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.

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  1. Speedmaster says:

    Well-stated! It’s so important to look at incentives and secondary effects, not just intentions.

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  2. Helen says:

    Until “new” cars make more use of recycled materials (steel and other components), trying to shift people into new vehicles will be net negative for the environment, I think. Amortizing the lifecycle costs of car and truck manufacture, use, and disposal over those extra 3 to 12, heck, my father-in-law drove his Jetta for 20 years – makes a big difference. If many more people decided to artificially shorten the life of their vehicles, we’d have a much worse problem.

    That said, I do think that targeting programs like this at high-use (and thus massively high emission) clunkers — ancient taxis, buses, commercial trucks — could yield a very good “environmental” return.

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  3. Paul says:

    Re: #1 d: Because that’s tough to do politically. Candidate X doesn’t care about poor people, he raised gas taxes! McCain is playing that card on Obama for not embracing the gas holiday despite the fact it doesn’t even work.

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  4. Scott says:

    econobiker is correct, California started a similar program almost 20 years ago. Here’s why I make my jab about New Yorkers thinking they are the center of the universe :)

    I do agree that the program is worthless. From a Freakonomics point of view, we can ask when does an automobile get retired? I would say, it’s when the cost of repairing is greater than the total value of the car. Anyone who has owned a car can admit that repair bills can add up fast. $1200 wouldn’t even cover the labor cost of an engine overhaul.

    My advice to New York…forget the Cash for Clunkers program, the cars will fade out naturally. Focus on incentives to buyers of efficient new cars. Start programs for low income buyers, with incentives, to purchase efficient used cars.

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  5. Mike B says:

    A better, more sustainable program would be for the government to certify carbon offsets for vehicles taken off the road based on how much useful life they have left (computed from millage and vehicle age). Vehicles are turned in, given an analysis on the amount of CO2 saved if the car is scrapped now as opposed to when it will naturally stop working (compared with a target average CO2 level so you won’t get $ for scrapping a Geo Metro) and then allow a private car dealer accepting/scrapping the car to sell a carbon offset of the same amount. The competitive dealer would provide some or most of the offset to the owner of the vehicle on top of the normal trade-in value they can expect today. The dealer then ensures that the car never drives again.

    This programme has the desired environmental effect, prevents scams involving “dead” vehicles or efficient vehicles and properly incentivizes drivers to ditch their vehicle by factoring in environmental benefits. Now of course you’ll need a robust carbon trading marketplace and enforceable caps would give the offsets significant value.

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  6. GW says:

    With scrap rates currently over $300 / ton, why does the government need to get involved in doing this at all?

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  7. Jes says:

    The government could do what Germany does: have vehicle registration costs based on fuel consumption, safety and other factors that make old cars too expensive to use and create incentives for new cars and new car technologies.

    German vehicles also have to pass safety inspections like *we used to have in the 1950s*: the German version goes beyond broken headlights and tire wear to include cosmetic damage on the car body which can “condemn” you vehicle off the road.

    You will see nary a clunker on the German autobahns because of these policies and rules. No doubt these policies helped Germany to sustain *four separate* major auto companies during the post-war years: Daimler, Volkswagen, Porsche and BMW.

    The downside for the US if we followed this lead is that we don’t have alternative transportation readily available for all the vehicles that would leave the roads but never be replaced for economic reasons. However such situations are transient and could be dealt with in some fashion to help ameliorate the temporary impact.

    Given the unparalleled abyss the US economy is still plunging head-long into, it might be wise to consider what war-ravaged economies did to survive the post-war years.

    Nonetheless there seems to be no courage on the part of either politician or citizen generally to do something like this that might actually be effective because abject fear of the short-term discomfort.

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  8. sw says:

    Another problem with these programs arises from the fact that some of the vehicles that are being retired may have been imported from other jurisdictions. Although from an environmental stand point it probably shouldn’t make a difference, most organizations that implement these programs are trying reduce emissions in their jurisdictions and not trying to subsidize the reductions in emissions for other jurisdictions. This makes it quite difficult to measure the impact of the program on the area that it is designed to help.

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