WEBVTT 00:00:00.000 --> 00:00:03.899 So the next time you are stuck in bumper to bumper 00:00:03.899 --> 00:00:06.500 traffic. Oh, the worst. Right. Just completely 00:00:06.500 --> 00:00:10.220 surrounded by this massive sea of leather -lined 00:00:10.220 --> 00:00:13.919 SUVs. Yeah. I really want you to blame a tiny, 00:00:14.400 --> 00:00:18.039 obscure tax loophole from 1978. The very specific 00:00:18.039 --> 00:00:20.980 year to blame. Exactly. Because today, for you 00:00:20.980 --> 00:00:24.059 listening, our mission on this deep dive is to 00:00:24.059 --> 00:00:27.949 show you how a law that was explicitly designed 00:00:27.949 --> 00:00:31.190 to force Americans into tiny eco -friendly cars, 00:00:32.070 --> 00:00:34.990 actually, accidentally gave birth to the modern 00:00:34.990 --> 00:00:37.969 gas guzzling sport utility vehicle. It's wild. 00:00:38.070 --> 00:00:40.250 It really is. It's like a classic case of a badly 00:00:40.250 --> 00:00:42.649 planned home renovation. You decide to knock 00:00:42.649 --> 00:00:45.549 down a drywall partition just to open up the 00:00:45.549 --> 00:00:47.189 living room a bit. And you suddenly realize it 00:00:47.189 --> 00:00:49.689 was a load -bearing wall. holding up the entire 00:00:49.689 --> 00:00:52.409 roof. Yes, exactly. And then, you know, the whole 00:00:52.409 --> 00:00:54.609 structure of American car culture basically comes 00:00:54.609 --> 00:00:57.270 crashing down only to rebuild itself into something 00:00:57.270 --> 00:00:59.729 completely unrecognizable. That is exactly the 00:00:59.729 --> 00:01:01.549 scale of what we are talking about today. So 00:01:01.549 --> 00:01:03.789 welcome to the deep dive. Glad to be here. We 00:01:03.789 --> 00:01:06.290 are pulling from a really fascinating stack of 00:01:06.290 --> 00:01:10.370 sources today. Primarily, there's this incredibly 00:01:10.370 --> 00:01:12.709 detailed Wikipedia article breaking down the 00:01:12.709 --> 00:01:16.920 Energy Tax Act. Oh, yeah. Public law 95 618 right 00:01:16.920 --> 00:01:19.959 officially signed into law on November 9 1978 00:01:19.959 --> 00:01:23.000 a big day Yeah, and to understand how this single 00:01:23.000 --> 00:01:25.719 piece of legislation reshaped the highways you 00:01:25.719 --> 00:01:29.769 drive on every single day We have to look at 00:01:29.769 --> 00:01:32.090 the immense pressure lawmakers were under at 00:01:32.090 --> 00:01:34.730 the time. Yeah, absolutely. Because to really 00:01:34.730 --> 00:01:37.969 grasp the anxiety of 1978, we have to transport 00:01:37.969 --> 00:01:40.530 ourselves back to a heart of the 1970s energy 00:01:40.530 --> 00:01:43.329 crisis. Right. The core objective of the Energy 00:01:43.329 --> 00:01:46.189 Tax Act, which, by the way, was just one piece 00:01:46.189 --> 00:01:48.030 of the massive National Energy Act. Oh, wow. 00:01:48.109 --> 00:01:50.290 Just one part of it. Yeah, just a piece. But 00:01:50.290 --> 00:01:52.310 its objective was singular. And it was urgent. 00:01:52.569 --> 00:01:54.489 The United States absolutely had to reduce its 00:01:54.489 --> 00:01:56.650 demand for oil and gas. Like non -negotiable. 00:01:56.810 --> 00:01:58.609 Exactly. The country was incredibly vulnerable. 00:01:59.049 --> 00:02:02.049 The supply chain was fragile. And, well, lawmakers 00:02:02.049 --> 00:02:04.670 desperately needed a way out. And the pressure 00:02:04.670 --> 00:02:07.290 wasn't just, you know, abstract economic theory. 00:02:07.390 --> 00:02:10.129 You had people literally waiting in lines for... 00:02:09.800 --> 00:02:12.159 hours just to fill up their gas tank. Oh yeah 00:02:12.159 --> 00:02:14.599 the block long lines. So according to the text 00:02:14.599 --> 00:02:17.539 the government decided to pull two primary levers 00:02:17.539 --> 00:02:20.919 to force the country to use less gas. First they 00:02:20.919 --> 00:02:23.699 wanted to heavily promote renewable energy. Okay. 00:02:23.840 --> 00:02:27.199 And second they wanted to strictly enforce vehicle 00:02:27.199 --> 00:02:29.580 fuel efficiency. Right so it is the foundational 00:02:29.580 --> 00:02:32.020 behavioral economics approach really. Oh so. 00:02:32.120 --> 00:02:34.939 Well you deploy a carrot to encourage the behavior 00:02:34.939 --> 00:02:37.539 you desperately want. Right the reward. And then 00:02:37.539 --> 00:02:40.219 you wheeled a stick. to punish the behavior you 00:02:40.219 --> 00:02:42.340 were trying to eliminate. OK, let's unpack this, 00:02:42.460 --> 00:02:44.300 starting with the carrot. Let's do it. So the 00:02:44.300 --> 00:02:46.599 government decided to incentivize conservation 00:02:46.599 --> 00:02:49.960 by dangling some, frankly, pretty aggressive 00:02:49.960 --> 00:02:52.039 tax credits in front of the American public. 