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.


Vlad Tepis

An old and futile concept, as evidenced by many of the comments appearing here.

Adam

Wow. What a bunch of mental masturbation! You are postulating a complicated model with all sorts of different variables, and yet stating that you know exactly how they will all interact.

You social scientists are real confident people. I'm just glad you all don't build the nation's bridges.

Instead of philosophizing about why this may not work, let's examine similar programs already in place and see how they do. Gun buybacks don't work, fine. But commenter #2 already said a similar program worked in Spain and another commenter said a similar program was conducted in Texas. How did they perform?

John Fasoldt

WHAT? You want to take my old car away from me? You're going to have to pry it from my cold, dead fingers. My 1980 Toyota Corolla has 78,000 miles on it, drum brakes, carburetor, a simple mechanical choke, no computer chips and gets almost 30 miles to the gallon. Tear it apart with two pairs of pliers and a screwdriver.... Park it anywhere without worry. YOU CAN EVEN LEAVE THE KEYS IN IT! This is truly the World's Greatest Car, take a look.

http://UnExCo.com/images/WorldsGreatest.jpg

lee schipper

Jim's point #55 has a clear answer. the oldest cars emit the most, at least if they are not caught. There are thousands of emissions studies supporting this. And DOE and DOT have many surveys over the years showing how little 15+ year old cars are driven relative to new cars. But the worst emit 100 times more NOx, CO and other pollutants per miles than present standards, so they do pollute out of proportion to their numbers or use. In fact a small share of all cars (some new ones too) account for 80% of the pollution, leading some to question whether it would be far more efficient to have roadside remote sensing units, very effective at finding the reals smokers. Be that as it may, many of you note correctly that most smokers are caught.

In many ways then clunkers are a thing of the past. A very tiny share of cars on teh road today are older than 1982, the year when gasoline prices (then) peaked and the cost of 1 mile of gasoline was just past its peak (and higher than today). Emission standards were pretty tight, and many states have inspection programs that catch the worst ones. So I buy Steve's arguments and second his worries that all kinds of secondary markets will arise that may undermine these. (One problem with clunkers in the US is they are driven to Mexico as "chocoladas", as many as 5 million or more are running around there or farther south.)
I also second all of those who praise higher taxes (a small group). See my recent discussion of this and US/European trends in fuel economy at
http://embarq.wri.org/en/Article.131.aspx

One note -- in 35 years of this work I have never seen subsidies in Europe for small cars. Note the data in that presentation show weight or power is the main difference between Europe (29 mpg fleet averagE) and the US (20.6 mpg fleet average) fuel economy. Only Denmark, whose base tax on new cars is about 180% on top of their value, gives a small break for the smallest cars. Danes have fewer cars relative to their incomes than other Europeans but they drive them more (per car, per year) so they get about the same miles per person as Swedes. Shows the importance of relaxing on the taxes on fixed costs (ownership) and hiking the t axes on use (fuel, emissions, kilometers worth of road wear on the roads.)

All cars face stiff value added taxes and other taxes. The nordic countries ratchet up their small but visible carbon taxes every year.

What would help get rid of the clunkers is a bounty, like a container deposit, on every car sold. The rights to the deposit transfer with ownership, and the final owner gets the $$ back for disposing of the car properly -- at a car recycling place.

Lee Schipper
Visiting Scholar
UC Berkeley

Associate Emeritus
EMBARQ, the WRI center for Sustainable Transport
www.embarq.wri.org

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George Scott

These older cars are often perfect for converting to Propane or some other alternative fuel. That is what should be done with older cars.

Bill McNeely

You might want to look to Dubai for how a variation of "Cash for Clunkers" could work. In Dubai car insurance is provided by the government for three years. At the end of those three years, if you still own the car, you are required to purchase private insurance. For most individuals this private insurance is more than they can afford and a new car is purchased or leased. These three year old cars are then sold to wholesalers who often take them to Africa for resale. The end result of this policy is that old cars are kept off the road and pollution is kept to a minimum.

Tom100

Some more inconvenient truths:

Old but servicable "clunkers" keep a lot of mechanics, auto parts stores and owners employed.

Older or untuned lawn mowers, gas power equipment and boats are far more polluting than old cars, and theres lots of them.

In addition to the points raised in this blog about the net environmental costs, frivolous use of any auto would negate any savings from a more efficient auto. Carbon/gas tax is the way to go.

And Blinder wanted to be Fed chairman?? Not if he's coming up with silly half baked "solutions" like this! Then again, what do you expect from a liberal...

James K. Bachmann

I have a '93 Olds that runs quite well. I figure it is better to drive it until the cost of repairs is more than the cost of a car that runs. That might be another '93 Olds for $500! There doesn't seem to be an emission problem with my current car that I keep well maintained.

Pquincy

Surely there must be a way to bundle the government incentives for scrapping clunkers! Once could use the expectation of to-be-scrapped clunkers to secure a bond that could be sold to investors. As the supply of clunkers decreased, their price would go up, ensuring the sale of more and more valuable bonds with higher and higher interest rates.

It can't fail...the rules have changed...these investments are safer than cash!

Alex

I agree with Chance: looking only at a car's CO2 emmissions is a small part of the environmental picture.

In addition to the raw materials, it takes a lot of transportation to manufacture a modern car. The components in your dashboard probably originate from more than five different countries; and many engines, subassemblies, etc. were produced in another continent before being delivered to the assembly plant (this is the case for the Chevrolet Equinox's Guangzhou-made engine).

