The Cash for Clunkers Program: A Bad Idea at the Wrong Time-Becker

The cash-for-clunkers program of the federal government began in late July, and will end this evening. It provides a credit of from $3500-$4500 for anyone who trades in an older car to buy a new fuel-efficient car. When measured by its popularity, this has been a highly successful program, for about 500,000 applications have been submitted under the program during these few weeks. The strong demand caught the government by surprise, so that it had to add a couple of billion dollars to the one billion dollars initially allocated to the program. Officials are far behind in the paperwork required to compensate dealers for the cars bought under the program. Unfortunately, that the subsidies are popular is no measure of its public value, and I am afraid there is little to be said at any level in defense of a cash-for-clunkers program. Hundreds of thousands new cars will be purchased under the program, but many of these purchases would have occurred later in 2009 or in 2010 instead of during the five week window of the clunkers program. There is little value to the economy in subsidizing consumers to buy cars a few months earlier than they would have bought them anyway. To be sure, some cars would be purchased under the program that would not have occurred during the next 18 months, if at all. But if the goal of the program is to help stimulate the economy by subsidizing consumer spending, why limit it to individuals who own old cars? Why not give vouchers to all consumers that they can spend for a limited time period on many durable goods, such as computers, printers, TV sets, washing machines, and refrigerators? If that seems like too obvious a straight handout, the government could require consumers to turn in old computers or other durable goods in exchange for new ones. Of course, as with the cash-for car clunkers subsidy, many consumers under this more general clunker program would simply alter when they purchased the new durables to take advantage of the subsidy. The net result would again be subsidies that produced little net increase in spending. Several arguments might explain why the decision was made to concentrate the clunkers program on cars rather than include other consumer goods. A cynical view is based on the fact that the federal government is now a major stockholder of two auto companies, GM and Chrysler. Subsidies to stimulate the demand for cars raises the sales and profitability of these companies, which would help justify the Obama administration's decision to bail out these companies in a big way. Of course, the longer-term effect on GM's and Chrysler's profits would be small if the cash-for-clunkers program mainly redistributed new car purchases from later times into these past five weeks. That the government wants its car ownership balance sheet to look better does not mean that the program makes good economic sense. Another justification for the program relates to the environment, and argues that carbon dioxide and other pollutants from burning gasoline would be reduced if new fuel-efficient cars replaced old inefficient cars. However, the exchange of clunkers for new cars would raise, not lower, the amount of gasoline consumed to the extent that consumers traded in old cars that they never or seldom drove because the cars were in such bad shape for nice new cars that they would drive a lot. Even if the older cars were in reasonably good shape but got poor gas mileage, new cars would be driven more miles because, being much more fuel efficient, they would use much less gasoline per mile of driving. On balance, the clunker exchange might result in only a small net reduction, if any, in the amount of gasoline used. According to Sunday's New York Times, the average trade-in got 15.8 miles to the gallon compared to about 25 miles per gallon for the cars that were purchased. If the cars will be driven about 50% more miles per year than the clunkers that were exchanged-not an extreme assumption- there would be essentially no effect on the gasoline consumed. The main problem I have with the cash-for-clunkers program from the viewpoint of reducing pollution is that the program is such an inefficient way to cut down on gasoline consumption. The obvious best approach, not politically easy to accomplish, would be to raise the federal tax on gasoline. This would encourage owners of all cars to drive fewer miles since the cost of driving would go up for every driver, no matter how fuel-efficient their cars were. Higher gas taxes would especially encourage owners of older inefficient cars to drive much less-as they did when gas prices topped $4 per gallon- and even induce them to trade in their old cars for more efficient cars without offering any special incentives to do so. This criticism of the clunkers program as inferior to a gas tax applies also to the CAFÉ standards approach of the US to raise the miles per gallon of gasoline of the fleet of new cars produced, the cash and tax credit incentives to buy hybrids, and various other approaches that are being used to try to reduce gasoline use. There is a further major difficulty with the clunkers program that illustrates a much more general problem of fiscal efforts to stimulate the economy. The details of spending programs are so slow for legislators to work out, and the delays in implementing the spending are so long, that the government "stimulus" gets implemented usually only after the economy is already pulling out of a recession. The US economy and that of most other major nations have stopped declining and are beginning to grow again. Yet rather little of the Obama stimulus package has yet been spent. As Posner indicates, most of this spending has taken the form of transfer payments, but that is for a good reason since government projects are much slower to develop and implement. Even payments to car dealers under the clunkers program are being delayed because of administrative snafus in processing claims. This is a classical argument against using government spending for counter cyclical purposes, but seems to have been forgotten during this recession.

Comments

[Anonymous]

Can you guys say, "Feel Good Politics"? Throw Joe Sixpack a bone? How about a handsome transition allowance for auto dealers wrestling with a deep recession, unsold '09 inventories, the GM and Chrysler BKs, tightening consumer credit, and a veil of mystery about what the new vehicle lineups will look like when 35 mpg kicks in? If there's any public policy defensibility about the "clunkers" program it'd have to be that it did succeed in removing a few hundred thousand worn-out, gas-hog, poor-emissions, and probably dangerous cars and trucks from the roadways. It isn't unreasonable to argue that real lives and limbs saved are worth more than Wall St bankers' bonuses. And some will be saved.

