Cash for Clunkers?

(4/1/2009) - I was at the gym the other day, and on the T.V. they were talking about a so-called Cash for Clunkers program the government was considering.  At first, this struck me as a waste

Here’s how the program that Congress is considering would work.  If you have a car at least eight years old, the government will buy it from you for up to $5,000 (less the older the car is).  

The plan is intended to have at least two effects.  First, the program is designed to have some stimulus effect on the economy and the beleaguered car manufacturers in particular.  Second, taking older, less fuel-efficient cars off the road will reduce the use of gasoline.

This is how its supposed to work in theory, at least.  There are some scenarios in which the government is not buying what its aiming for.  Since the government will only buy a clunker if the owner buys a new car, it knows that every subsidy is tied to a purchase.  In cases in which the clunker owner would have bought a new car anyways, there is no additional economic stimulus but the government’s subsidy does guarantee that a more fuel efficient car is purchased.  There will also be cases where an owner is turning in a clunker that was rarely driven in the first place.  In this case, the subsidy might have economic stimulus, but could possibly create even more pollution. 

Such exceptions are a hallmark of why government subsidies tend to be inefficient.  There is no economical way to pick and choose which subsidies are fulfilling the program’s aim and which are not.  The government must simply establish the most efficient set of rules it can and then take the wheat and the chaff at the same time. 

So what are the scenarios where the government subsidy is worth it, at least from a non-stimulus standpoint, since I don’t feel I’m qualified to evaluate that portion of the program? 

Lets look at what I think will be a regular scenario.  Ralph bought a new Ford Explorer in 1999, has driven it a typical 15,000 miles a year, and wants to trade it in for a new car before maintenance costs become to high.  While Ralph would have preferred a new Dodge Dakota that gets 15mpg (the same as his Explorer), the government is offering more money for the Explorer than he could get through a private sale.  He can’t afford one of the SUVs on the government’s list of acceptable models, so he opts for a 2009 Toyota Corolla, which gets 30mpg. 

Ralph proceeds to drive the Corolla for 10 years and 150,000 miles.  By changing from a car that gets 15mpg to one that gets 30mpg, Ralph (with the government’s help) reduced his consumption of gasoline from 10,000 gallons to 5,000 gallons.  Assuming that gas stays around $2 a gallon, that’s a savings of $10,000.  Instead of paying for gasoline, the money could be spent on other goods and services, which is more beneficial to the U.S. economy since we produce a rapidly shrinking portion of our petroleum.  While the government will lose money it would have otherwise earned from the gasoline tax (currently $0.184 a gallon, or $920 over the life of the car), it will earn probably all of this and some of the initial subsidy back in additional revenues generated from the growth of economic activity that Ralph’s new non-gasoline spending would create (for the purposes of this exercise, I’m going to assume that America doesn’t give up its consuming ways all of a sudden). 

If the price of gas rises in the next 10 years, which it almost certainly will unless the current recession becomes a world-wide depression, the savings for Ralph will be even greater.  At $4 a gallon, the price gas sold for last year, the savings will total $20,000 – almost the price of the new car. 

Preventing the combustion of 5,000 gallons of gasoline will also prevent delay the release of a lot of carbon (I say delay, because all of the world’s petroleum will be burned at some point in the near future).    

While I think a cash for clunkers program could be a worthwhile program to help Americans reduce fossil fuel consumption and promote investment in more fuel efficient cars, I don’t think this particular program does the job well enough to justify the cost (though the economic effects, which I’m not evaluating, might provide enough justification).  The main problem is that not all the cars on the list of vehicles that meet fuel efficiency requirements are actually that fuel efficient.  For example, Honda’s CRV that gets 22mpg, the Jeep Patriot gets 21mpg, and the Toyota Highlander gets 20mpg.  The rational behind this is that these vehicles are more fuel efficient than other vehicles in their class.  However, letting someone upgrade from 15mpg to 21mpg instead of 30mpg is a lot less efficient use of government funds as well. 

One thing I didn’t realize before now is how inefficient lots of modern sedans are.  The 2009 Honda Accord only gets 24mpg, the Toyota Camry gets 25mpg, and the Nissan Maxima only 22mpg (though this car isn’t on the government’s list for the Clunkers program).  Before researching this article, I assumed they were all closer to my 2000 Corolla, which gets about 32mpg (though its rated at 28mpg – maybe the combined ratings are all a bit low). 

From an environmental standpoint, the government shouldn’t be subsidizing the purchase of non-hybrid SUVs and pick-up trucks, or sedans that only get 24mpg.  Some higher standards would be appreciated.  And while the recent stimulus package has provided extra money for public transportation, it could always use more, especially now that states are slashing budgets left and right just as use is at historic highs, and the stimulus money isn’t being appropriated to help them operate (its mostly for buying new equipment).  Increased public transportation not only provides an alternative to driving cars of all types, but it provides a cheap way to travel for the low-paid and growing number of unemployed who can’t afford to buy a new car even if the government buys their old one for five grand.