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.

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.



View All Comments »
  1. takach says:

    today I decided to trade in my clunker … thru the Cash for Clunkers program and go for my $4500.00. I found out that
    my vehicle is a category III vehicle and qualifies only if I trade out for another category III vehicle. Well duh why would I want another huge gas guzzler? What is the point, you want my gas guzzler off the road, Mr. President give me a better incentive than purchasing a new gas guzzler that will get me
    only 4 miles more per gallon. This is sheer stupidity.

    Thumb up 0 Thumb down 0
  2. Rande Isabella says:

    I’ve got four clunkers I could drive into a dealership. However, when your clunker goes into the shop for a new transmission or major engine overhaul or other such work. . . you are disqualified, because of having dropped insurance during the long-term repairs. NONE of my qualified cars qualify, as a result. Also, the timing of this program did not correspond to my seasonal employment schedule. So I still would have been unable to “cash in” as so many have.

    So once I give a few thousand more dollars tot my mechanic, there will be one more Crown Victoria, Mercury Villager, Saab 9000 and Lincoln Continental on the road sucking up gas like there is no tomorrow. I guess I’ll just drive these cars until they barely have any life left in them.

    Then I’ll do what so many others who could not take advantage of the Cash for Clunkers program are talking about doing. . . I’ll drive the car to Washington and park it (legally) near the front of the White House and then fly home.

    Now THAT is freedom of speech!

    Rande Is. . .

    Thumb up 0 Thumb down 0
  3. Michael Parker says:

    Cash for clunkers… not a very good program in my opinnion along with everyone else I have talked to and heard about. The problem with the program is that the government built the program but neglected to add in that if we wanted to do the program we had to buy an AMERICAN cars. Instead they just left it open, now all our money that was given out on the program is headed to different countries like japan, china, korea and so on. That takes us back to square one but now with a car payment. Dont forget about the people who could not afford the program and couldnt afford to have a payment either. Those people could have used those vehicles for parts or even been sold to the millions of people who dont have a vehicle. Think of all the classic cars and collectables that were clunked. That drives the price up for the people who always dreamed of owning a classic car and restoring one as a piece of American History, all the father and sons who are looking for a project that can now not find one due to them all being crushed to make japanese cars. You know that is were all the scrap is going. I worked in a business that dealt with scrap, dont tell me im wrong. What should have been done was atleast put in the bill that if you do the program you HAVE to buy an AMERICAN car so that would drive the automobile industry up here. That would then fix the jobs in that industry. As far as crushing the cars so that no one could get them, thats just stupid. If you really wanted to help with that, this is how it should be done, first go ahead and scrap the vehivles BUT atleast sell parts off of them so that the people who couldnt buy parts or find parts for them could have made use of something from. You dont have to sell the actual body with the VIN on it but could have atleast parted it out and let mechanics who cant find engines buy those with the terms that they had to be rebuilt to better specifications and use less fuel, its possible, I did it with an 86 chevy and a 1995 vortec 350 engine. Gas mileage almost doubled. Even kept a soon to be classic alive. The truck gets better gas mileage than my cavalier did, even had all of the smog fixers in place. I hope that everyone is happy with all the problems they caused by doing this program and helping to let America lose part of its history in the process. Hope you have problems with your new cars. Im one of the people who couldnt afford the new vehicle due to being laid off because of just what happened with the cash for clunkers!

    p.s. just fyi alot of the cars on the lots i went to had hundreds of cars that were newer than 2000. many newer than 2006. but was all turned in for over seas cars and trucks. makes you think what our country is going to… is it still the united states of america or is the united states of other countries?

    Thumb up 0 Thumb down 0
  4. Sam Rudolph says:

    I am clearly years late to this part, but I just wanted to note the unexpected drawback of the Cash for Clunkers program- the artificial inflation of used-car prices that mostly negatively affected low-income car buyers and high school/college students.

    Thumb up 0 Thumb down 0