No Cash for Clunkers

Princeton economist Alan Blinder recently proposed a new government program he christened “Cash for Clunkers” in an article in The Times‘s Business section.

Under the program, the government would buy back old cars at above market prices and scrap them. According to Blinder, this would accomplish a policy trifecta: 1) help the environment by getting the most polluting cars off the road; 2) stimulate the economy by getting money in the hands of people who will spend it and increase the demand for new cars; and 3) reduce income inequality by funneling the money to the poor.

I am skeptical of this proposal for a number of reasons.

This plan has the general feel of a gun buyback program, but instead of buying crappy old guns the government is buying crappy old cars.

When it comes to gun buybacks, both the theory and the data could not be clearer in showing that they don’t work. The only guns that get turned in are ones that people put little value on anyway. There is no impact on crime. On the positive side, the “cash for clunkers” program is more attractive than the gun buyback program because, as long as they are being driven, old cars pollute, whereas old guns just sit there.

Still, my guess is that unless the price the government pays for the clunkers is very high, the majority of vehicles that are turned in will not have been driven much, if at all. Indeed, I suspect one of the most visible responses to this program will be a new market for mechanics fixing up cars that don’t run at all just enough so that they can be driven to the government’s lot to collect the cash.

The biggest problem with this policy, however, is the way it distorts long run incentives. Let’s say the rules of the program say that a car must be at least fifteen years old to qualify for a big government subsidy to scrap it. This gives powerful incentives to people with twelve-year-old cars they were planning on scrapping to keep driving them for three more years to collect the government bounty. Instead of reducing the number of clunkers on the road, this program could actually lead to an increase!

It also seems to me that any effect on the demand for new cars would be extremely limited. People who drive clunkers are generally not in the market for new cars. Presumably their replacement car will be a used car. The increased demand for used cars will lead to higher prices for used cars, which will push some buyers towards a new car, but the likely impact on new cars would be small.

Finally, it is not even clear that this program would have such beneficial redistribution effects either. In the short run, it would represent a windfall profit to those who own clunkers. In the long run, however, there is a market for used cars. In response to the program, the price of nine-year-old cars would have to rise enough to offset the increased value associated with a near-clunker someday becoming a clunker that can be sold to the government. The benefits of the program will actually be spread widely over all car owners, not narrowly focused on the poor.

This program highlights some general concerns that arise with government programs. The first is that policies which might be a good idea if implemented as one time, short term programs, can be much less attractive if made permanent because of the way they distort incentives.

I suspect that even if this policy was introduced as a one time program, it would be extended because there would be a constituency for it. The second thing this program highlights is that it is extremely difficult to deal with negative externalities (in this case pollution) by subsidizing them (as this program does). If folks are doing things that we want less of, it makes a lot more sense to punish them for those behaviors (through extra taxes for instance) than to reward them.


Ralph

Twenty-five years ago my Ford F250 with a 351 cid engine was labelled a "gross polluter" by the State of California. At that time, the San Diego County Air Pollution Control District sponsored some 1500 free installations of a triple-action catalytic converter manufactured by a local tech company. The truck has, ever since, passed all smog tests with emissions levels lower than a Toyota Corolla. Carbon monoxide emissions are literally zero, even today. I still have the truck, but I only use it to go to Home Depot or the dump. Though I still need a truck sometimes, it would never pay to replace it. Whatever happened to technology like this cat converter?

Pete

This scheme won't work. Most people driving cars of that age do so for financial reasons. "bangernomics" as it is called is a real science. Some people manage to keep themselves on the road without ever paying more than scrap price for a car, thus paying essentially paying nothing for the cost of purchasing a car.

As the rising price of scrap shows, it raises the minimum price a car sells for. This pushes up the price of all second hand cars. Many many people simply cannot afford a new car of ANY kind, no matter how many tax breaks and incentives and reward programs they are offered.

Raising the minimum value of a second hand car in this way has a detrimental effect on everyone who relies on the second hand market.

Old cars do have much much higher emissions than new ones. However, cars with fuel injection and a catalyst are at least in the same order of magnitude as a new car. Cars like that are rapidly reaching "clunker" age. A friend recently scrapped a perfectly good 10yrold car with a cat and fuel injection, because he couldn't be bothered to change the head gasket, and its market value was the same as its scrap value, so it was easier to replace with a similar car.

No, it has to start with the new cars. It only takes 5 years for a rule applied to new cars to cover half of the cars on the road.

CAFE standards. Proper ones. Now. Get rid of the tax breaks given to SUV buyers. Those are simple things that should have been done ages ago.

