Is “Cash for Clunkers” a clunker?

I’m not always in agreement with David Nicklaus but the St. Louis Post-Dispatch business columnist makes a good case against the Cash for Clunkers program. For those of you unfamiliar with Cash for Clunkers, its a stimulus program that gives people with “clunkers” rebates ($3,500 or $4,500) for turning them in when purchasing a new, more efficient automobile. Nicklaus makes two main points in his piece. First, that the program benefits wealthier Americans as the expense of low-income consumers, and second, that the program will not encourage more car buying.

The first point is valid, insomuch that the Americans who need the most lift generally are not the ones who can afford automobiles.

The clunkers program, MacDonald says, is “purely a handout,” and not a very egalitarian one at that. Because the people who can afford a new car tend to be wealthier than those who cannot, we’re doing the opposite of what Robin Hood tried to accomplish.

Buried within this argument is another that Nicklaus makes, which is that the program is underfunded to boot. So, not only does this program not benefit low-income Americans, it does not even do a good job of helping the middle class. Nicklaus cites the following, “Germany, a smaller country than the U.S., started a similar program with more than $2 billion and soon tripled the budget. Congress should have known that $1 billion wouldn’t last long.” The House recently approved another $2 billion to go with the first $1 billion – which was exhausted quickly – but the Senate is yet to confirm.

The second point Nicklaus makes is supported by the following logic:

A billion dollars was enough to subsidize about 250,000 trade-in deals, but much of the money goes to people who would have bought cars anyway. Some delayed their purchases when they heard that a clunkers credit was coming, and others moved up purchases that they would have made this fall or winter.

Glenn MacDonald, the Olin professor of economics and strategy at Washington University, has a harsher assessment. “The total number of cars sold isn’t going to go up an inch,” he said. “You’re just moving it around in time. You are going to sell more cars now and fewer cars later.”

I suppose that there may be some benefit to increasing sales now at the expense of sales later, but not if the boost was offset by those who delayed their purchases. My wife and I purchased a new automobile earlier this year, partly to stimulate the economy and partly because we wanted a new car, but not because we needed one. We timed the purchase with the federal tax rebate for hybrids. I’m guessing that if that rebate had expired, we may have waited for another incentive to get a better deal. Case in point.

The final issued (kind of) raised by Nicklaus in the article, and the one most relevant to this blog, is the environmental effect of this program. On its surface, Cash for Clunkers was designed to replace very inefficient automobiles with slightly less inefficient automobiles. In theory, that’s a fabulous objection. The problem is the always forgotten environmental cost to produce something. This cost stands in direct contrast to the goal of creating jobs, but is nonetheless real. Nicklaus argues, “Even worse, we’re destroying a lot of perfectly good used cars. With fewer $2,000 heaps available, low-income people are likely to pay more for basic transportation.” His point is more economic but is still valid. Not only are we dumping perfectly good cars in the trash, we’re reducing the availability of affordable private transportation. Go us. The energy used to produce one new car is so astronomical relative to the 10 miles per gallon increase it delivers in efficiency that it will take years to mitigate.

So, is Cash for Clunkers a clunker? I think so.