A popular rumor holds that our old household appliances will be next. Another sez the TARP and similar program $$$ held back and being repaid is already earmarked to take the Too-Big-to-Fail banks off their $ Multi-Billions in bad commercial real estate exposures. And the FDIC, of course, needs $ Hundreds of Billions if it's going to close 200 more regional & local banks and protect depositors to $250K per depositor per institution. Congress giveth and Congress taketh away. It just waits to drop the other shoe. All considered, it's a miracle we're still on this side of the grass.

Brian Davis
Austin, TX

[Anonymous]

(1) the car is one of the two major wealth ownership for American (house is the other).
(2) car is the necessity for American to find a job. Expend the possible location limitation of search for a new employment. (how many jobless without a car?).
(3) expanse of the gas is one of limiting factor for many people to keep the house in the suburbs. Particularly, low price big house in far distance to work place.
(4) yes, it is short time boost for economy, specifically, auto sector. Three hundred workers got called back to GM plant from my neck of woods are somewhat big relief to both the housing market and local restaurant alike. How long it would last? who knows. But sure feel better than without the boost.
(5) any better ideas? this is like terminal ill person waiting for miracle treatment to be develop by some Nobel price winner. You can find the right treatment after the person's death, or you can keep him/her alive, waiting for the good fellow come out treatment (hopefully, he has better sense of urgency to get to you before file the claim of Nobel price, not the other way around).
my 2 cents.
st.

[Anonymous]

My take on this in the url. Cash for Clunkers is addressed about half way down the post.

Steve Myers
Akron, OH

[Anonymous]

Becker and Posner persuasively explain why the Cash For Clunkers program is idiotic public policy. To be sure, however, the Cash For Clunkers idea has some symbolic value. Why not combine that symbolic aspect of Cash For Clunkers with government spending of taxpayer money in furtherance of a truly worthy aim? That is, apply Cash For Clunkers principles to send Pelosi and Waxman and their legislative allies to the political junkyard.

[Anonymous]

Prof Becker,

Could you separate your paragraphs with the return key if its not to much trouble?

[Anonymous]

Professor Becker,

I agree that the program was inefficient and probably had only mediocre effects on the economy or the environment. However, it may have been one of the only politically feasible way to start some long-term environmental benefits.

For instance, the average participant would have to drive the new car 58% more miles to match the CO2 output of the clunker (not to mention the other pollutants, which are probably much worse for the clunker). I suspect the increase will be much smaller than that. Also, combined with higher gas prices, this program could be a good way to get lower-wage Americans into more efficient vehicles.

Unfortunately, the program rewarded drivers who have been polluting the most, instead of those of us who have always driven fuel-efficient cars. However, the world is not fair, and this programs seems like a practical way to reduce emissions.

(Maybe if more Americans were happy to have their government tax gasoline and internalize the negative externalities associated with driving, Obama could have pursued a more efficient program!)

[Anonymous]

Has any keynesian policy from this administration or the previous actually done anything positive for us? NO..!

Passing the Clunkers bill, and all the other keynesian bills, on to the next generation is like ordering a steak from Gallagher's, skipping the bill, and sticking it to the next couple who takes your table. Can politicians be anymore irresponsible...!

[Anonymous]

The Cash for clunkers program from what I've seen was intended to provide a two pronged solution to two major American problems. The first is environmental. Such that the U.S. has International obligations to reduce its carbon emissions, this is accomplished by removing old worn out transportation vehicles from the roads which are one of the largest producers of the Nation's Carbon footprint. This it has done to a certain extent.

The second prong of the program, was stimulating the Economy. All Auto Manufacturers have been suffering from massive cash flow problems, due to the collapese or near collapse of the over leveraged Financial Industry. Such that the existing inventories of Auto Manufactures have become a significant drain on their assets which are required to weather this economic storm. By creating the "Cash for clunkers" program, Congress ahs created an artificial demand for this unused and econmically damaging excessive inventory. Reducing it to a level, whereby the Auto Industry is not being dragged down by an Inventory millstone around it's neck along with a lack of internal cash flow via non available loans from the Financial Industry. Also, by reducing Inventroy levels, It also sets up the Auto Industry and its suppliers, for a quicker recovery when sales begin to creep up naturally with the rest of the recovery of the Economy by replacing depleted inventories. So from this pespective, the "Cash for Clunkers" Program may very well be a success. Let's hope so.

"The times are piled high with difficulties and we must rise with the occasion, so we must think anew and act anew. We must disenthrall ourselves and then we shall save our Country."

We need and must put people back to work in paying, full time jobs, with benefits. That is the only solution to the Economic Crisis.

[Anonymous]

According to Sunday's New York Times, the average trade-in got 15.8 miles to the gallon compared to about 25 miles per gallon for the cars that were purchased. If the cars will be driven about 50% more miles per year than the clunkers that were exchanged-not an extreme assumption- there would be essentially no effect on the gasoline consumed.