Raising fuel tax will have a part to play in the US, but the sharp rise in fuel prices due to the fall of the dollar has really put a squeeze on buyers. I feel the price of fuel should be held at 4 dollars a gallon for the next few years, with the tax rate altered to keep it adjusted. If appropriate economic policies lead to a rise in the value of the dollar, this will be feasible.

Also, roadside emissions tests will be helpful in dealing with people who really don't care how much they pollute, and cheat their way past the regular emissions test. Just pull people over, quickly measure the idle emissions, and ticket any failures.

The key thing is a whopping great tax on new cars, weighted around the current fuel economy and emissions averages. Anything better than average, gets a tax break.. funded by the exponentially larger tax hike on worse than average cars. Then move the tax brackets as the current averages change.

Make it clear that there is a collective responsibility to reduce oil use and emissions, and thus those who burn too much oil will financially subsidise those who make a sacrifice. "If you wont save fuel yourself, you will have to pay someone else to do it for you"

This policy would bring very small efficient new cars down into the price range at which second hand car buyers would consider them seriously. It also creates a massive demand for that kind of car, and so they will be made available.

Remember that car designs are a commodity item. GM has plenty of good small cars to sell. They are made and sold as Vauxhalls in the UK, and Opels on the continent. No development needed, just ship over the tooling. GM really does have a 60mpg 5 seater car it could sell in the US. It just won't. Manufacturers buy and re-badge each others products all the time. In a pinch, american companies can buy a foreign design, change the badge, slap an uglier grille on the front, and start making them in under a year.

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charlie

Why does this column show a picture of a car that hasn't been within a thousand miles of the United States? Guess the Euro's have a few clunkers too.

Eric S

When I am done with my old car, the government will have to buy it! After all, who else would want an old car that barely runs and puts smoke into the stratosphere!
Who is to judge what cars are clunkers? If I don't like the old beater my neighbor is driving, can I have it declared a clunker and have the government pick it up and crush it?
The Walter Mitty in me is just loving the possibilities. Don't menace me with your SUV! I have the government to protect me and to make a better world more to my liking. Clunker owners beware!

martin dijkema

As an engineer and an economist, it always amuses me that economists sit in their offices and try and predict human behavior. Does Mr. Binder really not understand the Law of Unintended Consequences?

Mr. Levitt comes up with some excellent points - one is that it might actually increase the number of clunkers on the road by people keeping their 12 year old cars for another 3 years so they can collect the bounty. Another problem would be bringing already 'dead' cars in fields back to life simply to collect the bounty.

I suspect that academics such as Mr. Binder are so isolated from the outside world that they really have no clue and as such really do not grasp their own discipline very well, or at all. In Amsterdam, in the 1970s, the city government came up with a scheme to have 'free' bicycles on every street corner (cooked up by some economist), so people could use this and leave them at designated points for someone else to use. Needless to say, a five year old could have predicted the outcome - virtually all bicycles were gone from Holland within 48 hours - thousands - only to re-appear in Turkey.

Government that Governs Least, Governs Best.

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Vernon Huffer

Why would anyone except a car dealer or manufacturer like this idea? It is the manufacturing that causes much of the pollution. Consumers should be encouraged to keep their older cars running.

tinajuarez

My 1963 ford falcon got 28 MPG, the old 216 gets 23 MPG in a truck& those wonderful Honda 600s that got 40-55 MPG.. We re-build late 60's cars into highway drivable EVs. Newer cars are not good candidates because the extra steel reinforcing the airbags adds too much weight to make a useful EV.. Better to crush NEW cars, with recyclable plastics and poor mileage. Destroy the evidence of mindless greed and gov't/corporate complicity of the last two decades.

Jeffrey W. Dawson

When they had a no-questions-asked gun buyback program in Orlando, Florida, there were actually some very valuable, rare collectible guns turned in, unfortunately to be destroyed (e.g., priceless Colts). Oddest of all was a surface-to-air missile, though. Destroying old cars would also drive up the price of used car parts, which would hurt those who fix their own cars, not to mention restorers.

Amanda from Montreal

An alternative: follow Montreal's lead and salt the living daylights out of the roads in winter. Old clunkers are literally eaten alive after a few years on the roads.
Bonus: it also kills weeds...

Sabu

If economics is, at its roots, the study of incentives, isn't there quite a difference between how gunowners perceive their guns and how carowners perceive their old clunkers? People who choose not to participate in gun buyback programs, or who try to cheat the system by selling back unwanted guns and keeping others probably have a deeply engrained belief about the right to bear arms that is fundamentally opposed to the purpose of the buyback program in the first place. So, their incentives when examined subjectively, and with an eye to something more than just numbers, can't be easily compared with those of the clunkers owners. While I'm sure people will find innovative new ways to cheat the government clunker buyback program, I have a feeling that clunkers just don't have the same kind of charge (or discharge?) that guns do in American political discourse.