Keeping that 1988 Toyota Camry with 200K miles is much better for the environment than that Toyota Prius you waited three months to get...

Don Marti

The total profit to the industry from replacing a retired car might be greater than the cash payment to the owner -- especially if you count the insurance industry, which has to cover the damage inflicted by the extra "clunkers" on the road. What about creating an antitrust exception that lets insurers, automakers and suppliers collude to pay into a buy and destroy fund?

Scott Banks

Todd Dawson's enthusiasm for voluntary private initiatives might more attractive in cases when effective solutions can be voluntary and private. Unfortunately, it is not voluntary that we confront air quality issues and global warming—it is mandatory if we are to survive. Moreover, we cannot do it on a private, piecemeal basis, but will need to organize our entire society, and indeed our entire planet. A handful of Sierra clubbers cannot stop global warming on their weekends while the rest of us ignore them and promote small government.

I share Dawson's love of personal freedom, but I would remind him that to gain personal freedom one must first attain a certain freedom from necessity. Our affluent society has made it easy for some to forget this truism, but global warming stands ready to re-acquaint us with it in a hurry.

stilldreaming

jes #15, you write: "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."

And how exactly would it be good for the environment to junk a car based on cosmetic damage?

Let's not be so quick to accept that government programs to get clunkers off the roads help the environment. Consuming less and refraining from the endless pressure to purchase new items might be more beneficial than rushing to replace.

Jan Schmitz

This would get the clunkers off the street,
or driveways and yards, where they are generally parked. Usually these cars aren't in use. People are not inclined to dispose of them. But, if you give money for cars, this plan would clean up neighborhoods!!! and whole cities. The scrap metal is needed to build new cars. Let's clean up America and recycle steel!

Ellen

This seems an overly complicated replacement for two currently applied mechanisms.
Raising gas taxes will make more fuel efficient cars more economical than less fuel efficient cars.

Tightening emission standards. A car is not legal to drive on the road if it does not pass emission standards. Gradually reducing the acceptable amount of pollution will have the effect of pushing off the roads older and poorly maintained cars that create more pollution.

Of course, this would require politicians to have some courage.

Arthur

The buyback program is pointless. Just increase gasoline taxes, so gas prices are permanently not so low as they used to be. This will weed out inefficient cars, not matter if they are new or old. This will also force manufacturers to build more efficient cars. Because, what if someone drives a small 15 year old car that makes 30-35 mpg ? What is the point of taking these off the market ?

The collected tax money should be used to create new alternative energy infrastructure - hydrogen, electric, solar, wind. The technologies are out there, and are advancing fast. But the starting cost is often high. That is why we need an initial government push.

Matt O.

Re: #6

I like the idea in general, but tax deductible interest on car loans wouldn't help much. Unlike mortgages, auto loan interest is a small percentage of each monthly payment.

stilldreaming

Has anyone done a serious analysis of ecological costs of replacing a clunker with a new car?

I have a hunch that maintenance and repair of clunkers might be better for the environment (inspite of the fact that newer cars might have fewer harmful emissions).

I am sure that if a larger percentage of Americans would love their possesions -- repair and maintain rather than replace -- it would benefit the environment.

Oinky

Manufacturing a vehicle is a hugely resource- and energy-intensive process that generates vastly more pollution than even an old car generates in its entire lifespan. Discontinuing the use of an old car and buying a new one because its exhaust is cleaner does not reduce pollution, but rather increases it.

What leaves the tailpipe of an older car may be dirtier than what leaves the tailpipe of a newer car, but that's only a small part of the picture. The fact — uncomfortable though it may be to an egalitarian — is that the relatively small number of old/high-polluting cars on the road are "subsidised" by the overwhelmingly large number of new/low-polluting cars on the road. It's been pretty well demonstrated by EPA's own extensive studies that there are so few genuinely dirty old cars in any kind of regular use that even if all of them were magically made to disappear tomorrow, the effect on air quality would be unmeasurable.

The economic stimulus argument is fatally flawed, for reasons adequately covered in this blog post itself.

It'd be far more helpful (and appropriate) for the Federal Government to allow cars conforming to the internationalized European ECE safety and emissions regulations used by the _entire_ rest of the developed world outside North America. The on-road fleet fuel economy in Europe is double that in North America, with equal or greater safety and comparably clean tailpipe emissions. The different-but-not-better US regulations are effectively a non-tariff trade barrier designed and implemented to protect the domestic automakers (including the well-established American operations of foreign brands). Of course, it's seldom discussed that way. Rather, baseless claims are made along the lines of American regulations being the most stringent in the world. This is demonstrably untrue, and there is ample high-quality data to show that the American regulations do not do a better job in terms of safety performance or air cleanliness. This is not an appropriate tactic in a country whose controllers love to rhapsodize about the "free" market. More detailed info here.

Of course, this kind of a rational, common-sense, "right now" solution to the fuel crisis will not be implemented because GM, Ford, and Chrysler failed to learn the lessons of 1973 and 1979 and yet again grew fat, dumb, and happy making grossly oversized gas guzzlers which they're suddenly having a hard time selling (again), so out of one side of their mouth they babble about the free market and out of the other side they run to the Feds for protection from the cars that exist right now that would best meet Americans' needs and wants right now. The greatest point of irony is that many of those vehicles are in fact made by Ford and GM...just in other countries.

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David G.

What else to expect from the woodoo freconomist?