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  • Cash for Clunkers Bill Belongs in the Junkyard

    Car Junkyard

    Both the Senate and the House of Representatives are seeking to pass “Cash for Clunkers” legislation that would have three primary objectives: increase car sales, improve the environment, and stimulate the economy. The bill would provide consumers with a voucher (up to $4,500) to purchase a new vehicle to completely scrap the old one. The Associated Press gives a good summary of the House and Senate versions.

    Although the bill passed today in the House, cash for clunkers is full of problems and unintended consequences:

    1.) Economist, Freakonomics author and New York Times blogger Steven Levitt writes, “People who drive clunkers are generally not in the market for new cars. Presumably their replacement car will be a used car. The increased demand for used cars will lead to higher prices for used cars, which will push some buyers towards a new car, but the likely impact on new cars would be small.”

    2.) This program would distort the used car market in a couple 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. This will raise the sticker prices of used cars for people who can barely afford them in the first place. Because the program would scrap a relatively small percentage of used cars and parts, the effect may be marginal, but it’s still a market-distorting policy.

    3.) Thanks to one of our commenters, Karen, for this unintended consequence: “This bill would put every charity car donation program in the nation out of business since the amount of the voucher would be much greater than the tax deduction.” Simply do a Google search of “Donating Cars for Charity” to see how many organizations this would affect.

    4.) The environmental benefits are questionable. Maybe a few more miles-per-gallon improvement will emit less carbon dioxide per mile, but increased fuel efficiency often leads to more driving because people know they’re getting more miles to the gallon. Furthermore, the excitement of buying and driving a new car entices people to drive more. New cars are “[...] typically driven between 15,000 and 18,000 miles a year in its first three years of ownership, while a car owned for 10 years is driven between 5,000 and 6,000 miles a year and a 15-year-old car is driven only 2,000 miles on average.” There are also the pollution costs of actually building a car and the disposal of a car to be considered, rather than just the pollution caused by driving the vehicle.

    5.) Proponents of the bill point to Germany’s boost in car sales as a reason to enact the program in the United States, but Germany’s incentive structure for buying new cars is much different ours. Gas prices in Germany are $5.50 per gallon, forcing people to switch to smaller cars. Their government also put in place other tax breaks and incentives on top of their cash for clunkers provision. And it may not have as big an impact on stimulating Germany’s economy as previously thought; the program instead simply shifted spending: “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.”

    6.) Clearly this won’t be a costless program – it’s estimated to be $4 billion in taxpayer money from the $787 billion stimulus bill. Chump change, right? But if the program in Germany does provide any forecast, it will cost more. In Germany’s case, the program has become three times more expensive than what they initially budgeted.

    This is a good example of economic Frederic Bastiat’s broken window fallacy, except that instead of breaking windows to “stimulate the economy”, we’re destroying perfectly good cars. Meanwhile, we’re asking consumers to purchase cars they might not be able to afford and incur more debt. Sounds strangely reminiscent of the home mortgage crisis, don’t you think?

    Posted in Economics [slideshow_deploy]

    21 Responses to Cash for Clunkers Bill Belongs in the Junkyard

    1. Nan says:

      Would somebody tell me why democrats are out to destroy the country they live in? Everytime they come out with some "cool" idea, it destroys the economy and our freedoms. I would rather have a group of 5 year olds running this country. Have these so called mature grownups, forgot the history of economics that we have been demonstrating very well for a couple hundred years, give or take some disruptive points in time.(Hint:FDR)

      Why don't they just give cars away to people who drive an old car? Then, while they are creating better days, they could raise the minimum wages to $40.00 an hour. Since they have no fear of consequences of printing money, why not just pour it on, instead of dribbling it out.

    2. William H, Newport, says:

      Ironically, there is a little known bill called

      HR 571 that would restore fairness to auto/boat donations. This legislation would stimulate all car sales, new and used by giving everyone a tax break. It would be much less expensive and far more reaching than "Cash for Clunkers".

      Tax the gas guzzlers, don't reward them. By passing HR 571 we would not only sell more cars we would help so many struggling charities that have cut services as much as 80% since the donation tax change of 2005. Karen, a previous commenter was right on, "Clunkers" will be another (potentially fatal) dagger to struggling charities.

    3. Andy, Washington DC says:

      Given the success of scrappage programs around the world (albeit on a much smaller scale) in increasing auto sales and the environmentally friendly nature of this program it will eventually get passed after all the political bickering.