00:02:52.139 --> 00:02:54.599 Oh, yeah. Like, if you were a private resident 00:02:54.599 --> 00:02:57.060 and you decided to outfit your house with green 00:02:57.060 --> 00:02:59.719 tech, meaning, you know, you installed solar, 00:02:59.939 --> 00:03:03.340 wind, or geothermal sources of energy, the government 00:03:03.340 --> 00:03:05.960 was gonna hand you an income tax credit to offset 00:03:05.960 --> 00:03:08.659 the cost. And the math on these incentives was 00:03:08.659 --> 00:03:10.659 highly specific, actually. Okay, lay it on me. 00:03:10.819 --> 00:03:13.680 Okay, so as a homeowner, you would get a credit 00:03:13.680 --> 00:03:17.439 equal to 30 % of the cost of the equipment, up 00:03:17.439 --> 00:03:21.460 to a $2 ,000 spend. 30 % is pretty solid. It 00:03:21.460 --> 00:03:25.000 is. But they knew major installations cost way 00:03:25.000 --> 00:03:27.139 more than that, so it didn't stop there. Right. 00:03:27.199 --> 00:03:29.840 Because if you went big and spent more, they 00:03:29.840 --> 00:03:32.360 would also give you an additional 20 % credit 00:03:32.360 --> 00:03:36.120 on the cost greater than $2 ,000. Yep. Maxing 00:03:36.120 --> 00:03:38.889 out at a $10 ,000 limit. according to the source. 00:03:39.129 --> 00:03:40.830 And they made sure to loop the commercial sector 00:03:40.830 --> 00:03:42.930 in as well, right? They did. Businesses weren't 00:03:42.930 --> 00:03:45.069 left out. Yeah, businesses were offered their 00:03:45.069 --> 00:03:47.409 own tax credits for installing renewable energy 00:03:47.409 --> 00:03:51.050 equipment, amounting to a maximum 25 % of the 00:03:51.050 --> 00:03:53.310 equipment cost. Which is a huge incentive for 00:03:53.310 --> 00:03:56.389 a large company. For sure. And those business 00:03:56.389 --> 00:03:58.810 incentives were considered so vital to the national 00:03:58.810 --> 00:04:01.310 interest that they were actually bumped up just 00:04:01.310 --> 00:04:04.110 two years later by the Crude Oil Windfall Profits 00:04:04.110 --> 00:04:07.270 Tax Act of 1980. Which really paints a picture. 00:04:07.080 --> 00:04:11.659 of a government genuinely trying to make green 00:04:11.659 --> 00:04:14.319 energy financially viable for the early adopters. 00:04:14.479 --> 00:04:16.879 It does, but I have to push back a little on 00:04:16.879 --> 00:04:19.199 the actual impact of this strategy. Okay, go 00:04:19.199 --> 00:04:20.980 for it. Because you read these numbers, and it 00:04:20.980 --> 00:04:24.240 sounds like a 1970s government coupon code. A 00:04:24.240 --> 00:04:27.779 coupon code. Yeah, like, use promo code ENERGY78 00:04:27.779 --> 00:04:30.939 for 30 % off your new solar panels. Right, right. 00:04:31.199 --> 00:04:34.060 So the government hands out these $2 ,000 coupons 00:04:34.060 --> 00:04:37.670 for like... Solar water heaters. But let's be 00:04:37.670 --> 00:04:41.110 real, in the face of a macroeconomic oil crisis, 00:04:41.610 --> 00:04:44.529 outfitting a few suburban roofs with 1970s solar 00:04:44.529 --> 00:04:46.970 tech is like trying to put out a house fire with 00:04:46.970 --> 00:04:49.269 a squirt gun. That's a fair point. I mean, how 00:04:49.269 --> 00:04:51.689 much does a couple hundred bucks in a tax return 00:04:51.689 --> 00:04:54.230 really move the needle for the entire country's 00:04:54.230 --> 00:04:56.930 oil consumption? Well, if we connect this to 00:04:56.930 --> 00:05:00.389 the bigger picture, you immediately see the fatal 00:05:00.389 --> 00:05:02.939 limitation of the carrot approach. Right. The 00:05:02.939 --> 00:05:05.620 lawmakers in 1978 quickly realized that consumer 00:05:05.620 --> 00:05:08.500 goodwill was never going to cut it. Fostering 00:05:08.500 --> 00:05:10.879 early adoption of renewables is fantastic for 00:05:10.879 --> 00:05:13.540 long term infrastructure. Sure. Decades down 00:05:13.540 --> 00:05:16.819 the line. Exactly. But it doesn't solve a systemic 00:05:16.819 --> 00:05:20.339 bleeding crisis in the short term. Offering a 00:05:20.339 --> 00:05:22.740 tax break to a few progressive homeowners wasn't 00:05:22.740 --> 00:05:25.399 going to fix the massive daily grain on the oil 00:05:25.399 --> 00:05:28.160 supply caused by millions of highly inefficient 00:05:28.160 --> 00:05:29.779 vehicles driving to work every single morning. 00:05:29.779 --> 00:05:31.779 Right. They needed something that actually hurt. 00:05:31.920 --> 00:05:34.699 They needed the stick. Precisely. They realized 00:05:34.699 --> 00:05:37.279 they couldn't just reward good behavior. They 00:05:37.279 --> 00:05:41.259 had to directly, painfully penalize inefficiency. 