Conor Friedersdorf, one of my favorite conservative bloggers, highlights two “sound” and “serious” arguments against the cash for clunkers, or CARS, program, which offers car buyers a government-financed rebate when they trade in a car for a higher-mileage car (some limitations apply). The traded-in “clunker” is turned into scrap metal.
The first serious argument Conor quotes comes from Radley Balko (a blogger I read religiously — seriously, if you’re not reading Radley, you’re missing one of the best bloggers on the planet). Radley, in the midst of a post critiquing the Daily Show, writes:
There’s also the laughable idea that the government is ordering the destruction of tens of thousands of used automobiles it paid people thousands of dollars to exchange . . . for new cars that may get no more than an added four miles per gallon. And all in the name of saving energy. I’m no television comedy writer, but if they wanted to, the creative minds at TDS could certainly have gotten some mileage (sorry) out of the idea that the government’s energy savings equation looks something like this:
(all of the energy that went into making the old car) + (the energy it will take to destroy it) + (all of the energy it took to make the new car) + ($3,500) < an extra four miles per gallon!
Obviously, Radley’s tone was a bit tongue in cheek, but since it’s one of the two “serious” arguments Conor chose to quote, I’ll address it seriously. There are two problems with the formula Radley presents.
It’s true that some trade-ins would qualify for just a four mile per hour difference — and it was based mostly on that, a month ago, I thought the CARS program sucked. But in practice, it appears consumers are eager for more substantial improvements:
Transportation Secretary Ray LaHood said the average mileage of new vehicles purchased through the program is 9.6 miles per gallon higher than for the vehicles traded in for scrap. Buyers of new cars and trucks that get 10 mpg better than their trade-ins get the $4,500 rebate. People whose cars get between 4 mpg and 10 mpg better fuel efficiency qualify for a smaller $3,500 rebate.
LaHood said some 80 percent of the traded-in vehicles are pickups or SUVs, meaning many gas-guzzlers are being taken off the road.
I’d argue for more stringent mileage requirements, but regardless, clearly the CARS program has been doing much better than just 4mpg. To imply that CARS gets an improvement of just 4pmg isn’t a “serious” argument.
Radley’s formula is also mistaken because it includes costs that would have been incurred regardless of whether or not the CARS program existed. For instance, “all of the energy that went into making the old car” was expended before the CARS program began, which makes it a sunk cost; blaming that energy cost on the CARS program is irrational.
Similarly, many of the new cars would eventually have been manufactured and sold at a later date — when the sales wouldn’t do as much good for the environment (because sooner is better than later), and when the economy might not need the boost as much. To whatever degree the CARS program displaces demand from other times, rather than creating it, it wrong to hold CARS responsible for “all of the energy it took to make the new car.”
Working out ecological benefits of government programs is hard. But on the whole, this program appears to be, if not perfect, definitely beneficial. That’s worth something.
Conor then quotes National Review’s Rich Lowry:
The fundamental mistake is to think that the government can magically induce economic activity with no countervailing downside. The Clunkers program is really just shifting around sales, creating the illusion of a demand for cars conjured out of nowhere. To the extent the program has enticed people to speed up or delay their purchases to take advantage of the rebate, it has borrowed demand from earlier this year or the future for a burst of sales in the summer of 2009.
This is a less intelligent argument than Radley’s (presumably reflecting the big drop in economic literacy when one shifts from reading Reason to reading NR). But first, let’s note that this argument entirely contradicts Radley’s argument. If — as Rich claims — “the Clunkers program is just shifting around sales,” without creating any new demand, then none of the “energy it took to make the new car” can be blamed on CARS, since the new car would have been created regardless. If Conor noticed the contradiction, he didn’t mention it in his post.
That aside, Rich is correct that there’s a downside. Specifically, the downside is the billion dollars it cost taxpayers (soon to be three billion, once the Senate votes to extend the CARS program). Stimulus costs money — even stimulus that’s beneficial in the long run. This isn’t news.
The rest of Rich’s argument is preposterous. For Rich’s argument to be true, we’d have to believe that demand for cars at the current price, and demand for cars at the current price minus $4500, are the same.
There are inevitably going to be some prospective car-buyers who won’t trade in their current car at current prices now or in the future, but who will do so if the price is $4500 lower. To illustrate this, I’ve done something I haven’t done since college: I’ve drawn a supply and demand graph. (Well, really, just demand.)
This is very basic economics. As prices drop, demand increases, leading to increased sales. That in turn leads manufacturers to produce more cars (supply goes up), which will get them to hire more workers, or at least slow down layoffs.
Aren’t conservatives supposed to know about supply and demand? Apparently, that’s not something they teach writers for the National Review.
It’s true that some of the increased sales due to CARS are sales displaced from other times — either pent-up demand from the past year, or people who would have bought a new car anyway, sometime in the future. Contrary to what Rich thinks, displaced sales are a strong argument in favor of CARS, because the economy needs the stimulus more now than it will a year from now. (We hope.)
But some of the demand must be new demand, created by lower prices. Unless we assume basic economics have ceased to function.
There’s a lot I’d criticize about the CARS program — it should have been more stringent about improved mileage, it should have included older cars, and perhaps it should have been extended to used car buyers, as well. (I’m not sure about that last point only because I’m not sure how much lower the stimulus effect would have been.) But on the whole, the program appears to be a success. If the arguments Conor quoted are the “sound” and “serious” arguments against the program, then cash for clunkers looks pretty damned good.
I know that the plural of anecdote is not data, but simply because this program got my dad’s truck off the road am I glad it happened. My father bought a pick-up at least fifteen years ago, and he was planning on keeping it until it literally fell apart. It’s halfway there at this point – no air conditioning, no power windows, no radio, the driver’s door had to be opened from the inside. He did all the repairs himself the last five years, and I don’t even want to think what the mpg was.
