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A victim of its own success?
One of the more embarrassing features of the New Deal was the Agricultural Adjustment Act of 1933, which paid farmers to slaughter livestock and plow up good crops, as if destroying useful goods could somehow make the nation wealthier. And yet here we are again, with the cash for clunkers program insisting that working vehicles must be junked to qualify for the subsidy. Economist Mom laments the tragedy and waste, as only an economist and mother could:
I don't think I can do it.... I mean, look at all the time and money (and love) I've poured into the (already) old beagle I adopted almost two years ago. It just seems very wasteful (and somehow "heartless", even with a car) to prematurely end a "life" that still could be valuable to someone-- doesn't it?
Bradford Plumer (via Free Exchange) has doubts about the environmental or energy benefits:
as we've noted before, the actual environmental benefits of this program may well prove modest. The fuel-economy requirements for the new car were, after all, fairly lax: You could in theory trade in a Hummer that got 14 mpg and get $3,500 toward a brand new 18 mpg SUV. That's still an upgrade (and, in fact, that trade would actually save more gas than upgrading a 30 mpg sedan to a 35 mpg vehicle), but it's a meager one. And if the upgrades are, in fact, all meager, they could end up being dwarfed by the energy required to manufacture new vehicles.
And yet, the chaos as dealers and consumers try to participate in the program is leading some to describe the program as
among the most successful stimulus packages to come out of Washington since the start of the recession. The boom in car sales will give a much-needed bump not just to auto makers and dealers but also local government coffers that collect taxes on car transactions.
I've been suggesting, as has Calculated Risk, that there was a significant potential without the cash for clunkers program to see a strong rebound in auto sales. Perhaps that was about to get started in July of 2009, though doubtless the program has also helped move sales that would have taken place later in the year into July ([1], [2]). But I'm not going to be persuaded that destroying productive physical capital is a way to improve the welfare of the average American.
There's not much we can do now for those 5 million piglets needlessly slaughtered in 1933. But I'm still hoping that glitches in the DOT computer system end up giving Economist Mom's beloved beagle an accidental reprieve.
Posted by James Hamilton at August 2, 2009 06:47 AM
I completely agree. Further, with the money going out the door so quickly, it seems the program could have been designed to allocate money only to those who were willing to buy a replacement car providing substantial, rather than marginal, improvements in economy. The fuel economy thresholds seem overly strict on the clunker side (my own 1991 Buick does not qualify!), while far too lax on the new car side. I wonder if this was to increase the likelihood that domestic automakers, with their lower-economy product range, would benefit.
Posted by: Ken at August 2, 2009 09:26 AM
Couldn't agree more. Here is my take that I posted on Economistmom's site. http://learnecon.blogspot.com/2009/08/what-is-seen-and-what-is-not-seen.html This program is a classic error or reasoning, deliberately well intentioned, but harmful in the total effect once we consider what is not seen. Great reminder of the slaughter of the little pigs.
Posted by: Steven Myers at August 2, 2009 10:11 AM
Prof. Hamilton,
"...as if destroying useful goods could somehow make the nation wealthier."
Of course, the cash for clunkers program was not intended to make the nation wealthier (a stock variable), but was intended to juice the GDP numbers (a flow variable). I believe the gamble was that juiced up GDP numbers might contribute to consumer confidence. And apparently it also contributed to investor confidence because the stock market seemed to like the GDP news. Who knows, the increase equity wealth from this week's news about better than expected (or at least not as bad as expected news) GDP growth may well be greater than the loss of wealth from clunkers gone to meet their maker.
Posted by: 2slugbaits at August 2, 2009 10:13 AM
Just talked about this yesterday with my son and pointed out that it's much more environmentally damaging to make a new car than to drive an older one. This program is just a hand out to car dealers and manufacturers, really. Most dealers would have cut that much from a car's price to sell it for a trade in anyway. This way they keep that money and the government pays them.
Posted by: donna at August 2, 2009 10:43 AM
Something most people are missing is that the population of possible trade-ins is almost totally light trucks (pickups, SUV's, vans and minivans) since the 18mpg EPA max on the trade-in eliminates most potentially eligible passenger vehicles (CAFE standard has never been lower than 26mpg for passenger cars in the last 25 years, even large sedans have achieved an CAFE average in excess of 18mpg for the entire 25 year period). Given the $4500 max, there are few vehicles in good shape less than 10 years old which will be taken off the road. Further, anything other than the engine and drive train may still be "parted-out" under this program.
Posted by: benamery21 at August 2, 2009 11:02 AM
This seems to be a recurring problem of politically-driven policy solutions--that there's tendency for 'two-fer' policies intended to achieve not one, but two goals. In this case, it's not clear to me whether the goal is energy efficiency or stimulation of auto sales. The same ambiguity applies, for example, to recent energy efficiency initiatives which, at least in New Jersey, are targeted at low income households.
As a consequence, neither goal may be particularly well-served, or resources may be inefficiently deployed in reaching a particular goal. And then we're not even talking about the equity issues of who gets a subsidy and who doesn't.