00:05:41.379 --> 00:05:45.000 Yeah. And that direct causal link, the failure 00:05:45.000 --> 00:05:47.620 of the carrot to act fast enough, is what leads 00:05:47.620 --> 00:05:50.100 us to the most famous and ultimately the most 00:05:50.100 --> 00:05:52.519 world -altering provision of the entire Energy 00:05:52.519 --> 00:05:55.740 Tax Act. The gas guzzler tax. There it is. I 00:05:55.740 --> 00:05:58.160 mean, just the name alone tells you they were 00:05:58.160 --> 00:06:00.560 done playing nice. Oh, absolutely. This is where 00:06:00.560 --> 00:06:03.540 the legislation bared its teeth. The act created 00:06:03.540 --> 00:06:05.980 a hefty tax specifically designed to hit the 00:06:05.980 --> 00:06:08.800 sales of vehicles that had official EPA estimated 00:06:08.800 --> 00:06:11.459 gas mileage falling below certain specified levels. 00:06:11.920 --> 00:06:14.040 And what is truly remarkable when you look at 00:06:14.040 --> 00:06:16.660 the source text is how severely the penalties 00:06:16.660 --> 00:06:19.120 wrapped up over time. Oh, they skyrocketed. They 00:06:19.120 --> 00:06:21.600 really did. The government engineered this tax 00:06:21.600 --> 00:06:24.819 not just as a slight deterrent, but as a financial 00:06:24.819 --> 00:06:28.160 guillotine to force compliance. Wow. The pain 00:06:28.160 --> 00:06:30.899 of ignoring it. was designed to become completely 00:06:30.899 --> 00:06:34.160 unbearable for auto manufacturers. Let's trace 00:06:34.160 --> 00:06:36.180 the escalating penalties. OK, let's hear the 00:06:36.180 --> 00:06:40.459 numbers. So in 1980, the tax for a vehicle with 00:06:40.459 --> 00:06:43.319 a fuel efficiency of 14 to 15 miles per gallon 00:06:43.319 --> 00:06:46.579 was a relatively modest $200. Right, 200 bucks. 00:06:47.000 --> 00:06:50.220 But if the vehicle was a total boat getting 13 00:06:50.220 --> 00:06:53.759 miles per gallon or below, the tax was $550. 00:06:54.339 --> 00:06:57.790 Which, you know, in 1980 money. is a sting. Definitely. 00:06:58.069 --> 00:07:00.569 But maybe a luxury car buyer just swallows that 00:07:00.569 --> 00:07:03.730 $550 cost as the price of doing business to get 00:07:03.730 --> 00:07:05.790 their big V8 engine, right? Right. Maybe just 00:07:05.790 --> 00:07:07.689 eat the cost. But then you jump forward just 00:07:07.689 --> 00:07:09.649 a half decade and the gloves completely come 00:07:09.649 --> 00:07:13.709 off. Well, they do. By 1985 and 1986, the stakes 00:07:13.709 --> 00:07:16.740 were raised exponentially. that 14 to 15 miles 00:07:16.740 --> 00:07:19.220 per gallon tier. Yeah. The penalty jumped from 00:07:19.220 --> 00:07:23.100 $200 all the way up to $1 ,800 in 1985. That 00:07:23.100 --> 00:07:26.019 is a massive jump. And for those truly inefficient 00:07:26.019 --> 00:07:28.939 vehicles getting below 12 .5 miles per gallon, 00:07:29.480 --> 00:07:34.459 the tax was hiked in 1986 to a massive $3 ,850. 00:07:34.759 --> 00:07:37.120 It is a staggering increase. And the source actually 00:07:37.120 --> 00:07:39.800 outlines the current tax levels, too, which surprisingly 00:07:39.800 --> 00:07:42.319 have been locked in place since January 1st, 00:07:42.339 --> 00:07:45.569 1991. Right. If a vehicle gets an unadjusted 00:07:45.569 --> 00:07:49.449 combined MPG of at least 22 .5, they clear the 00:07:49.449 --> 00:07:52.930 bar. They pay nothing. No tax. Safe. Yep. But 00:07:52.930 --> 00:07:55.209 from there, it scales up across 11 different 00:07:55.209 --> 00:07:58.089 penalty brackets. By the time you get to a vehicle 00:07:58.089 --> 00:08:00.970 getting less than 12 .5 miles per gallon, the 00:08:00.970 --> 00:08:04.829 tax is a whopping $7 ,700. That's incredible. 00:08:04.949 --> 00:08:06.850 I really want to ground that number for you listening. 00:08:07.290 --> 00:08:10.569 Think about car prices in 1991. OK. A brand new 00:08:10.569 --> 00:08:13.009 standard family sedan might have cost around 00:08:13.009 --> 00:08:15.689 $15 ,000. Wow. So the government is basically 00:08:15.689 --> 00:08:19.310 saying, if you build a wildly inefficient car, 00:08:19.790 --> 00:08:22.709 you owe the IRS a penalty that is literally half 00:08:22.709 --> 00:08:25.029 the retail value of the vehicle. Half the value. 00:08:25.050 --> 00:08:28.139 That is a market killing penalty. And that is 00:08:28.139 --> 00:08:32.100 a hard, inescapable mathematical reality applied 00:08:32.100 --> 00:08:34.919 to every single non -compliant vehicle that rolls 00:08:34.919 --> 00:08:37.580 off the assembly line. Speaking of mathematical 00:08:37.580 --> 00:08:40.860 reality, we have to talk about how the government 00:08:40.860 --> 00:08:42.940 actually calculates this because the formula 00:08:42.940 --> 00:08:45.000 and the source material is fascinating. Pretty 00:08:45.000 --> 00:08:47.440 dense. It is. They don't just take the sticker 00:08:47.440 --> 00:08:51.759 on the window. The EPA uses a combined fuel economy 00:08:51.759 --> 00:08:55.259 MPG value to determine the exact tax liability. 