18 June 2009

Cash for Clunkers

This bill caught my eye, and I finally read the version the Senate is considering. (It's H.R. 2751, search for it here, I cannot seem to link directly to the bill text.)

If your trade-in vehicle meets conditions (must be drivable, insured at least a year prior, get 18 mpg or less, and be post-1984), you can receive a $3,500 voucher for buying
  • a vehicle with 4 more mpg compared to the trade-in ($4,500 if 10 mpg better)
  • a small truck with 2 more mpg ($4,500 if 5 mpg better)
  • a medium sized >15 mpg truck that gets at least 1 more mpg ($4,500 if 2 mpg better)
  • a medium sized truck that gets at least 15 mpg and your trade in is a larger truck
  • a larger truck that is smaller than your 2001 or earlier trade-in
The dealer is responsible for delivering this car to the government where it "will be crushed or shredded." The dealer can, however, sell parts other than the body and drivetrain/engine.

The net result is that the government will overpay for these trade-ins but still receive something of value. However, they will then take this valuable car and destroy it.

How is this possible stimulative?

If people buy more cars, then perhaps it is stimulative for the auto industry. But we as a society are spending $3,500 to buy a car worth maybe $2,000, and then destroying what we bought. It stimulates one side while ignoring the hidden costs of where the money is coming from to finance the program (see Bastiat's broken window fallacy). The government, I am guessing, is hoping that a large positive externality exists from doing this, but this ignores that
  • more efficient cars are driven more than less efficient cars (Prius drivers drive more)
  • the savings will be minimal (as little as 1 mpg savings)
  • many buyers likely would be buying these cars anyway
Bottom Line: We prosper when we allocate resources well. This policy instead destroys resources and makes us poorer.

8 comments:

Damian said...

The more i think about it the angrier I get. Reminds me of pig slaughters in the depression to keep pig prices high

GRACE said...

It is ridiculous. This bill comes down to a misguided attempt to stimulate the car industry in the U.S., which, hey, is partially owned by the taxpayers. (This also includes U.S.-based foreign car manufacturers and dealers)

The real efficiency is in driving less (or at least not needlessly), charting more efficient courses when driving, maintaining your vehicle, and maybe ride sharing if you can do it, etc., not buying a new car.

Funny thing is that this policy is currently being tried in Germany where they have absolutely no need for such measures with their already fuel efficient auto fleet.

Michelle said...

Here's my version - the government will buy your car for $500 and shred it when you buy a bicycle, bus pass, walking shoes, and/or prove you have not replaced your car. Alas, I have no car to make the $500 on. Maybe I can steal my neighbor's.

Damian said...

I would love to see more ride sharing. If urban hitch-hiking returned to where it was in the past, where my dad tells me he hitched his way to high school almost every day, the gains would be tremendous. No longer would we have people waiting for infrequent public buses just to go a couple miles, etc. There is so much available space in cars and as prices go up, I hope this comes back a bit.

Ju said...

I don't qualify because my car already gets good gas mileage. My dad swears by the car buying process here: http://excarsalesman.typepad.com/ It is kind of similar.

I haven't tried it yet, but I might because it looks good.

I have a feeling dealers are going to automatically increase prices because of the increased demand (artificial) for lower MPG cars. So the thousands of savings from this bill for consumers is not entirely accurate. The demand will increase prices and you'll get a voucher from increased prices. I'm certain some markets you'll come out even as if they never offered this voucher. It is poorly written legislation.

Gayle said...

With the mountain of buy-a-car incentives, I can't understand why the real bottom line is almost always overlooked. A new car payment is affordable for us. The car payment plus the state sales tax, annual personal property tax AND auto insurance for a new car is a budget-breaker.

Better for us if they'd subsidize State Farm!

George J. Janczyn said...

You mentioned difficulty finding the text of the bill. OpenCongress.org will answer just about everything you want to know about Congress. This bill's text and current status can be seen at:

http://www.opencongress.org/bill/111-h2751/show

Regards,

Gj

Asparagus said...

If you couldn't afford the home you live in, the govt will help you keep it....

If you buy gas-guzzler, the govt will help you pay for your next car....

Moral hazard isn't just for big banks anymore.