Last year I blogged about the Cash for Clunkers program in which the government subsidizes consumers who turn in their beat-up old cars to buy new ones. I noted that this program was likely to have a host of negative unintended consequences that its proponents were ignoring.
The bad news is that the House of Representatives has now passed a Cash for Clunkers bill. The good news is that the version they passed applies to so few vehicles that there is virtually no incentive for anyone to take advantage of the program, so its unintended consequences will be smaller than they otherwise would be.
Under the plan, owners of cars and trucks that get less than 18 m.p.g. could get a voucher of $3,500 to $4,500 for a new vehicle, depending on the mileage of the new model.
The plan does have several hurdles that will keep some potential buyers on the sidelines. The clunker being traded in will be crushed or recycled, meaning it will have no trade-in value beyond the voucher. Of the 25 million vehicles estimated to qualify for the voucher, most will be trucks: even 15 years ago, only five models of midsize sedans managed just 18 m.p.g.
To ensure the vehicles being crushed are actually coming off the road rather than cinder blocks, the trade-ins have to have been registered and insured for at least the past year.
According to that same newspaper report:
With auto sales running at their lowest rate in four decades, the Congressional Budget Office estimated the bill could spur sales of about 625,000 vehicles; backers are hoping for 1 million.
The act “will shore up millions of jobs and stimulate local economies,” said Rep. Betty Sutton, D-Ohio. “It will improve our environment and reduce our dependence on foreign oil.”
My guess is the estimate of 625,000 extra vehicles sold is hopelessly optimistic (although, of course, it depends on how long the program is in place). Let’s assume they mean 625,000 vehicles in the first year.
Twenty-five million vehicles that qualify based on m.p.g. represent roughly 10 percent of the vehicles on the road. I’m not sure what fraction of those have a trade-in value less than $3,500 or $4,500 but are still being driven. Perhaps some blog readers know that number. I’m going to guess roughly 20 percent, or 5 million vehicles, which is not such a small number.
But let’s say you own one of those vehicles which you could sell for $3,000. If you use Cash for Clunkers you get an extra $1,000 for your vehicle. So of those 5 million people driving gas-guzzling old beaters that are worth almost nothing, how many of them are going to be pushed over the margin to buy a fancy new vehicle because of a $1,000 subsidy?
Logic suggests that number will be small. I doubt a new vehicle is the logical next car for these folks, and a $1,000 subsidy just isn’t very large; look at the rebates and deals the automakers themselves are offering these days.
If any vehicles are going to qualify under this program, I suspect it will be because enterprising people who already plan to buy new cars will go out and buy old junkers on the used-car market and then trade them in under the program. But those transactions won’t represent incremental new car sales; it will just be a way for people who were already going to buy a car to rip off the government.
One thing will happen: entrepreneurs will play the role of the middleman, buying old beaters and then reselling them to people who are about to buy new cars, skimming off a little profit along the way.
If I weren’t so busy, I might just start that kind of business myself.