Legal Commentary

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

By Gary 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.

Full post as published by Becker-Posner Blog on August 24, 2009 (boomark / email).