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.


Imad Qureshi

I have a 93 accord with over 286000 miles. I am sure it doesn't give me more 18 miles per gallon now but officially it gives 24 miles per gallon in city. So I am not eligible to get $4500 if I want to buy a new Prius.

Jeff Wittich

I am also interested in the environmental trade-offs from disposing of a car before its natural end of life. Does an extra 4 mpg over a 3 year period offset the resources consumed in producing and shipping a new car?

alewis14151

@16: "Once again, the irresponsible get rewarded. I own a 1986 Honda Civic that gets around 50 mpg. Because I have been environmentally friendly for 23 years, I get nothing. If I had bought a gas guzzler, I could get $4500."

Don't you think you're way ahead of the guzzler buyer? 23 years at 50mpg translates into some serious money, 'way more than $4500, surely.

David W

The other problem is that mpg is based on EPA estimates for a new car in a perfect world. My 93 Mercury Sable averages about 13 MPG but would not qualify because the EPA claims it gets 19 MPG. Maybe it did in 1993 but !!!

Ingo Gunther

The German government started a similar program several months ago with considerable success in boosting car sales.
From the truthaboutcars website:
"It was a mere footnote in the German government's latest $50b fiscal stimulus;" writes the Financial Times about Germany's Abwrackprämie (a.k.a. "cash for clunkers"). The footnote turned into an epic win. BUT-"a scrapping bonus aimed at encouraging new car purchases has become such a success that it has left Berlin facing up to three times the measure's initial $1.5b price tag." The FT was lowballing. Today, Germany's government allocated $5b for Abwrackprämie, the sequel, reports Automobilwoche [sub]. That's enough money for two million old cars crushed and two million new cars bought. If that's the way the deal goes down, Germany will have the biggest car sales year in recorded history. ... "

Tim

Keep in mind that increasing from something like 14 to 24 mpg will, over 100,00 miles, save about 1,100 more gallons of gas than an increase from 24 to 44 will. Low hanging fruit like this can make a big difference even if the increase doesn't sound like much.

Rich Wilson

I think anyone who has used the 'Hummer Tax Break' should be disqualified. We give them a tax break to buy a bigger vehicle, and then we give them more money to trade it in? Brilliant!

Don

I tink there is another indirect negative impact in this plan: if your analysis is correct and there are few clunkers induced off of the road by the bill, but the government justifies the bill by over-estimating its impact, then the funds to pay "all those" incentive payments will have to be held away from more useful programs.

Kirk

Considering the net effect of the trade-in value given up and the tax credit earned is, let's say $1K - $2K, unless one adjusts their number of dependents this year for payroll taxes, the tax credit due will not be realized until the following year. So there goes another $100 in interest income lost. But that's marginal change. Let's just say the real net is $1,500. That $1,500 will be taken right out of the new car owner's bank account in about 4 months from monthly payments and increases to insurance premiums.

So the deal is this - give me your clunker, and I'll give you $0.25/mile (that's a 10mpg improvement at $2.50/gallon), but you'll pay more in insurance and personal property taxes, and then you'll pay me $300-$400 every month for the next 5 years. But I'll throw in the first 4 months of payments for free.

I'm thinking no. But then I'm thinking the supply of money coupled with our deficit is going to necessitate inflation and higher taxes beginning next year, and if I needed a new car inside the next two years, I might want to lock in at today's prices and 0% financing, if I can still find it.

Read more...

Johnny E

They used to have programs like this, not for gas guzzlers, but for cars that wouldn't pass the emissions tests. It seemed to work in cleaning up the air. It should basically be designed for cars ready to be scrapped to speed up the process.

Maybe Frealonomics should analyze the quality issue vs. planned obsolescence. How many fewer cars are being sold just because they last longer and don't need replacing? It must hurt manufacturers to improve their products so much that fewer need to be sold.

I know the Japanese are credited for bringing quality into the equation but my 1980 Datsun ran great until it hit 80,000 miles and then everything broke at once so it had to be junked.

