When Harry Reid and Nancy Pelosi sent the Detroit automakers away and told them to come up with a plan, it made me want to put my head through a wall.  Not because the automakers didn’t need one, but because they’re operating in a black box unless and until the government comes up with their plan. 

While the proposal Jeffrey Leonard puts forward isn’t flawless (as Atrios notes), it does start to address the conundrum that the automakers are now faced with:

[O]ur automakers aren’t as bad as you think. If you go to Europe or especially China and Asia, you will see excellent small cars produced by Ford and Chevrolet that sell very well. You won’t see them in the United States, however, because these are not the cars American have been buying. Like it or not, a major reason that American automakers have built the cars that they’ve built for the domestic market is that they’ve had to contend with highly misleading long-term market signals based on cheap gas. While engines have become more efficient over the last thirty years, much of Detroit’s ingenuity has gone into giving Americans more power, performance and luxury for the buck rather than more miles per gallon.

We can sit around and wax rhapsodic about highways covered in green cars, but until the government adopts policy that creates demand for them, there is no evidence that anyone will buy them.

There are a variety of ways to create that demand. The most effective would be to impose a substantial gas tax. Another would be to tax weight or horsepower, as many countries do. (This is far better than a luxury tax, as it directly targets the gas wasters, rather than those who might just want a fur-lined Prius.) Such taxes can be phased in slowly or quickly, but the important thing is that if Detroit knows to expect demand for fuel-efficient cars, it will produce many more of them.

You cannot create an effective business plan if you cannot project what the market for your product will be.  A market for green cars can only be guaranteed by government action.  It’s a simple and very basic business principle.  If the automakers tell everyone what they want to hear and promise to make small, fuel-efficient cars and yet people continue to want SUVs, Honda and Toyota will supply that market and then everyone will bitch about how GM and Ford are not competitive because they’ve got shitloads of cars nobody wants.

You can ask them to be profitable, or you can ask them to be energy efficient.  If the government wants them to be both, they have to create the market conditions for that to happen.