Clashing clunkers

The federal government’s “cash for clunkers” program has been the hot economic news item the past two weeks.  The program is novel, visible, finding lots of takers, and by far the most popular item in the stimulus package.  It is not without its critics, however, on both the economic and environmental fronts.  Let’s review the debate.

The first national “cash for clunkers” proposal, as far as I know, came from the eminent macro/policy economist Alan Blinder in a NYT column about a year ago. Blinder noted that smaller-scale programs had already been implemented in several states and Canadian provinces.  He touted it as a “public policy trifecta”:  (1) It would help the economy at low cost:  he estimated the cost of a good national program at about $20 billion, cheap in comparison with the then-stimulus of $168 billion (not to mention this year’s $787 billion stimulus).  (2) It would do a lot to reduce exhaust pollution, an estimated 75% of which comes from cars over 12 years old. As for the apparent waste of retiring old cars that still have some life in them, he said they could be refitted with new emissions controls and resold, or their scrap metal could be recycled. (3) It would be progressive in its impact, since it’s mostly poor people that drive those old clunkers.

My former graduate macro professor Willem Buiter had a typically hilarious and typically negative response, sarcastically titled “Please torch my car.”

Buiter allows that it could work as a short-term Keynesian demand stimulus, but disses the plan as voluntary euthanasia for still-serviceable cars:  “It’s like being paid to burn down your house to encourage the residential construction industry.” (If Buiter were Austrian instead of Dutch, he might have invoked the broken-window fallacy.)

The obvious rejoinder to this argument is that those cars are big polluters (see Blinder, above) and that giving people generous trade-in offers that they can use to buy new, more fuel-efficient cars helps the environment and the car owner at the same time.  (One could also add that what he calls waste, others would call an upgrade that raises the consumer’s utility. Not many of us wish we were still using our 1970s TV’s and 1990’s cell phones, even though they might still be serviceable, too.)  Buiter calls the environmental argument disingenuous:

‘. . . production of . . . new vehicles is, when you put it through the appropriate global input-output matrix, an environmentally damaging affair, requiring lots of metals, plastics and energy.  You have to weigh the environmental benefits from running a new car (a lower flow production of greenhouse gases, say) against the one-off environmental cost of a higher volume of car production.’

Yes, we do. And in the flurry of articles about cash for clunkers, someone has surely done that by now.  In the meantime, I’ll note my favorite part of Buiter’s column: the conclusion, in which he notes that he drives ‘an 18-year old hooptie.’  I wish I could hear my almost-60-year-old Dutch economics professor saying ‘hooptie’ in person.  I associate that word with a different seminar:

The Economic Policy Institute (EPI), writing this week, gives the program a rave review, saying that the average mileage improvement from old clunker to new replacement is about 10 mpg and that the associated savings will be about $821 per year per car. The EPI also estimates that CO2 emissions will fall by about 850,000 tons per year as a result. But their study does not address Buiter’s criticism that we need to look at the environmental impact of manufacturing new cars. Let’s keep looking.

First, a key criticism of the program is that it lets people trade in their old gas guzzlers for new ones with only slightly better mileage. As the program currently stands, you can get a $3500 credit toward a new vehicle if the new car gets 4 mpg more than your old one (or $4500 if the difference is 10 mpg). Still, an average 10 mpg difference is what the Department of Transportation estimates, so that part of EPI’s calculation appears valid. A different problem is that the demand for gasoline is at least somewhat elastic, so people may use their new fuel-efficient cars to drive longer distances, offsetting the reduced CO2 emissions.  Again, what about the environmental cost of producing new cars?  Minnesota Public Radio found a few studies:

‘Experts at the nonprofit organization CalCars based in Palo Alto, California, calculated that replacing an old vehicle with a new one reduces carbon emissions only if it provides more than twice the fuel economy of the vehicle it replaces. So, they say trading from 18 to 22 or 25 mpg doesn’t make up for the energy it took to manufacture, then destroy the old car before its lifetime is up.

‘An Associated Press analysis estimates that “cash for clunkers” could have the same effect on global warming pollution as shutting down power for the entire country for an hour per year.

‘The law requires that the trade-in vehicle be crushed or shredded, so that it can’t be resold and re-used. In St. Cloud, the old cars will make their first stop at a recycling processing center.’

So much, then, for Blinder’s suggestion that trade-ins be refitted with new emissions systems. But here’s a caveat to the point about new cars:

‘Environmental professor [Derek] Larson points out that the new vehicles were already manufactured, and the number of vehicles sold under this program is a relatively small percentage of national auto sales in a year. Larson said that’s not likely to have much impact on factory production. The effect might be limited to dealerships that sold most of their inventory or the inventory of a particular kind of fuel-efficient car.’

Scorecard: So far it looks like the clunkers program’s effect on the environment is indeed negligible.  Its greatest economic beneficiaries appear to be auto dealerships (even more so than auto manufacturers) and ‘hooptie’ owners, with perhaps a nice psychological spillover to consumers in general, or so says the Gallup Poll.