Posted by: Steven Kopits at August 2, 2009 11:28 AM
While I agree with 2slugbaits as to program purpose, I'm curious about the destruction of value here: I'd be the first to agree that the aggregate increase in the price of other used cars (probably on the same order of magnitude as the program cost) due to the reduction in supply is not creating real value, although I think some schools of economists would be very disinclined to grant me the difference between value and price here.
If we assume that $4500 is a good proxy for the lost productive value of each of these destroyed assets, then how much reduced maintenance and fuel is needed to make this value-neutral on a cost-benefit test (ignoring any value from the multiplier effects of the primary (stimulative) purpose of the program)? On gas alone, we'd need to save 1800 gallons at $2.50 per gallon (assuming none of the oil burning externalities which are the secondary point of the program). If we get an average 25% fuel economy improvement (say from 14 to 17.5mpg), it takes 126,000 miles (~10 years) to payback in simple fuel savings. Well, that probably is more miles/years than most of these vehicles have left before they'd have been scrapped anyway. I'd guess half of that is a bit more reasonable average. But it isn't hard to see maintenance reductions saving half the $4500 dollars over a presumed 5 year additional life of the junked vehicle. If we saved just $450 bucks a year on maintenance of a 0-5 y.o. vehicle over a 10-15 year old vehicle, I'd say we broke even (given that the gubbmnt cost of money's about zero, and especially given that they own a big chunk of the mfg's).
Now, I'm definitely not claiming the buyer is saving money over this timeframe, but the consumption of new car would have happened even if we'd allowed the trade-in to be sold. So really, all we are doing is moving future consumption of consumables like gas, tires and car parts up from being distributed over the next five years into the present.
Are there things we could be doing with much higher NPV? Sure. Many of those things aren't nearly as easy, though, and I'm pretty sure this has a higher stimulus bang/buck than cutting the capital gains tax and the estate tax. Pretty sure it's higher than paying the living expenses of one set of potentially productive folks, preventing them from doing productive work, and paying another set of folks to sit around watching the first set, too. Guessing that producing goods and then blowing them up has limited long term value as well. Funny that this $1B is getting so much scrutiny as to its productive value when those several $Trillions are pretty much given a pass, eh?
Posted by: benamery21 at August 2, 2009 11:49 AM
Ironically, I wonder to what extent it's helping foreign manufacturers over domestic.
Posted by: matt at anarchyjapan at August 2, 2009 12:21 PM
One should consider the ever present unintended consequences. If the additional funds are approved, 750,000 usable cars that can be used by those who cannot afford a new one will be gone. How many additional people will be laid off from the auto replacement parts companies with a significant part of their customer base gone? Have an additional 750,000 people just taken on additional debt that they would not otherwise have done? How many additional foreclosures and cutbacks in spending in other areas will result? This crisis was caused by excessive leverage and this only intensifies the problem.
Posted by: Marshall at August 2, 2009 12:24 PM
The point is to get those oil consuming gas hogs off the street.........while giving the auto industry(and not just the domestic) a break hoping people will spend more money because they think things are getting better.
People actually think it is for the environment?
Wow, even I could read between the fine lines on this one.
Posted by: The Rage at August 2, 2009 12:49 PM
So what would you say about the killing of productive cows? That's going on today, not under a government initiative, but through Cooperatives Working Together. Google "dairy cooperative herd reduction".
Posted by: Bill Harshaw at August 2, 2009 01:25 PM
Cash for clunkers boils down to taxpayers paying $3 billion to destroy $2 billion of productive assets, on the premise that this $5 billion cost (the taxes can hardly be considered to be being spent "productively") somehow will be good for the economy.
It's another example of the Broken Window Fallacy in action, the belief that destroying assets is good for the economy because it causes income to be earned by those who replace the assets. (As opposed to being good for those who get paid to replace the assets, and bad for everyone else.)
As to the green fig leaf of environmentalism that's being used to justify this handout to the car companies, it's shamefully small and thin.
In Europe, where there is more experience with these programs, the environmentalists have seen right through them.
If you look at it from other angles, it's just as bad.
Say you bring in a car with $4,000 trade-in value to get a $4,500 credit instead. After the dealer takes the first $4,000 to make up for the lost trade-in value, that leaves a net benefit of all of $500 in "credit" to be split between you and the dealer -- at a cost to taxpayers of $4,500.
A $500 financial benefit for a tax cost of $4,500 ... not so good for taxpayers.
Or take the "stimulative" effect. The European experience shows that, just as one would expect, the great majority of people who bring in old cars to get the credit would have traded them in anyway -- so the initial surge in car sales comes at the expense of a later fall in sales. This is exactly what's happened in Germany. I.e., just as with temporary investment credits, the main result is a shift in the timing of purchases, not an increase in the number of them.
Paying $4,500 each merely to shift the timing of sales that would occur anyhow ... even less good for taxpayers.
That Congress and the White House are hailing this as such a great success says a lot about what their belief in "stimulus" amounts to -- and maybe about how they've piled up that $64 trillion in explicit and implicit debt for us all to deal with in coming years.
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