Still No Cash for Clunkers

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.

The Detroit Free Press reports:

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.

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  1. Phreddy Tran says:

    Actually, I’m one of those who will be taking advantage of this once it goes through. I have a 1995 T-bird that has a trade-in value of $356 (according to Edmunds.com). It still runs, but it guzzles gasoline like a wino drinks ripple. I let my brother drive it, but now we can trade it in for something far better.

    Your estimate of $3000 resale is far too generous for these old American-made cars.

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  2. chris markl says:

    “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. ”

    There is a requirement in the bill that the car must be owned, registered, and insured for a year by the individual trading the car in.

    I think what is interesting is how will dealers react to this bill, will they jack up prices in some unique way?

    My wife and I follow the bill closely, we drive a 1999 ford explorer that gets like 16 mpg, great car, works well, but the probability of something breaking in the engine increases every week because of its age, thus while we are not in the market for a car, under this bill we will purchase a new car. In fact we wouldn’t be able to purchase a car without this subsidy because our current car has such a low trade in value and because we are pretty poor. Also we will purchase a hybrid, thus making us the poster children for the cash for clunkers campaign (except we don’t intend to buy american.)

    Its really odd I’ve never really been directly effected by a bill going into law before, and my wife and are waiting every week for this thing to pass, and its frustrating. We both don’t support government subsidies but when we could be direct beneficiaries from it we are all for them, sad but selfish behavior on our parts.

    But in reality I can’t imagine there are too many people in our situation or atleast aren’t that many people who are as strategic as us, where this bill actually propels us to purchase a car if passed yet restrain from buying a car if it is not passed.

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  3. Julie says:

    Wouldn’t the requirement of having the vehicle registered and insured for a full year before trade-in stall the opportunities to profit by buying old clunkers before trade-in?

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  4. Dave C. says:

    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.

    These people are not ripping off the government, they are doing the heavy lifting. As you say, this program is not a good match for people who are driving these cars. I don’t see why it matters who is taking these cars off the road. If someone buys a junker then turns it in to buy a new car, we’ve gotten rid of a junker in the same way as if the driver of that junker had gotten rid of it.

    It seems like this will be a three-way exchange. A buys junker from B for cash. A trades it in under the program. B buys a better car. This decrease in supply should raise the value of junkers. This means B can now afford to upgrade because the clunker is now worth more. A gets paid for the legwork. B gets a better car. The government gets a clunker off the road. Sounds fine to me.

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  5. Brian says:

    Actually, the cash for clunkers is 18 mpg or less, and you have to have owned/insured the car for the year previous to trade in. While I don’t like the small increments in fuel mileage, this will help people who are considering purchasing a new car, have a car that was made after 1985 and gets 18 mpg or less. Hopefully, some of those people out there who own the trucks may see this as an opportunity to make a life-style change and use it to purchase a much higher mileage vehicle than the minimum allowed. Combining this with being able to take the sale/use tax as a deduction, even if you normally take the standard deduction, and it’s a slightly better offer than you’re suggesting. Will it solve the worlds problems? No, but I do believe in incremental progress.

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  6. Kristian says:

    Does it really matter who buys the new car? If you remove one car from the market, will that not create demand for a new one one way or the other?

    Presumably the seller of the ‘clunker’ would buy a marginally less old car instead. This effect would ‘trickle up’ all the way through the market until everyone drives a newer car. Or what am I missing here?

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  7. Tristan says:

    I believe that part of the “registered for 1 year” hurdle is that is has to be registered to you for that year, so you can’t buy a junker the day before you go to buy a new car and get the voucher.

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  8. Clifton Ealy says:

    If people are rational, and there’s an efficient market, shouldn’t all 5 million people driving cars worth less 4500 and getting less than 18 mpg end up getting rid of their cars?

    Say someone has such a car worth 4000 dollars. I want a new car. I sell my old car, and buy this fellows car for $4250, then I have it scrapped for $4500. I have $250 extra dollars, and whoever I bought the car from does too. And there’s one less polluting clunker in the world.

    The last three paragraphs of the post suggests Levitt understands this too, which makes his conclusion that the program won’t work very puzzling.

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