00:08:55.799 --> 00:09:00.200 It is weighted 55 % city driving and 45 % highway 00:09:00.200 --> 00:09:02.500 driving. Makes sense. But the equation they use 00:09:02.500 --> 00:09:06.000 to calculate the unadjusted MPG is pretty intense. 00:09:06.340 --> 00:09:08.519 Instead of boring everyone with the exact decimal 00:09:08.519 --> 00:09:10.600 points from the text, think of it like calculating 00:09:10.600 --> 00:09:13.019 your final grade in a class where the final exam 00:09:13.019 --> 00:09:15.740 is heavily weighted. OK, good analogy. The EPA 00:09:15.740 --> 00:09:17.940 takes your city driving, applies its 50 % 45 00:09:17.940 --> 00:09:20.519 % weight, takes your highway driving at 45 % 00:09:20.519 --> 00:09:23.340 and runs it through a specific harmonic average 00:09:23.340 --> 00:09:26.059 formula, and then they add a constant of 0 .15 00:09:26.059 --> 00:09:28.360 at the very end just to finalize the approximation. 00:09:28.639 --> 00:09:30.639 It looks like a high school calculus nightmare. 00:09:31.039 --> 00:09:34.399 It does, but the reason it is a complex harmonic 00:09:34.399 --> 00:09:37.240 average, rather than just simple addition and 00:09:37.240 --> 00:09:40.240 division, is actually brilliant. Really? Why? 00:09:40.539 --> 00:09:43.679 It is complex algebra deliberately designed to 00:09:43.679 --> 00:09:47.320 prevent carmakers from gaining the system. I 00:09:47.320 --> 00:09:49.480 see. Yeah, you can't just build a car with gears 00:09:49.480 --> 00:09:52.279 optimized only to coast efficiently on the highway 00:09:52.279 --> 00:09:55.460 to offset terrible city mileage. The formula 00:09:55.460 --> 00:09:57.940 mathematically forces the manufacturer to build 00:09:57.940 --> 00:10:00.899 a genuinely well -rounded, efficient engine. 00:10:01.120 --> 00:10:03.320 OK, that makes a lot of sense. And because that 00:10:03.320 --> 00:10:05.460 calculation is technically an approximation based 00:10:05.460 --> 00:10:08.120 on the fuel economy guide, the text notes the 00:10:08.120 --> 00:10:10.879 actual tax liability might even be off by one 00:10:10.879 --> 00:10:13.840 entire tax bracket in reality. Exactly. And to 00:10:13.840 --> 00:10:16.080 figure out the total penalty, which the formula 00:10:16.080 --> 00:10:19.159 calls P sub T, the manufacturer has to sum up 00:10:19.159 --> 00:10:21.340 the specific tax bracket penalty and multiply 00:10:21.340 --> 00:10:23.600 it by the exact number of non -compliant cars 00:10:23.600 --> 00:10:26.200 they sold. Right. Volume matters. Sell 10 ,000 00:10:26.200 --> 00:10:28.519 cars in that absolute bottom tier, and you are 00:10:28.519 --> 00:10:32.539 multiplying 10 ,000 by $7 ,700. Which brings 00:10:32.539 --> 00:10:34.580 up a crucial clarification about who's actually 00:10:34.580 --> 00:10:37.470 writing the check here. Right. Who pays it? This 00:10:37.470 --> 00:10:40.049 tax is collected by the Internal Revenue Service 00:10:40.049 --> 00:10:43.230 and it is normally paid directly by the manufacturer 00:10:43.230 --> 00:10:45.950 or the vehicle importer. Okay. You, the consumer, 00:10:46.509 --> 00:10:50.289 are not writing a $7 ,700 check directly to the 00:10:50.289 --> 00:10:53.029 IRS when you buy the car off the lot. Right. 00:10:53.190 --> 00:10:56.610 Okay, so if I put myself in the shoes of a car 00:10:56.610 --> 00:11:00.049 manufacturer in the 1980s, I am looking at this 00:11:00.049 --> 00:11:03.370 and I'm sweating. Oh, totally. panic mode. If 00:11:03.370 --> 00:11:06.529 they're paying millions upon millions of dollars 00:11:06.529 --> 00:11:09.210 in IRS penalties and they're being forced to 00:11:09.210 --> 00:11:12.710 redesign their entire fleet, basic business logic 00:11:12.710 --> 00:11:15.629 says this must have devastated the auto industry's 00:11:15.629 --> 00:11:17.230 bottom line. You would think so. Like they should 00:11:17.230 --> 00:11:19.529 be going bankrupt. The only way they survive 00:11:19.529 --> 00:11:21.950 that kind of financial hit is if they drastically 00:11:21.950 --> 00:11:24.210 jacked up the prices on the cars they did manage 00:11:24.210 --> 00:11:26.309 to sell. Is that what happened? Well, what's 00:11:26.309 --> 00:11:29.129 fascinating here is The economic impact detailed 00:11:29.129 --> 00:11:32.309 in the source reveals a complete paradox. A paradox? 