In VW tailpipe scandal, how should the government respond?

General Motors’ and Volkswagen’s long histories have often intertwined with one another and with the federal government. In trying to compete with VW in the late 1950s, GM developed its own rear-engine, air-cooled car to out-do the Beetle. Safety problems with the Corvair ended up changing permanently the relationship between a major industry and the federal government.

Variations on the Corvair scenario have occurred periodically ever since. The Ford Pinto gas tank. The Audi auto-acceleration. Just last week, GM was assessed about a billion dollars over problems with an ignition switch attributed to at least 13 deaths. The issue started coming to light years ago, and GM eventually recalled more than 8 million cars.

VW’s troubles are just starting and may involve multiple governments — potentially anywhere it sold a car with a particular diesel engine. This morning the company pegs the number of cars at 11 million. Unlike GM, VW faces not a driver life-and-death issue but rather one of allegedly using internal software to cheat tailpipe emissions tests.

I believe the story is only one tenth understood at this point, so I am withholding judgment. I do  confess to being a VW enthusiast, but my current model has a regular engine, not diesel. The offense in the U.S. is against the EPA, the regulations of which require the somewhat conflicting qualities of ever-lower emissions and ever-rising gas mileage. So it plays into  the global warming agenda, with all the political overtones that engenders.

Let’s presume the VW infraction occurred exactly as we now understand it — crafty software deliberately inserted into the car management system for the purpose of faking emissions results. It’s a serious issue, a direct violation of law and regulation. Even if you don’t like a law or regulation, you can’t simply flout it.  Certainly not on this scale. So the question is, what is a proper and proportional response by the government?

News reports state the EPA could levy fines upwards of $18 billion. Now the Justice Department is pursuing possible criminal charges. As a free marketeer and respecter of the rule of law, I favor criminal action against those responsible.

Here’s why.

According to its web site, VW worldwide has 592,586 employees, direct and working in dealers and service organizations. They produce 41,000 cars every day, all of which must be distributed, sold and serviced.  Just as very few of General Motors’ 212,000 employees had anything to do with ignition switches, very few of VW’s dependents even knew about, much less had a hand in engineering deception into the diesel cars. Those that did should face the legal ramifications. For some, it could mean jail time.

This would have the benefit of shedding light on the efficacy of regulatory standards and the engineering challenges they pose.

A gigantic fine might be legally admissible and satisfy some people’s desire for revenge against a giant corporation. But fines penalize employees, others in the sales and service ecosystem, shareholders and ultimately those customers who unwittingly bought one of the cars or who choose to still by a VW. It does economic damage in excess of the damage done by whatever came from the tailpipes of the affected cars.

Plenty of costly market repercussion will hit VW without an EPA fine. The company has already set aside billions to recall and fix the cars out there with the bad software. Potentially thousands of customers will find another brand.  Those stuck with the questionable cars, even when they’re fixed, might find they have different characteristics that when people test drove them — making the cars something of a bill of goods.  Reputational damage is tangible and expensive. I’ll bet 50 tort lawyer firms are preparing to sue, and they will probably pull in plaintiffs who live next door to diesel Jetta owners. And anyhow, a fine won’t absorb the diesel particulate matter that escaped — itself an unknown quantity.

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