There seems to be a problem with the logic here. Even if it's true that the newer cars are driven more miles, there is no reason to believe that the number of cars on the road will increase as a result of the average car being driven more miles. For example, cars might be bought less often. And if the total number of cars on the road stays the same, then the increase in fuel efficiency is still beneficial.

Assuming the amount of fuel consumed per day does decrease as a result of the program, it's worth pointing out also how hard it would be to reproduce the same result again. In order to save the same amount of fuel again, the same number of 25 MPG cars would have to be traded in for 57 MPG cars.

Regardless of its other merits or demerits, I think the program counts as a modest success for the environment.

[Anonymous]

Readers continue to wait patiently for any engineers or mathematicians to post comments on this subject.

[Anonymous]

Why are we discussing the relative value of political stupidity.

[Anonymous]

When I googled "Becker Posner Blog" today, the search did not return this website! Also, the first link was the ANTI-Becker-Posner Blog. Why is this the case?

[Anonymous]

Did GM or Chrysler sell any cars with this program, or was it just Japanese Auto that received the taxpayer's $2.9 billion...?

GM and Chrysler are so bad. It doesn't matter how many billions the govt. gives to the UAW to reward them for voting for Obama, nobody wants the garbage they make at the prices they charge. Obama can give the UAW another $30 billion of our money by borrowing from the Chinese or printing it, it won't matter. They are a joke and a disgrace to the basic concept of business and trade. They NEED TO FAIL in order to do us all a favor...!

[Anonymous]

It was not a bad idea to help stimulate spending and the economy... especially for the auto industry.

I think the environmental affect, though slight, is a bonus.

[Anonymous]

Great. The feds(us) are giving money away which we borrowed from the Chinese so the auto companies which we(the feds) own can make enough money to pay ourselves back so that the Chinese can make a decent return on their investment. Makes perfect sense to me.

[Anonymous]

The linchpin here is his estimate that new cars will be driven, on average, 50% more miles than old cars. Is there any justification for this assertion that mileage demand is so elastic? Is it based on the reduction in driving last summer? Poll data showing that many clunkers were never driven at all? Help me out.

CFK
Urbana, IL

[Anonymous]

Becker: On balance, the clunker exchange might result in only a small net reduction, if any, in the amount of gasoline used.

Anon:Regardless of its other merits or demerits, I think the program counts as a modest success for the environment.

Both Becker and Anonymous (and most people) miss one crucial fact here. The difference between the two cars MPG is NOT the only relevant use of gasoline (I'll say "oil")-- there is also the one-time but very substantial use of oil involved in MANUFACTURING A NEW CAR!!!

Good grief, people.

Petroleum distillates are involved in almost every single aspect of manufacturing a new car, from direct use (in every plastic), to nearly every indirect aspect, like trucking the finished car to the dealer, like getting ten bazillion workers to their respective factories/offices, like keeping all the various machinery "oiled", ad infinitum.

In all probability, the total oil consumed by the "trade-in" guy is an order of magnitude greater than the guy who sticks with his old clunker, the difference in MPG notwithstanding. And that goes for *every* do-gooder who junks an old car to buy a Prius, regardless of the Cash For Clunkers fiasco.

Like most (all?) liberal feel-good ideas, this one has exactly the opposite result than intended.

[Anonymous]

PS: and where do I put my username?
-- zeppenwolf

[Anonymous]

Anonymous,

If most of these cars would have been purchased eventually anyway, then cash for clunkers didn't encourage any new car production.

[Anonymous]

Anonymous,

If most of these cars would have been purchased eventually anyway, then cash for clunkers didn't encourage any new car production, and therefore didn't encourage the use of more production-related oil.

[Anonymous]

Anon, Aug. 27,2009 10:11 & 10:12
Anon, Aug. 26,2009 11:44

What the heck are you folks talking about? When it comes to Economic Development there is the long term and the short term. Of course production hasn't increased as of today. This is a long term development impact plan.

The problem you folks have, is a short term mentality and not being able to see beyond your nose. Which is what created these economic crises in the first place. It's called "Boom and Bust" and now we've got to try and stabilize it for the long term. Not only for ourselves, but for future generations. This ain't going to be easy and won't be completed by tomorrow afternoon. Thank Wall Street and K-Street for this. Not too mention all of the half baked Free Trade/Free Market/Anarcho-Capitalist Ideologues who lead this Nation down this "Primrose Path".

[Anonymous]

Only persons who drink too much Obama Kool-Aid could view Cash for Clunkers as any sort of effective economic policy. What absolute bunk.

[Anonymous]

Anon. Aug. 27, 2009 9:25

And so ..., those who seek with malacious intent to destroy the People, the Country and the Nation; have begun to show their faces and true natures.

[Anonymous]

If you took 1000 people chosen at random from the phone directory, they could do a better job running the country than all of the power mongers we have running things now. Americans will never learn.

[Anonymous]

It's also a hand out for the rich.