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. foo says:

    >As an example recent gas price increases suddenly >made 10-15 year old Geo Metros worth alot more due >to their miserly fuel use. How can a 15 year old car >that gets 30-40 miles to the gallon be worse than a >3 year old car that gets 24 miles to the gallon?

    It is a lot more complicated than mpg. There is also the number of pollutants per mile. Take a modern hummer getting 10 mpg and a clunker from 1970 also getting 10 mpg. With the a modern emmission system, the hummer is going to put out a fraction (1/1000) of the nitrous oxides, cabron monoxide and the like. A modern example of this would be motorcycles (they have changed the standards recently so it might not be as true any more). You get great mpg compared to a car but you are emitting more pollutants per mile so it is a net loss to the environment but a plus to your pocketbook.

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  2. Witty Nickname says:

    Texas tried something like this earlier in the year where they would give a limited amount of $3,000 cash vouchers good to the purchase of a new vehicle for any car model pre-1996. Really made me mad, I had just sold me 1995 Nissan Altima for $1,700 three months before the program started.

    The difference was this was just like a trade in, except you were guaranteed $3,000 to the state, and the car could not be resold, and it HAD to be used to purchase a new vehicle. It was also a limited time deal. They never announced how many vouchers there were, they just said there was a set number, and when they were gone, that was it. They ran out a few months ago.

    I still think it was a waste of my tax dollars.

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  3. James A says:

    Government + New Program = BAD IDEA

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  4. Chance says:

    No, the biggest problem with this policy is that used cars in decent condition are inherently more “green” than newer cars. Why? Because although they may emit more pollution per car, the pollution involved in their production and transport is already paid for and done. Let’s say I own a 15 year old mitsubishi mirage. It is in decent shape, and has a few more years ahead of it. I keep it tuned up and maintained.

    Now, if I want a Prius, its likely new metals have to be mined, new oil pumped for the plastics, more oil or coal burned for the electricity needed in the factories for the various part, and oil burned on the ship or train or semi to get it to the lot.

    Now, no one is suggesting you not get the most efficient car you can when it it time to get a new car, but if “green” is a primary motivation for you, you should take into account factors like those above.

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  5. Alexandre says:

    I can’t believe extra government intervention advocacy is still in vogue in 2008, especially for a Princeton economist. There shouldn’t be any more debate that markets are light years more efficient at correctly pricing assets (such as old cars) than government. Levitt’s comment here clearly demonstrates such government intervention would skew the incentives at play and causes opposite effects to what we are looking for. And this doesn’t even take into account the army of low-productivity bureaucrats it would take to implement such program.

    “the best government is the one that governs least” – Thoreau

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  6. Lisa says:

    In California the programs are run by county Air Pollution Control districts, so their only purpose is to get heavy polluting cars off the road. They don’t accept any “clunker”. The cars have to be pre-1986 when emission standards were tightened; these cars generate about 20x the pollution of currently produced cars.

    The programs don’t pay “above market prices”. They pay a fixed amount ($650-$800 depending on county) for a car that is required to be drivable, contain all major parts, and have been registered to the owner for at least 24 months.

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  7. Keith M says:

    Why would you want anyone to buy a new car? There are plenty of used cars that nobody is doing anything with. I remember learning that the average term of ownership is 2-3 years before people get sick of their new car, pitch it, and buy another new one. There should be a 5000% tax on new cars, unless they run on electricity. But we all know why Big Capital in America has no interest in electric cars (that’s why the plans and patent for superefficient, lightweight batteries were bought out by Texaco and locked away in a safe, forever).

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  8. Blah says:

    Patents are public knowledge. There are no super efficient batteries (ones that outperform laptops) out there. The Texaco patents is very narrow and is not the reason for the electrical car failure despite what some paranoid people believe. It is right there with the 100mpg carberaotr that gm bought the rights too and so on…

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