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.


Chris Harris

On a slightly different tangent, I am wondering if a model similar to that used in Singapore will work. They put heavy taxes on new vehicles (upwards of 200% of the vehicle price) in order to subsidize public transportation.

Of course this requires a very transparent government, and the short-run effects would be calamitous, but the long run effects would tax those that really needed a vehicle and reward those that didn't. Would delivery prices for goods rise? Will people cheat the system somehow due to loopholes?

Giovanna

There are implications in some of the comments above that an older Geo Metro is stingy on the gas but by definition pollutes. Not necessarily so. My 1983 Metro got a "perfect" California smog rating last spring after I invested significant money on parts and a mechanic to install them. The mechanic was astounded, and I was overjoyed that I didn't have to deal with replacing one of the favorite cars I've ever had for at least another two years. 40 mpg city, can park in 2/3 of a parallel space on the street, and great on road trips.

Giovanna

BTW, isn't that an Indian Ambassador in the photo? Didn't they only come in black and white? Great snap!

Mike

I have a more basic issue. By the time a car is 20 years old, one of two things has likely happened. Either (1) It's outlived it's useful life and will be scrapped without any gov't incentive. or (2) It has collector value, and will shortly be restored to pristine condition.

In stark contrast to sunny California, old cars tend to be rusted into sponges after 20 years of daily use on NY roads. The few old clunkers you see here are bound to be scrapped without government help.

Collector cars generate essentially zero pollution. The average collector drives only a few hundred miles on sunny summer days. He spends more time underneath the car turning wrenches than behind the wheel. Crushing old cars cuts off collectors from an irreplaceable source of parts. That's why even California allows pick 'n' pull.

If you want a government program to stop pollution, the correct answer is to tax SUV's to death. Even if we accept the statement that they are less polluting per mile, a Hummer on the road outpollutes twenty '72 Chevy's in the garage. Go for the gusto...crush a Hummer today.

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Craig Russell

@Taed:

Allow me to use your comment that fuel economy isn't a huge issue because you only drive ~6000 miles per year to illustrate a point about how one of the biggest problems with the way we look at fuel economy has to do with the system we use to measure it.

(This is a notion that I read elsewhere--I don't recall where--but which has been really eye-opening for me).

The problem is that our system--measured in miles per gallon--obscures how gigantic differences in fuel economy are at the bottom end of the scale.

Let's use as an example Taed's three cars: the 6 mpg Caprice, the 13 mpg Thunderbird, and the 20 mpg Taurus. Imagine you drive each car 6000 miles per year, and pay $4 per gallon for gas. The fuel costs of each are:

$4000/year for Caprice
$1846/year for Thunderbird
$1200/year for Taurus

Switching from the 6 mpg Caprice to the 13 mpg Thunderbird--a difference, by the current scale, of only 7 mpg--saves you $2154 per year. But then, add another 7 mpg (the move from the Thunderbird to the Taurus), and you only save $646 per year.

The lesson is: increases and decreases in the mpg scale are all equal--not even close!

Let's say you decided to trade your 20 mpg Thunderbird for a ~50 mpg Prius. At 6000 miles per year and $4 per gallon, you would pay $480 per year for gas--a savings of $720 compared to your Thunderbird. That's not negligible--but it's nothing compared to the $2154 you saved by moving from 6 mpg to 13 mpg.

My point is that the best way to reduce fuel use is not to get everyone into 50+ mpg hybrids; it's to get everyone AWAY FROM the extremely low end of the scale. For most drivers, the savings above 20 mpg are only moderate; but, when looking at figures below 20 mpg, even very small increases on the mpg scale lead to huge savings.

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Inst

Regarding the perverse incentives, isn't this a patchable problem? All the government has to do is to institute a gradient of compensation as the age of the car increases, or maybe a reverse gradient to combat perverse incentives.

Inst

And oh yes, wasn't Alan Blinder the guy who published editorials and articles stating that the negative externalities of globalization were significant? It was okay when the blue-collar workers were losing their jobs, but when service workers started being threatened by globalization, his articles started coming in. So he's not actually Chicago School.

Capriracer351

I'll be darned if I trade in my '68 Mustang or my '85 Mercury Capri Drag Race cars!!! I am just about sick of people wanting to regulate everything in my life. First you want my guns, then my cars. Then you want to regulate the temperature of my house. Where does it end? The nanny state is a totalitarian state. Next thing you know, they will want to regulate what I eat.... Oh, wait a minute, THEY DO!!!! ARRRGH!!!!

MarianKay

I am with #25. Why call our car a clunker? Our family car is 15 years old. We have low property taxes on it and no payments. We drive only 2-3K miles per year so why would we get a new one? We have to live with the stupid comments on the old thing, but we just laugh all the way to the bank.

Jim

I don't recall seeing any data that suggests older cars are making an inordinate contribution to either polution or gas consumption. Before fixing a problem, we ought to determine whether or not that problem exists.

