Don’t Subsidize My Car

May 21, 2001 • Commentary

Government subsidies can have strange, unintended consequences. People often get something they don’t really want. Remember the great Velveeta giveaway in the late 1980s? Milk‐​price supports resulted in such a large federal buy of moo juice that it had to be stored as American cheese in the caves of northern Kansas. Eventually it went out of date, and there was so much of it that the feds literally could not give it away.

With most subsidies, the government pays someone to produce something that no one wants to buy. But what happens when the government pays people to buy something that no one wants to produce?

That may be the case with the president’s proposal to provide tax incentives for the purchase of hybrid gas‐​electric vehicles. These sophisticated machines employ a computer‐​managed combination of gasoline and electric engines in a fashion that results in impressive fuel efficiency. They charge their batteries when slowing or braking, so they never need to be (in fact, they can’t be) plugged in.

There are currently two on the “market” (more on that later): Toyota’s four‐​passenger Prius, a fairly conventional car, and Honda’s two‐​seater Insight, a futuristic machine from which you expect George Jetson to emerge. Rather than cite somewhat misleading EPA figures, the real fuel economies observed by owners of these vehicles appears to average around 46 miles per gallon for the Prius and 62 mpg for the Insight. Those are big numbers. I’m averaging 68.8 mpg over the 14,000 lifetime miles on my Insight, and I enjoy it immensely.

So where are these cars? I doubt most people can recall seeing one, even though the Insight’s profile is as striking as an old Citroen. You haven’t seen them because there aren’t many being produced. They’re hemorrhaging money for both Toyota and Honda. My best guess is that Honda has already lost about $80 million on the 8,000 Insights it has shipped to the U.S. over the 18 months of its availability. Last spring, the Washington Post estimated Toyota is losing even more—$17,000 per copy—on each Prius.

Obviously, these cars can’t achieve profitability under any reasonable sales projections. If they could, the advertising spots would be as frequent as Chevy’s “Heartbeat of America.” But they are not. In fact, I’ll bet most readers can’t recall ever having seen the plugs for the Prius (aging hippies drive it in through a tropical rainforest while a chimpanzee applauds) or the Insight (comes out of a car wash— it’s a “clean” vehicle, get it?).

News stories about the popularity of these vehicles simply aren’t true. There’s a waiting list for the Prius, but that’s because Toyota will only ship 12,000. This allows Toyota to keep the out‐​the‐​door price around $22,000, no haggling please. But Toyota overestimated demand in Canada, where Priuses are sitting on lots. Meanwhile, a phenomenal one‐​third of Insights remain unsold, despite the fact that April was the biggest sales month in the line’s history (573 vehicles). A persuasive customer can drive one away today from an East Coast dealer today for around $16,000—$5,000 under sticker.

The proposed federal subsidy to the owners of these vehicles is probably the last thing Toyota or Honda wants. In fact, it may have the perverse effect of stopping production of these cars altogether. How come? Because the more cars Honda and Toyota sell, the more money they lose. A $1,500 subsidy to consumers simply reduces Toyota’s loss on every Prius from $17,000 to $15,500. Even if that figure is overestimated (Toyota and Honda have been circumspect about how much money they’re losing), $1,500 isn’t going to help.

Ironically, there is a potentially profitable hybrid vehicle: the behemoth American SUV, whose profit margins are so fat that a few thousand dollars in additional technology, subsidized by Uncle Sam, might still benefit the shareholders. Daimler‐​Chrysler has such a plan—a hybrid Dodge Durango with fuel economy boosted from 15 to 18 mpg. Yes this will save a little gas. And 100,000 of them, perhaps turning a small profit, will save about the same amount of fuel that 10,000 Insights would, losing Honda a hundred million.“But what an irony. In an attempt to gain the support of environmentalists, President Bush proposes hybrid‐​car subsidies that increase sales of SUVs while knocking the Prius and the Insight into the ditch.

This newest example of well‐​intentioned subsidies gone wrong won’t win President Bush any support with the greens. The last thing they want to see is Americans hopping in their subsidized, hybrid SUVs to drive to the 7–11 for a little Velveeta.

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