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Cash for Clunkers is Another Bailout for the Auto Industry

Posted By Nicolas Loris On June 3, 2009 @ 10:02 am In Ongoing Priorities | Comments Disabled

Today, the Senate could pass a Food and Drug Administration bill that would grant the agency new authority to regulate tobacco products. Slipped into that bill is a newly introduced amendment that would, for one year, attempt to boost car sales and reduce carbon dioxide emissions [1]:

Sens. Debbie Stabenow, D-Mich., and Sam Brownback, R-Kan., introduced an amendment Tuesday that would set up a program that allows consumers with older, less fuel efficient vehicles to trade in their “clunker” for a voucher worth up to $4,500 toward the purchase of a new car that must get at least 22 miles per gallon or an SUV or pickup that gets at least 18 mpg — clearly a focus on U.S. manufacturers. Buyers of small trucks and SUV’s fare better. If the new vehicle gets at least 2 mpg more than the “clunker,” a $3,500 voucher is issued; for new trucks or SUV’s getting more than 2 mpg, the new car owner gets $4,500.”

On paper, it sounds great. $4,500 for a more fuel-efficient vehicle. Everyone loves more miles to the gallon. But there’s the law of unintended consequences and the cash for clunkers program is no exception.

First, it could very well backfire environmentally. Maybe a few more miles-per-gallon improvement will emit less carbon dioxide per mile, but increased fuel efficiency often leads to more driving and new cars [2]“constitute a miniscule source of overall carbon dioxide emissions.”

Staying on in the issue of environmentalism, the pollution costs of constructing a car could exceed the polluting costs of running a car. One study [3]by “Environment and Forecasting Institute in Heidelberg, Germany, looked at the full impact of a “medium-sized car” driven for 13,000km a year for 10 years. It concluded that the extraction of the raw materials for each car alone produced 25 tonnes of waste and 922m cubic metres of “polluted air”. This compared with 2,040m cubic metres of polluted air for the full life-cycle of the vehicle, meaning that the manufacturing stage was roughly responsible for 45%.” Although refuting studies say the manufacturing is closer to 20 percent of the car’s total emissions, a Carnegie Mellon study found [3]“the manufacturing stage was responsible for 59% of all “toxics” (mercury, etc) released over the car’s full life-cycle.”

Secondly, brand new cars aren’t even a consideration for most consumers. They go straight to the used car market, especially in a recessionary environment. This program would largely distort the used car market in a number of ways. If the idea is to get older cars off the road, the supply of used cars will be reduced at a time when demand has been increasing [4]. Economics 101 suggests this will raise the sticker prices of used cars for people who can barely afford them in the first place. Driving up the cost of older cars may be an intended consequence for policymakers to encourage people to buy new, but it’s a bad deal for consumers.

Again, because the idea is to get older, “inefficient” cars off the road, cash for clunkers distorts the used car part market. In a good Q&A [5] the USA Today about the cash for clunkers program, one question reads, “What will the dealer do with my old car?” The answer [5]: “Gives it to a salvage operator. The engine, transmission and some other parts must be destroyed so they can’t be reused. The idea is to cull fuel-thirsty, polluting drivetrains. Operators can resell other parts, however.”

Back to Econ101. Reduced supply drives up the price of used auto parts and these engines and transmissions would probably be more efficient than the ones sitting in real clunkers at junkyards now.

Third, there’s a cost involved. The estimated cost [6]of the Senate bill is between $3 -4 billion, money that will come from the stimulus bill. But if a similar program in Germany provides any forecast, it will cost more. In Germany’s case the program has become three times more expensive [7]than what they initially budgeted. And intended to stimulate the economy, the program instead simply shifted spending [7].

Retailers, for instance, say the bonus is shifting spending patterns rather than creating demand. Higher February car sales coincided with falling turnover at consumer electronics stores. Stefan Genth, managing director of the HDE retailers’ federation, slammed the bonus last week, saying it was “sucking out spending” from the retail sector.”

Of all the energy and regulatory provisions out there to reduce carbon dioxide and help the auto industry, this certainly isn’t the worst idea. It’s like breaking one window as opposed to three. But you’re still breaking a window. Let’s call it what it really is: an auto bailout in disguise.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2009/06/03/cash-for-clunkers-is-another-bailout-for-the-auto-industry/

URLs in this post:

[1] emissions: http://www.foxnews.com/politics/2009/06/02/senate-poised-pass-cash-clunkers/

[2] cars : http://cei.org/cei_files/fm/active/0/EnvironmentalSource_EnergyAuto.pdf

[3] study : http://www.guardian.co.uk/money/2006/feb/28/ethicalmoney.leohickmanonethicalliving

[4] demand has been increasing: http://www.cardealerdaily.com/used-car-prices-soar-as-demand-increases/

[5] Q&A: http://www.usatoday.com/money/autos/2009-05-11-chrysler-gm-cash-clunkers_N.htm

[6] estimated cost : http://www.bloomberg.com/apps/news?pid=20603037&sid=as9HTPAxor0E

[7] three times more expensive : http://www.ft.com/cms/s/0/646018d0-23a4-11de-996a-00144feabdc0.html?nclick_check=1

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