Neil (SM)

#15, #16, #18: I think this is not as much about helping the irresponsible, and not as much about lessening environmental impact as it is about conserving finite and shrinking petroleum resources. "Buying time, " in other words, to inevitably switch to alternative fuels. From that standpoint, it makes sense. It's an incentive, not a handout.

Miriam

I think there may be more people who will benefit from this than you think. The trade in value for our truck is negligible because it needs body work so we are looking at about a $3,000 incentive. And we plan on buying another American/Union made vehicle.

elizabeth

Some have asked whether the environmental savings of marginally better gas mileage outweigh the costs of discarding a clunker before the end of its natural life. I think the same question can be extended to maintenance. Many new cars are designed so that individual components cannot really be repaired, instead, if a little thing breaks, an entire section of the car is replaced. I recognize that snapping in a new dashboard requires less labor than rebuilding a speedometer, as I recently did, but is it more environmentally sound? The trend toward replacing rather than repairing is all around us.

James

Regardless of the effectiveness of this legislation in actually increasing the average fuel economy of the fleet, which I agree will be minimal at best, it's really a bizzare and somewhat frustrating kind of transfer. I don't know if this has a specific funding mechanism, but assuming it comes out of general tax revenues (or, at the margin, from selling treasury debt which we will then have to service and repay from future general tax revenues), this is a sizeable transfer from taxpayers in general, including people like me who don't even own a car, to people who purchased vehicles with lousy fuel economy at a time when oil prices were low. Given that there are many other mechanisms out there to increase the fuel economy of the vehicle stock that are likely to be much more effective, I see no justification for this kind of income transfer from taxpayers at large to a specific group of people who chose to purchase the least fuel-efficient vehicles in the first place.

Read more...

Johnny-o

I think you may give people too much credit--I doubt many of the takers will actually bother to figure out the numbers. They'll just do it "because it is there," or someone they know did it. Build it and they will come.

Michael Williams

There are three problems with this law:

1) It is grossly unfair to people who were responsible and purchased quality, energy efficient vehicles. Only people who irresponsibly purchased gas guzzlers will benefit.

2) The plan may not even be beneficial to the environment. It completely fails to take into account the environmental / energy costs of producing the new vehicle to replace the old one. My bet is that unless the old vehicle is truly horrendous, keeping the old vehicle in good repair until it gives out is probably more beneficial to the environment than producing a new one.

3) Although it may benefit the global car market in a general way, there is no guarantee that the bill will benefit the American auto industry / American economy to any significant degree. Unless the people who trade in buy American cars (or foreign cars built in the US), the economic benefit to the US will be pretty minimal. No doubt some, at least, of the affected people will buy US cars, so the question is how many.

Read more...

Knox

Maybe it's my rural bias, but I think you're missing the large market of old trucks and SUVs that people will be happy to trade in under a plan like this. In my (admittedly farm-heavy) area, many people have one or two old vehicles they only use for farm duty, but still keep some low level of insurance on to satisfy state laws. Plenty of these folks will be rushing to get paid to crush something that's already a bucket of rust anyway. Maybe not 1 million of them, but certainly it has to be a significant number.

harryo

It's still not clear what mileage rating they are using, city, highway or combined for the clunkers or the new vehicles, anyone know?

Todd Berko

The real, although highly doubtful, beneficiaries of this law may be the dealers who buy and sell clunkers, the buy here, pay here dealers. They will be able to offer their clients more for their current clunker and upgrade them to a better clunker. e.g. buy a $2,500 clunker for $3,000 and sell them a $5,000 clunker.

They will profit from the low end sale and then sell the initial clunker for $3,500, reaping a $500 profit.

The question is will the upscale buyer of a new car go through the brain damage of buying the car, taking ownership the clunker, pay the sales tax (about $250) , take time off from work ($100) to register the vehicle and put this clunker on his insurance for a net $1,000 tax credit.

This ignores example ignores the time value of money, investing $3,850 and waiting for the tax return.

Perhaps an enterprising new car dealer could work with a low-end used vehicle dealer to figure a way to sell you the clunker and the new car while minimizing transaction costs and new car owner irritation.

Read more...

sk

I junked my old car and bought a new one nearly two months ago...had I known about this bill I would have been able to take advantage of it. Poor timing on my part.