Here’s another synopsis of the debate, from Justin Fox, a.k.a. The Curious Capitalist at Time. Blinder’s own comment to Fox:

‘I always thought that cash for clunkers would be an effective stimulus, but it seems to have exceeded expectations. It would be a shame to cut it off here. The original bill was way under-budgeted.

‘That said, I wasn’t happy with the design details, which pay too little attention to environmental concerns.’

P.S. I believe a Clash video is overdue by now:

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6 Responses to “Clashing clunkers”

  1. Nick Miller Says:

    A great, comprehensive and entertaining read. How do you think “Cash for Clunkers” measures up against the First Time Homebuyer Tax Credit in terms of effectiveness in goosing the economy?

  2. Mark Eanes Says:

    Your former professor obviously taught you well. Although the environmental impact is likely to be negligible, it is always good to see anything receive a lot of buzz that at least makes people think about the environment and their possible impacts on it.

  3. Ranjit Says:

    Nick,

    It’s hard to say which of those two policies would have the greater impact. The Tax Policy Center at the Urban Institute is my favorite source for this kind of thing:

    http://www.taxpolicycenter.org/taxtopics/recoveryreport/firsttime_homebuyer.cfm

    They give the Homebuyer program a C+. Although it’s a great subsidy to homebuyers (10% of the purchase price, or about half the down payment), many of those people would have bought those homes anyway. Also, it applies to resold homes as well as new ones, and the purchase of an old home does not involve much new economic activity (i.e., is not counted in GDP except for realty/banking/legal services involved).

    The cash-for-clunkers program has much the same issues. While a free-trading treehugger like myself likes the fact that the subsidy extends to purchases of Priuses and other imports, those don’t raise GDP either (except the dealership’s and the financer’s services, and any domestic content in the car). Some of the people buying those new cars would have bought them anyway. And so far most of the cars being purchased had already been built (and hence were already counted in GDP).

    In either case, to have a direct measurable effect on GDP, new cars or new houses would have to be built. That said, the indirect effects on the economy of these programs could be significant, since housing and autos receive so much attention. Crowds at dealerships and “SOLD” signs in front of houses have to be good for consumer and investor confidence.

  4. democommie Says:

    Ranjit:

    I tend to agree with your major points. I wish they’d offer a program here in Upstate, I’m thinking “Sawbucks for Shitboxes”. Every time I drive down the street I am amazed at how many vehicles that are missing bumpers and trim or are severely rusted are being driven, with valid inspection stickers, no less. Perhaps it the NY DMV’s version of social darwinism?

  5. Richard Says:

    The most obvious effect of this program seems to be overlooked here. If one provides a subsidy to crush the “clunkers,” which tend to be relatively cheap substitutes for more expensive automobiles, one will reduce the supply of these alternatives. The most damaged individuals will be those attempting to enter the car market without sufficient income to pay for the higher-end models. These individuals have no clunkers to cash in, nor can they purchase said clunker due to the supply-reducing and price-rising result of this subsidy. However, they (through their taxes) are forced by the point of a gun (namely, the government’s guns) to pay for their own demise. Progressive? Perhaps to some, but not to all.

    It is surprising how quickly during a downturn mainstream economists turn against liberty and to the State in order to manage the economic system. The State can always use violence to take from some individuals and give to others–such is the case with any subsidy. To subsidize the car industry and housing industry at the expense of every other industry in America is obvious central management. Mainstream economists would point to incentive issues as a problematic result of this subsidization–but I will play the Austrian and point to the optimization issue as the main problem. The question is: How much? Why not direct all of our resources toward these industries–all can drive cars lined with gold! In a state of liberty, we can point to individual utility maximization as a series of limits directing productive activity–but with the State directing production, there are no such limits–we have no way of rationally knowing how much of our available resources should be directed to the production of cars and houses relative to food, clothing, etc.

    For a concrete example, think of this possibility: the government directs stimulus to the expansion of schools and roads, which requires the input of oil and fuel; oil and fuel prices (not to mention labor, machinery, etc.) rise as a result of this increased demand; other industries which require these inputs find their profitability damaged, and supply falls for, for example, food; food prices rise, and consumers find their real income fall. If this stimulus was, perhaps, a trillion dollars, say, one can imagine how far real income can fall for many consumers–how much their livelihood may be damaged. Though they will be able to drive on perfect roads and their children will go to perfect schools, many of them will become malnourished.

    Many people don’t think such a problem could arise, mostly because they are so used to free-market management of resources which has price signals and profit-and-loss tests that ration and attempt to direct resources into the most-pressing and most-efficient endeavors. The state has no such signals, and democratic voting cannot logically provide such signals. There will be errors, and there will be waste, and there will be suffering, since the state has no way of rationally allocating the resources of an economy.

  6. democommie Says:

    Richard:

    I had not seen this until now. I’m guessing you’re a Libertarian.

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