a 5 percent increase in July sales, while Toyota’s sales fell 3 percent.