00:11:32.490 --> 00:11:35.950 Yes. The tax successfully created a massive existential 00:11:35.950 --> 00:11:38.830 incentive for manufacturers to meet that minimum 00:11:38.830 --> 00:11:43.250 22 .5 MPG requirement. Because of those crushing 00:11:43.250 --> 00:11:47.389 penalties, vehicles that got under 22 .5 MPG 00:11:47.389 --> 00:11:49.570 were functionally eliminated from the mainstream 00:11:49.570 --> 00:11:51.990 passenger car market. You just couldn't afford 00:11:51.990 --> 00:11:55.620 to build them anymore. Obviously. So this caused 00:11:55.620 --> 00:11:58.919 overall passenger vehicle sales volume to decrease 00:11:58.919 --> 00:12:02.019 by approximately 0 .5 percent. OK, so they are 00:12:02.019 --> 00:12:04.820 moving fewer units off the lot. Less volume. 00:12:05.120 --> 00:12:08.419 Exactly. But despite selling fewer cars, the 00:12:08.419 --> 00:12:11.019 auto manufacturers actually increased their total 00:12:11.019 --> 00:12:14.000 sales revenues. Wait, really? Yes. That is the 00:12:14.000 --> 00:12:17.019 paradox. They sold less, but they made more money. 00:12:17.120 --> 00:12:19.029 Yep. And I guess it all comes down to the concept 00:12:19.029 --> 00:12:21.529 of added value, right? Come on. To meet these 00:12:21.529 --> 00:12:23.990 strict new standards, the manufacturers were 00:12:23.990 --> 00:12:26.169 suddenly forced to make a much greater use of 00:12:26.169 --> 00:12:29.009 advanced fuel economy technology. We're talking 00:12:29.009 --> 00:12:32.230 fuel injection, lighter materials, better aerodynamics. 00:12:32.409 --> 00:12:34.289 Right, the cars got way better. And because the 00:12:34.289 --> 00:12:36.389 vehicles were now technologically more advanced, 00:12:36.750 --> 00:12:39.350 the overall price of the products increased. 00:12:39.649 --> 00:12:41.809 Exactly. They passed the cost of that massive 00:12:41.809 --> 00:12:44.370 R &D innovation directly onto the consumer. And 00:12:44.370 --> 00:12:47.080 the consumers just paid it. They did. And the 00:12:47.080 --> 00:12:49.419 psychology of the consumer shifted to accept 00:12:49.419 --> 00:12:52.659 it. Buyers were willing to pay a premium for 00:12:52.659 --> 00:12:56.440 the added value of this new, high -tech, fuel 00:12:56.440 --> 00:12:59.659 -efficient green technology. So the baseline 00:12:59.659 --> 00:13:02.159 price of automobiles permanently shifted upward, 00:13:02.759 --> 00:13:04.899 and manufacturers ultimately increased their 00:13:04.899 --> 00:13:07.379 profit margins despite the lower sales volume. 00:13:07.559 --> 00:13:10.539 That is wild. They adapted, they innovated, and 00:13:10.539 --> 00:13:12.860 they made more money. A total win for them, weirdly. 00:13:13.120 --> 00:13:15.679 But there is another wild economic wrinkle in 00:13:15.679 --> 00:13:17.340 the text, and this one has to do with the fuel 00:13:17.340 --> 00:13:20.220 sector itself. Oh yes. The entire point of the 00:13:20.220 --> 00:13:23.879 1978 law was to reduce gas consumption. You would 00:13:23.879 --> 00:13:25.940 assume that if the government successfully forces 00:13:25.940 --> 00:13:28.379 everyone to drive highly fuel -efficient vehicles, 00:13:28.740 --> 00:13:30.980 the oil and gas companies would face a massive 00:13:30.980 --> 00:13:33.120 loss in revenue because people are buying half 00:13:33.120 --> 00:13:35.159 as much gas. You would definitely assume that. 00:13:35.539 --> 00:13:37.549 But the source points out a potential... paradox 00:13:37.549 --> 00:13:39.649 that behavioral economists know all too well. 00:13:39.789 --> 00:13:42.110 OK, lay it on me. It is often referred to as 00:13:42.110 --> 00:13:45.649 the Jevons paradox. The fuel sector might indeed 00:13:45.649 --> 00:13:49.210 lose revenue unless, and this is key, the sheer 00:13:49.210 --> 00:13:51.549 availability of highly fuel efficient vehicles 00:13:51.549 --> 00:13:54.909 alters human behavior. OK, how so? Think about 00:13:54.909 --> 00:13:57.809 the mechanics of it. If it suddenly cost you 00:13:57.809 --> 00:14:00.350 half as much money to drive a mile, you might 00:14:00.350 --> 00:14:03.029 just decide to drive twice as many miles. Oh. 00:14:03.659 --> 00:14:06.419 It's a behavioral trap. Exactly. Like if your 00:14:06.419 --> 00:14:10.299 old 1970s V8 sedan cost you 20 bucks just to 00:14:10.299 --> 00:14:12.320 drive across town, you stayed home. You consolidated 00:14:12.320 --> 00:14:14.500 your errands. Right. You planned ahead. But if 00:14:14.500 --> 00:14:17.340 you're new, government -mandated, efficient car 00:14:17.340 --> 00:14:20.539 does the same trip for five bucks. Suddenly you're 00:14:20.539 --> 00:14:22.980 willing to commute 45 minutes to work. You take 00:14:22.980 --> 00:14:25.960 more weekend road trips. The extreme vehicle 00:14:25.960 --> 00:14:29.019 efficiency actually subsidized suburban sprawl. 