Steve Metz

The big problem with the idea is most of the clunkers out there do not pollute much more than a modern car. These cars that are 15 years old all have O2 sensors and realy will not run at all if there is a problem with emissions.

High gas tax that the proceeds go to alternate energy reasearch and tax credit for hybrid vehicles and cars that get over 40 mpg would be a more valuable use of reasources.

jad

And why do we need these cars off the road? I drive (drove) a 26-year-old car until last spring when at nearly 300K miles, it retired itself, without government interference. It got 25 mpg and in two decades never failed a California smog test. I'm driving a nearly identical car now in another state. Exactly what is so dangerous or evil about this behavior that it needs government correction?

Leon A Davis

The energy required to produce a new vehicle for me to buy is several times the energy I will use to run my 1982 Toyota 4X4 pickup for the next twenty years. I drive less than 10K per year anyway. All these vehicle buyback programs are for is to increase sales for auto companies. End of story. My classic Toy is stone cold reliable and in perfect condition, while my friend's fancy new $40,000 GMC rig has been in the shop a half-dozen times in the three months since he purchased it. Plus, while GM is losing billions and billions, the dealer is giving my buddy the runaround. Go figure.

Barbara Schaffer

California does have such a program for old cars. In California, cars past a certain age do not have to meet the same emission standards as newer cars. In 2004, I replaced my 1973 Volvo with a 1985 model. I would have sold the older car, which was still running, if the state had not offered me $500 for it. (Perhaps it was because of this program that I was forced to give up my old car, since it was becoming very hard to find junkyard parts for it.)

When I turned it in at an authorized junk yard, I had to be able to drive it in and show that it was in all ways operational - they checked that all the signal lights worked.

I think it's a good program because it keeps polluting vehicles off the used car market.

hazbins

I am with those posters who say - let the automobile companies be responsible for it - but as the middle man. Let the government provide incentives for gm, ford, and chrysler to buy back used cars at a premium. Let the govt pay the automobile companies for cars that are destroyed and turned to scrap.

We do this with refrigerators, don't we? Govt incentive to get energy star appliances, companies pick up old frigs.

Pat Garity

1. Just because an old car passes a state smog test doesn't mean that it doesn't pollute. Standards for older were and still are "looser".
2. The money for buy back programs usually comes from industries that pollute. (so called stationary sources) They need "pollution credits".
3. The California program sold pollution credits from scrapped "gross polluters" to stationary sources.
4. As a result the stationary sources could continue to pollute.
5. Vehicles that were "buy backs" in California were required to be crushed.
6. Newer cars (1994-96 and later On Board Diagnostics equipped) are MUCH cleaner than their predecessors.
7. Just because your old "whatever" still gets great mileage doesn't mean it doesn't emit a lot of pollutants.

Dwight

The price of steel is incentive enough.

the phunky physicist

There has never been such a think as the 100 MPg carbuerator, because little energy is lost in a carbuerator, whose only function (before fuel injection) was to mix air and gasoline. There was nothing missing that kept the gasoline from delivering more power.

From my first job at Energy Specialist for UC Berkeley's Energy And Resources Program in the 1970s I have been the one the scammers (and victims) all contact about repeated violations --- of the Laws of Thermodynamics.

Build a light weight car and you can get high fuel economy -- but why ruin it with a carbuerator when fuel injection is much better?

Dendroica

12 year old cars are still less polluting than 20 years old vehicles, and removing those would not have as great an impact on pollution. As for fuel efficiency, most 12-25 year old vehicles are just as efficient as modern cars, due to reduced mass but they are less safe. Since we must assume that most of these vehicles are still being driven for economic, rather than simple choice reasons, many will not be removed from the vehicle pool simply by providing small rebates. There are ways to address all of your problems, such as having the vehicles require at least a two continuous year registration by the current owner (to prevent beaters being turned in by used car dealers) and requiring a national emissions test might be a better idea. Pass the test, the government pays for the test plus gives you a $100 gas voucher. Fail the test and the vehicle must be repaired within 30 days, or you can't register it in any state again until it is repaired.

In the past you've been much better on concepts; this wasn't your best work. Sometimes economists miss the little details that people who actually know about the subject might have at their disposal.

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Adam

For all you kiddies out in TV land.

Commenter #89 works for a foundation created by a grant from Shell, the oil company.