My clunker is driven less than 2,000 miles per year (about 1/5th the national average). If it were 4 times less efficient and/or more polluting than a new car (it is neither), then I would be doing the environment a short term disservice by trading it in (lots of resources went into that new car) and a long term disservice by behaving like an average new car buyer who I would be encouraged to emulate.

A car, unlike a gun, has a fairly short service life. There is no point in removing cars from the pool that are already near the end of their service lives. The remaining use of these cars will not have a significant impact on total consumption or pollution, even though the instantaneous rates of both may be high for any individual vehicle. The cars that we really need to get off the road are the 1-year old Hummers, which have long inefficient futures ahead of them.

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Kate

A 1989 Honda Civic sits in my driveway. When last it was driven on a trip, it got 40 mpg and it passed emissions in New York. It needs some work, so my husband and I are debating -- fix it or sell it?

It has no airbags so it is not a car I want my kids to drive, regardless of the gas mileage.

We bought it used in 1992 and it still has only 130,000 miles on it.

let them eat gollum balls

that car may not be more than 30 yrs old, btw...
http://flickr.com/photos/pandiyan/69286121/
http://images.google.com/images?q=last+India++British+Morris+Oxford
why is your apple's (img) interior orange-colored? the outside looks like a granny, which is not even one of the "pink fleshed" cvs.

Steve MacLeod

These are all interesting comments. I would have to agree with the European posters. There seems to be a large disconnect between wanting to do the right thing and the will, political or otherwise, to do it.

I live in Alberta where the oil sands drive our economy. A great percentage of the output from these sands ends up going down to you folks in the States to satisfy your need for oil. I see on the news that there are politicians seriously considering going into Alaska's protected wilderness to feed your country's hunger. Ridiculous.

I agree with less government is better government, but what other way can you get industry to start to invest in technologies to replace these "clunkers" altogether. Corporations will do just enough to put on an appearance of being environmentally aware. Unless regulations, tax breaks or some sort of government program is put in place to encourage(force) companies to invest in proactive strategies rather than reactive, our countries will continue to try and fix the problems that we have created in the first place.

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pepx

1) might be a good program if it's well thoght and follow successful examples, otherwise the idea must either scrapped or reformulated.
2) isn't curious to hear about such programs, just when the american car industry slumps in such dramatical way.

fritz

old clunkers will die of there own accord.

let them eat gollum balls

toad has a good point: let low-miles drivers buy these rapidly depreciated hummers.
hard to believe ppl in the 60's could stand (at the gas pump) for thetime ittook to fillup a 6mpg vehicle. those old gas pumps were slow. of course that's prolly why selfserve gas didn't exist yet...
it amazes me how few current vehicles are rated

kevin bingham

I drive a 1982 VW diesel pickup, it gets 45 mpg. The pollution and energy required to make a new car seems to be counterproductive to take this great truck off the road. Besides, they dont make fuel effecient small pickup trucks in this country anymore. The geo metro likewise- gets better mileage than the prius, and they stopped making them. Some of the older cars are just plain better
vehicles than what they offer now.
It seems to me that it would be better for the environment to just keep cars running instead of constantly building new ones that are disposed of in 5 years.

Andrew Song

Instead of the government buying back car, why doesn't GM, Ford and Chrysler have a program to buy back their own junkers at a premium when the costumer buys a new auto from them, instead of gouging the consumer with their low ball trade in values? This would increase sales in the auto industry, American corporations would be held accountable for the polluting autos they produced in the past as well as stimulate the economy with consumer domestic spending.

Scott Baker

I'm a firm believer that if you offer an award for some behavior you wil get more of that behavior. I have a simpler plan than the ones above (though many of these are, frankly, better than anything I've heard out of either presidential candidate. I call it the 25-for-25 program:

Any owner who trades in a car that's been owned for at least a year for a car that gets 25% better gas mileage gets a $2500 federal rebate.

That's it. Yes, you might get a few people trading in newer cars for older ones with better mileage, but so what? It'll still reduce oil consumption and keep money in this country. This plan will encourage people to drive fuel efficient cars and manufacturers to make fuel efficient cars.

Here's another plan. I call it the Greenhouse Gas Reduction Incentive Plan (GGRIP). Here how this works:

Rachet up the CAFE standards to 50mpg by 2025, BUT give triple credit for every Zero Emission Vehicle (ZEV) an auto manufacturer sells (no fair keeping them on the lot).

This will encourage electric, fuel cell, flywheel, and even compressed air cars (they work better than you think), Get a GGRIP! Of course, we have to have a renewables based energy infrastructure, or else we're just shifting the problem. More on that in my upcoming book, "Why I should be President." Just kidding...I think.

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Pat Miller

The California program was for vehicles that could not pass the smog regulations without expensive repairs.

Here's my situation, it's going to cost me $500+ in smog related repairs to fix a car that's worth about $1000. See the problem here? Is it really worth spending all this cash to drive an old car for one more year? This is where the government really screws the lower class. Governor Shwarzenegger just killed the CAP (Consumer Assistance Program) due to our massive budget deficit. Now I'm stuck with a working car that can't pass smog....... what the hell am I supposed to do with it now? Get $150 from ecology auto wrecking?