00:14:29.080 --> 00:14:31.399 And that sprawl ate up all the gas the government 00:14:31.399 --> 00:14:33.940 was trying to save in the first place. The irony 00:14:33.940 --> 00:14:37.059 is palpable. The law made driving cheaper, which 00:14:37.059 --> 00:14:39.799 encouraged more driving, partially negating the 00:14:39.799 --> 00:14:42.620 entire conservation effort. Man. So to recap 00:14:42.620 --> 00:14:45.879 the story so far. The auto manufacturers successfully 00:14:45.879 --> 00:14:48.159 adapted their passenger cars to the strict new 00:14:48.159 --> 00:14:50.360 rules, they figured out how to charge a premium 00:14:50.360 --> 00:14:52.679 and make even more money doing it, and consumers 00:14:52.679 --> 00:14:54.480 started driving further. That's the summary. 00:14:54.899 --> 00:14:57.019 But while the executives in Detroit were crunching 00:14:57.019 --> 00:14:59.340 all those harmonic average calculus formulas, 00:14:59.860 --> 00:15:03.179 they noticed a massive glaring omission in the 00:15:03.179 --> 00:15:06.120 actual text of the law. And this single omission 00:15:06.120 --> 00:15:09.480 is the pivot point for modern American transportation. 00:15:09.860 --> 00:15:12.730 Here's where it gets really interesting. The 00:15:12.730 --> 00:15:17.330 gas guzzler tax had a blind spot. A massive landscape 00:15:17.330 --> 00:15:19.909 -altering blind spot. Oh yeah. The tax of the 00:15:19.909 --> 00:15:22.429 law expressly stated that the tax applied only 00:15:22.429 --> 00:15:25.690 to passenger cars. Trucks, sport utility vehicles, 00:15:25.850 --> 00:15:28.269 and minivans were completely exempt. Totally 00:15:28.269 --> 00:15:30.909 immune. They were not covered by the tax at all. 00:15:31.090 --> 00:15:33.850 Zero penalties. And to understand the why... 00:15:33.610 --> 00:15:36.370 behind this glaring loophole. We have to look 00:15:36.370 --> 00:15:39.370 fairly at the historical context of 1978. Right. 00:15:39.429 --> 00:15:41.350 What were they thinking? Well, in the late 70s, 00:15:41.529 --> 00:15:43.429 trucks and early utility vehicles were simply 00:15:43.429 --> 00:15:46.210 not mainstream consumer options. They were rugged, 00:15:46.509 --> 00:15:49.429 uncomfortable, utilitarian machines used almost 00:15:49.429 --> 00:15:51.850 exclusively for commercial purposes. Like farming 00:15:51.850 --> 00:15:54.669 and construction. Exactly. Hauling heavy goods. 00:15:55.250 --> 00:15:57.070 Because they were rarely used for everyday non 00:15:57.070 --> 00:15:59.289 -commercial driving, Congress simply didn't view 00:15:59.289 --> 00:16:01.409 them as consumer passenger vehicles when they 00:16:01.409 --> 00:16:04.330 drafted the legislation. They figured, why hit 00:16:04.330 --> 00:16:08.750 a farmer with a $7 ,700 tax just because his 00:16:08.750 --> 00:16:11.409 work equipment needs a massive engine to pull 00:16:11.409 --> 00:16:13.590 a tractor out of the mud? Right. It makes total 00:16:13.590 --> 00:16:16.029 sense on paper. You don't want to penalize American 00:16:16.029 --> 00:16:18.820 industry. But in the real world, this exemption, 00:16:19.100 --> 00:16:22.460 combined with the massive IRS penalties on passenger 00:16:22.460 --> 00:16:25.700 cars, became a death sentence for a very specific 00:16:25.700 --> 00:16:28.960 beloved type of vehicle. Because up until this 00:16:28.960 --> 00:16:31.700 point, American roads were dominated by the classic 00:16:31.700 --> 00:16:35.340 full -size car. We're talking about those massive 00:16:35.340 --> 00:16:38.820 boat -like sedans from the 1960s and 70s. The 00:16:38.820 --> 00:16:41.460 iconic land yachts. The cars that floated down 00:16:41.460 --> 00:16:42.940 the highway and felt like you were driving a 00:16:42.940 --> 00:16:45.519 living room sofa. But because of the gas guzzler 00:16:45.519 --> 00:16:48.179 tax, combined with the general economic inflation 00:16:48.179 --> 00:16:50.960 of the late 70s and early 80s, the successive 00:16:50.960 --> 00:16:53.860 downsizing of American passenger autos began. 00:16:53.960 --> 00:16:56.480 They had to shrink. The classic American full 00:16:56.480 --> 00:16:58.519 -size car, as it had been known and loved for 00:16:58.519 --> 00:17:00.919 decades, was effectively killed off by the federal 00:17:00.919 --> 00:17:03.299 government. Rest in peace. The manufacturers 00:17:03.299 --> 00:17:05.619 just couldn't afford the IRS penalties to keep 00:17:05.619 --> 00:17:08.400 building them with giant V8s, and consumers couldn't 00:17:08.400 --> 00:17:10.940 afford the gas to keep driving them. But here 00:17:10.940 --> 00:17:14.319 is the critical psychological factor. the American 00:17:14.319 --> 00:17:18.160 consumer still wanted size. They still wanted 00:17:18.160 --> 00:17:21.440 interior space. They wanted to feel safe, surrounded 00:17:21.440 --> 00:17:24.220 by tons of steel. And the auto manufacturers, 00:17:24.539 --> 00:17:26.980 looking at their balance sheets, knew they desperately 00:17:26.980 --> 00:17:29.119 needed to give consumers the size they demanded. 