Thanks to the program (and an additional factory rebate) he was able to get a new truck with (for a truck) excellent mileage. With air conditioning. This is very important to my mother who would have to use this thing periodically and lives in Alabama.
This program may not be as awesome as the government makes it out to be, but it is getting rid of old cars, getting more efficient cars on the road, making cars more affordable to a large segment of the population, and helping the car industry which seriously needs the help. There may be a downside, but the upside is too good for me to trash talk the program.
Listening to M.I.A and just remembered why Friedersdorf is worth reading even if his math skillz are sketchy.
Cash for Clunkers is hurting charity car donation since the amount of the voucher is so much greater than that of the tax deduction one would get by donating a car. The cars that are now being donated to charity are the ones that aren’t able to get a voucher because they don’t run. Charities sell these cars at the very same scrap yards that are now flooded with Cash for Clunkers cars. The result, the value of scrap metal is down and so is the revenue charities get from donations of non-running cars. Cash fo Clunkers is delivering charities a double whammy!
Here’s the other thing: miles per gallon really sucks as a consumption measure, and anyone who makes generalized arguments from mpg is kinda innumerate. Sure, if I turn in my ancient 30-mpg compact for something getting 35 mpg, that’s only about a 15% reduction in gas consumption (although it’s unlikely the old car still gets 30 mpg with blown rings and a wonky transmission).
But if I replace that old truck/SUV that gets 8 mpg on a good day downhill with one that gets a mere 12 mpg, that’s a 33% reduction in gas consumption.
And if you go by actual gas consumed, it looks even better. Over a typical 10,000-mile driving year, the compact-for-compact swap will save you about 40 gallons of gas, but the truck-for-truck swap will save you about 400 gallons.
karenc,
I think that must vary regionally, since the Boston Herald reports that Boston-area charities saw some decrease due to the recession, but not specifically when the CARS program began.
I’d think the biggest dropoff in car donations came when Congress changed the rules so that people no longer could cheat the IRS by claiming a value to the donation that was much higher than the charity actually sold the car for.
Another obvious issue with CARS is debatably the EPA classifications combined with the mileage cutoff: the way CARS is set up, it primarily benefits people who have work trucks and SUVs, and doesn’t offer much benefit to people with relatively low-MPG “normal” cars.
In fact, the EPA mysteriously “reclassified” some cars from 18 MPG (qualifying for CARS) to 19 MPG (not qualifying) shortly before CARS started. There’s an interesting Consumerist article on it somewhere.
And yes, I confess to personal annoyance: I own an old as hell grand caravan which functionally gets about 15 MPG but which the EPA classifies as 19 MPG. (making matters even more annoying is that the EPA doesn’t distinguish between the regular and grand versions, though the grand version weighs a fair bit more and has worse mileage.) I drive that van everywhere, every day. I’d love to trade it in, but can’t.
I CAN, however, trade in my works-perfectly-for-what-I-need beatup early-90s work truck, on which I put something well under 10k miles/year just to get wood, dump runs, etc. I don’t want to, but CARS will give me twice what I paid for it, so I guess I will.
From an environmental standpoint, though, I’d be much better off trading in the minivan.
>Specifically, the downside is the billion dollars it cost taxpayers (soon to be three billion, once the Senate votes to extend the CARS program).
$3 billion = how many days of U.S. occupation of Iraq?
It SHOULD have included those of us that bought fuel efficient cars 12 or 15 years ago. hell, we should have gotten a bigger rebate than the gas guzzler drivers.
jimS,
It SHOULD have included those of us that bought fuel efficient cars 12 or 15 years ago.
So long as those cars remain more fuel-efficient than 18 mpg, why should you get a rebate? I bought a Civic hybrid in 2002 and have enjoyed the savings on gas all along. Virtue in buying a fuel efficient car is its own reward, so long as the price of gas is so high.
PG writes:
Wait until the plug-ins start to get on the roads. The virtue of them is never stopping at the pump, and being able to refill in the comfort of your own home.
And another person complaining about the moral hazard of apparently rewarding people for having bought fuel-inefficient cars:
I think this would make sense as a complaint if government tax policies were, like religion, about rewarding the virtuous and punishing the less-so, but they’re not. They’re about maximizing some particular goal, in this case the number of gas-guzzlers removed from the road and the number of new and more efficient cars sold. Sure, someone who bought an SUV as a “business expense” during the Bush Admin benefited then from certain tax policies that encouraged the purchase of “trucks” as part of the 2002-03 economic stimulus, and now that person is benefiting from the Obama Admin’s counteracting the Bush policies. That’s what we get for having a two-party system in which the goals pursued by one administration may be a 180 on those pursued by the next.
For the most part I agree with most of you. This is a step towards improvement and I give a slight nod to Congress for that. This program IS creating demand that didn’t exist. People who would not be able to purchase a new car without it and who probably need new vehicles now can. $4500 is a lot of money and if you don’t think it is then this program is not for you. As far as hurting donations…I doubt that can be attributed to the CARS program at this point, how can you prove that yet? With the combination of 0% interest, manufacture rebates and the government rebate cars can be relatively reasonable again…thus providing demand and thus providing and economic stimulus. I think this program is a big step forward compared to the stimulus checks sent out last year. Sure it was nice to get some cash but it obviously didn’t stimulate the economy. I know I didn’t go buy something nice for myself in effort to stimulate the economy, I paid bills. I don’t have a vehicle that would qualify for this program but I know several people who did AND who needed this boost in order to purchase a new vehicle. So I say kudos for this program and the (for once) logical attempt at boosting the economy.