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Why Subsidize Insight?

by Patrick J. Michaels

This article appeared on cato.org on August 29, 2000.

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I'm on record decrying Al Gore's promise of a big subsidy for people who purchase so-called hybrid cars--lightweight, aerodynamic machines that combine internal combustion engines and electric motors in a way that modestly boosts fuel efficiency. I maintain that position; I don't see why taxpayers should be forced to help pay for my car. (What's next, subsidies for salads, funded by a Big Mac tax?)

But the new Honda Insight, which has been on sale since January and uses just about every trick in the book to save fuel, is a different matter. Honda cars have been good to me, so, after a great deal of guilt-tripping for having previously dissed the idea of the Insight (I was a good liberal decades ago and am practiced at such emotions), I went out and test-drove an Insight. They're hard to find because consumers snap them up minutes after they roll off the delivery truck. The Honda dealer in Santa Cruz, Calif., for example, has 50 people waiting.

"It just drives like an ordinary car," the salesman told me as he handed over the keys. But what other car drives like a high-powered computer that just happens to have four wheels? What other car can seamlessly mesh two completely different types of motors and take you through 40 stoplights across 122 miles from Charlottesville, Va., to Washington, D.C., at 64.8 miles per gallon? In other words, as far as gas is concerned, the car costs about a dollar an hour to drive. And how many cars these days stop traffic, too, as people in my college town ran across busy streets to check out what is really a looker? Now I know why my uncle bought that Corvette.

So I bought Insight No. 2630. I didn't do it to save the planet. Instead, I bought it because, given its parameters (two comfortable seats only, for example) it is sleeker, cooler, more entertaining transportation than anything on the market. I don't think there's going to be a massive rush to buy a certain car because of an outpouring of "green" virtue; instead, what we will drive has to be better than what we do drive today. The Insight may be a prototype of that phenomenon, but the car will be bought in large numbers only if it proves durable and dependable.

Which brings us back to Gore's proposed subsidy. According to his Web site, "Al Gore will give American consumers a $5,000 credit for the purchase of hybrid vehicles." Whatever the reason, demand for the small supply of Insight vehicles is already phenomenal; in southern California they sell for $5,000 above the $20,000 sticker price. Subsidizing the vehicle will only create more demand, which in Gore's lexicon will lead to "price gouging." The demand-driven dealer premium in southern California is exactly the same amount Gore wants taxpayers to pay people to buy a car that can't stay on the lot anyway.

Furthermore, the Japanese government is subsidizing Honda to the tune of a few thousand dollars per car. Folks, here's a rare chance to get some of your balance-of-payments back! Or would you prefer that the 260,000,000 Americans who don't own Insights pay the dealer a premium--because that's exactly where subsidies wind up in a demand-driven market.

Honda has sold about 2,000 Insights to American customers as of this writing. That's not many cars. For the time being, Japanese subsidy or not, Honda is losing money on every car--about $8,000 per car for model year 2000, according to Business Week. But whether it loses that money (with or without the government subsidy) is inconsequential to a company with such an impressive array of profit-making lines. Instead, Honda's Insight is a loss leader, a technological marker that shows just how far the "competition" (I'm afraid we all know who that is) has to go to produce a fun car that can easily run 600 miles between 10-gallon fill-ups and can cruise the highway at well over 100 mph. If the technology proves durable, economies of scale will eventually take over.

At that point, bet that Detroit will demand either a subsidy to produce what will likely be an inferior version of Insight (U.S. automakers are several years behind, now--the Insight prototype was built in 1996) or, God forbid, a tariff against the most fuel-efficient vehicle in the world, by claiming the Japanese "dumped" Insights on the U.S. market. How will the vice president, now carrying the endorsement of the United Auto Workers of America, respond?