00:17:29.440 --> 00:17:31.700 But they had to do it without triggering the 00:17:31.700 --> 00:17:34.940 massive IRS penalties associated with large passenger 00:17:34.940 --> 00:17:38.160 cars. Precisely. So imagine you are the CEO of 00:17:38.160 --> 00:17:41.559 an auto company in 1983. You can't afford to 00:17:41.559 --> 00:17:43.759 build the big passenger cars your customers want 00:17:43.759 --> 00:17:46.859 because of the tax. You look at a rugged exempt 00:17:46.859 --> 00:17:48.859 pickup truck. You look at the tax code loophole 00:17:48.859 --> 00:17:51.319 and a massive light bulb goes off. Dang. You 00:17:51.319 --> 00:17:53.519 realize you have to pivot and you have to pivot 00:17:53.519 --> 00:17:55.819 fast. And according to the historical timeline 00:17:55.819 --> 00:17:58.420 in the text, the industry moved with incredible 00:17:58.420 --> 00:18:01.359 speed. How fast. It took just one product cycle 00:18:01.359 --> 00:18:03.680 for the market to fully exploit this loophole. 00:18:04.180 --> 00:18:07.299 By 1984, the very first modern SUVs were introduced 00:18:07.299 --> 00:18:10.460 to the mainstream public. Specifically, the Jeep 00:18:10.460 --> 00:18:14.880 Cherokee XJ and the Chevrolet S10 Blazer. Because 00:18:14.880 --> 00:18:16.980 these vehicles were technically classified under 00:18:16.980 --> 00:18:20.119 the law as light trucks or utility vehicles, 00:18:20.619 --> 00:18:23.200 they completely bypassed the gas guzzler tax. 00:18:23.279 --> 00:18:25.299 They just drove right through the loophole. He 00:18:25.299 --> 00:18:27.849 really did. And that opened the floodgates. The 00:18:27.849 --> 00:18:30.410 federal classification exemption became the ultimate 00:18:30.410 --> 00:18:32.950 design prompt for the next generation of American 00:18:32.950 --> 00:18:35.670 transportation. Ford really saw the writing on 00:18:35.670 --> 00:18:37.529 the wall here, and they took it to the next level. 00:18:37.529 --> 00:18:39.869 Oh, big time. They capitalized on this shift 00:18:39.869 --> 00:18:43.849 by introducing the Ford Explorer. And the genius 00:18:43.849 --> 00:18:46.329 of the Explorer was that Ford didn't market it 00:18:46.329 --> 00:18:49.650 as a rugged work vehicle for contractors. They 00:18:49.650 --> 00:18:52.650 transformed the SUV into the common person's 00:18:52.650 --> 00:18:55.190 luxury vehicle. They completely changed the cultural 00:18:55.190 --> 00:18:56.849 perception of what a truck could be. Exactly. 00:18:56.880 --> 00:19:00.140 Wait, yes. And the source notes, they used extensive 00:19:00.140 --> 00:19:02.480 cross marketing to achieve this psychological 00:19:02.480 --> 00:19:05.119 shift, most famously partnering with the Northwest 00:19:05.119 --> 00:19:07.880 Clothier, Eddie Bauer. Ah, the Eddie Bauer edition. 00:19:08.200 --> 00:19:10.819 They slapped the Eddie Bauer logo on it, threw 00:19:10.819 --> 00:19:14.000 in premium leather seats, added upscale trim, 00:19:14.059 --> 00:19:17.559 and suddenly driving a vehicle with a truck classification 00:19:17.559 --> 00:19:19.920 wasn't about hauling lumber on a job site. No, 00:19:19.940 --> 00:19:22.440 not at all. It was about lifestyle. It was about 00:19:22.440 --> 00:19:25.819 luxury, suburban status, and outdoor aesthetics. 00:19:25.960 --> 00:19:28.950 Yeah. all while legally dodging the massive gas 00:19:28.950 --> 00:19:32.349 guzzler tax that killed the luxury sedan. Which, 00:19:32.670 --> 00:19:34.369 you know, this raises an important question. 00:19:34.470 --> 00:19:37.250 Yeah. And it is one that critics of the gas guzzler 00:19:37.250 --> 00:19:39.569 tax point out quite forcefully in our source 00:19:39.569 --> 00:19:41.769 material. OK, what do they say? Well, when we 00:19:41.769 --> 00:19:43.670 look at the data today, we see that the average 00:19:43.670 --> 00:19:45.829 fuel economy of the U .S. passenger car fleet 00:19:45.829 --> 00:19:48.970 has increased significantly since 1978. Sure. 00:19:49.349 --> 00:19:51.970 But critics argue that celebrating those passenger 00:19:51.970 --> 00:19:54.609 car efficiency numbers is actually highly misleading. 00:19:54.750 --> 00:19:56.630 Right. And it is important for you listening 00:19:56.630 --> 00:19:59.210 that we look at what the critics say completely 00:19:59.210 --> 00:20:01.789 impartially here. We aren't taking sides. We're 00:20:01.789 --> 00:20:04.410 just reporting the argument from the text. Their 00:20:04.410 --> 00:20:07.309 argument is that the celebrated efficiency numbers 00:20:07.309 --> 00:20:10.450 for passenger cars completely ignore the massive 00:20:10.450 --> 00:20:13.049 dominant market share that has been taken over 00:20:13.049 --> 00:20:16.390 by midsize and full -size SUVs, which are classified 00:20:16.390 --> 00:20:19.799 as light trucks. Exactly. The critics contend 00:20:19.799 --> 00:20:22.079 that the psychological drivers of the American 00:20:22.079 --> 00:20:25.200 consumer never actually changed. Only the shape 00:20:25.200 --> 00:20:27.940 of the vehicle did. Interesting. If you ask a 00:20:27.940 --> 00:20:30.680 consumer today their stated reasons for purchasing 00:20:30.680 --> 00:20:33.460 an SUV, they will likely list the desire for 00:20:33.460 --> 00:20:36.059 comfort, the need for ample interior room for 00:20:36.059 --> 00:20:38.819 their family, and a perception of safety based 00:20:38.819 --> 00:20:41.059 on the sheer physical size and height of the 00:20:41.059 --> 00:20:43.630 vehicle. Which are the exact same reasons people 00:20:43.630 --> 00:20:46.650 bought those massive, now obsolete, American 00:20:46.650 --> 00:20:48.730 full -size cars from the 1950s straight through 00:20:48.730 --> 00:20:51.789 the 1970s. Yep, same exact psychology. People 00:20:51.789 --> 00:20:53.890 still wanted the giant living room sofa car, 00:20:53.950 --> 00:20:55.789 just had to be lifted two feet off the ground, 00:20:55.930 --> 00:20:58.069 given four -wheel drive, and officially called 00:20:58.069 --> 00:21:02.190 a utility vehicle to avoid a $7 ,700 IRS bill. 00:21:02.470 --> 00:21:05.349 And that is the absolute crux of the critic's 00:21:05.349 --> 00:21:07.980 perspective. They contend that the overwhelming 00:21:07.980 --> 00:21:10.500 dominance of the modern SUV on today's roads 00:21:10.500 --> 00:21:14.519 is a direct, unintended result of the gas guzzler 00:21:14.519 --> 00:21:17.660 tax. Because the government failed to apply the 00:21:17.660 --> 00:21:20.339 tax uniformly to all consumer vehicles, they 00:21:20.339 --> 00:21:23.279 created an artificial, massive market advantage 00:21:23.279 --> 00:21:26.640 for SUVs. The tax code essentially chose the 00:21:26.640 --> 00:21:28.400 winner of the automotive market for the next 00:21:28.400 --> 00:21:31.839 50 years. It is genuinely wild to think about 00:21:31.839 --> 00:21:33.779 the chain reaction here, so what does this all 00:21:33.779 --> 00:21:36.259 mean? Good question. We started this deep dive 00:21:36.259 --> 00:21:40.720 looking at a noble, urgent plan from 1978. Lawmakers, 00:21:40.779 --> 00:21:43.279 facing a terrifying energy crisis and lines at 00:21:43.279 --> 00:21:45.819 the gas pumps, tried to force Americans into 00:21:45.819 --> 00:21:48.480 highly fuel -efficient cars using a small carat 00:21:48.480 --> 00:21:51.599 of tax credits and a massive stick of steep IRS 00:21:51.599 --> 00:21:53.779 penalties. Right. But instead of just creating 00:21:53.779 --> 00:21:57.400 a utopia of hyper -efficient tiny sedans, the 00:21:57.400 --> 00:21:59.890 legislation effectively killed the classic American 00:21:59.890 --> 00:22:02.329 full -size car. It spurred a loophole that accidentally 00:22:02.329 --> 00:22:04.809 flooded our modern roads with massive luxury 00:22:04.809 --> 00:22:07.069 SUVs. It's the ultimate unintended consequence. 00:22:07.450 --> 00:22:09.529 So the next time you are stuck in traffic, surrounded 00:22:09.529 --> 00:22:11.829 by huge utility vehicles that have never seen 00:22:11.829 --> 00:22:14.130 a speck of farm dirt, you are literally looking 00:22:14.130 --> 00:22:17.910 at the unintended legacy of a 1970s tax loophole. 00:22:18.269 --> 00:22:20.529 It is the home renovation that accidentally rebuilt 00:22:20.529 --> 00:22:23.190 the entire neighborhood. Which leaves us with 00:22:23.190 --> 00:22:25.490 a lingering thought to consider. for you listening 00:22:25.490 --> 00:22:28.890 at home. If a single logical exemption in a 1978 00:22:28.890 --> 00:22:32.109 tax code could unintentionally rewrite the entire 00:22:32.109 --> 00:22:34.950 physical and cultural landscape of consumer transportation, 00:22:35.450 --> 00:22:37.230 how many of today's well -intentioned environmental 00:22:37.230 --> 00:22:40.029 policies are currently creating the next SUV 00:22:40.029 --> 00:22:43.390 loophole? A massive structural shift in our society 00:22:43.390 --> 00:22:45.309 that won't become obvious to us for another 40 00:22:45.309 --> 00:22:45.670 years.