      Our local auto industry needs this stimulus after all and the guise of helping the environment will appease voters.

    4. Chris Pedersen Nixa, says:

      This is going to be one of the largest scams in American History, riddled with fraud and abuse. Some of these vehicles won't be worth more than scrap iron at the "fair market" price [ by the ton ] , changing daily.

      The windfall will come when these junks are put back in circulation through public/dealer auto auctions and sold directly to the public or dealer/owners of used car lots for re-sale , placing them on our roads once a again with a re-named re-cycled title.

      This will lead to another taxpayer voucher being issued time and a again for the same junk being traded in. Anyone can claim a fraudulent MPG to qualify.

      Is there a "mandate" to classify these junks a "salvage only" . Even then the shady people in the auto industry knows how to get around this. However , notwithstanding any mandate the "Boneyards" will be able to market the "drivetrains" [engines , transmisions, etc. to the public as "replacements" for other cars , trucks , pick-ups etc. What a waste of time and our tax dollars. The democrates have had their noses to close to the exhaust pipe for far too long.

    5. Paul Rinderle says:

      I just read that 60% of emissions of a car over its lifetime is emitted during the manufacturing process.

      Consequences of good intentions again not analyzed.

    6. Pingback: » Financial News Update - 06/10/09 NoisyRoom.net: “Extremism in the defense of liberty is no vice. Moderation in the face of tyranny is no virtue.” Barry Goldwater

    7. Barb -mn says:

      Everybody needs business, everybody has a choice on a vehicle to buy. It would be unfair to tax someone higher for buying a gas guzzler. Their already paying more for gas!

      This is nothing but a government con to get you in a car of the government's choice. Smaller, more dangerous car. The government bribes the people (taxpayers)with their (the people/taxpayers) own money. Silly us. Let's give em' to those who deserve them, charities.

    8. Bubba, TN says:

      This will help new car sales and the manufacturing industry (JOBS). Our daughter drives an older SUV (15 mpg) and I would very much like to trade it for a newer more fuel efficient vehicle. But when you go to trade as you well know you don’t get much for your trade with having an older car, making it discouraging to want to buy a new car. I don’t mind owing more for a reliable car that will be under warranty. It will give me the peace of mind knowing our daughter has something reliable to drive back and forth to college in. I do know people are WAITING for this to pass and by WAITING it only hurts car sales even more. That’s why its so important to get this passed as soon as possible. It worked in Europe to stimulate the economy it will work here too. It pasted overwhelming in the House, now if only the Senate will get it together. The President’s for it and the American people are too. This needs to be done A.S.A.P.

    9. karen, utica , ny says:

      Thank you for incorporating my previous comments in your article. It is most appreciated. I believe a better idea is to just change the amount a person can deduct for donating their car back to the book value. That way every car is eligible, the government doesn't have to spend $4 million of our dollars giving away vouchers and trying to administer a program that is way too convoluted!

    10. Barb -mn says:

      I agree 100% Karen. Thank you.

      Just an open field for government to corrupt and create another crisis down the road.

    11. Kimberly, Norton, MA says:

      "Cash for Clunkers" is nothing more than a headline grabbing piece of legislation. As pointed out by Nick Loris and many of the folks that have commented, there are more holes in this bill than there are in the ozone layer that the law makers claim to be looking to protect.

      1. One of the best ways to help our environment is to not be wasteful. Use, reuse and recycle things instead of use and toss. The energy used to produce cars has a major impact on the environment. Encourage things like car donations that give people a break on their taxes, raise money for non-profit groups, and give people that can't afford new cars a chance to buy & use the ones that are already built.

      2. Economically, many Americans can not afford a $30-$50K automobile. The maximum credit proposed in this bill is $4500. That's less than 1 years worth of payments on that new car.

      3. Comparing the results achieved in European countries is like comparing apples & oranges. Geographical and cultural differences make their stats irrelivant in projecting U.S. results.

      "Cash for Clunkers" is designed to make us think our law makers are working hard on environmental issues when in fact it's a FLASH! to blind us from the reality and details.

    12. Tim,TN. says:

      I personly think this bill does what all others have done so far and simply put more people out of work used car lots mechinics private auto auctions and people that help them opperate.I have watched our goverment dump billions into GM and Crysler to avoid bankruptcy and what happens anyway I don t see this being a good idea ether just one more bite of U.S. freedoms.

    13. mary, nj says:

      Another Great Failure from WASHINGTON. The government is suppose to be for the People, not CORPORATIONS!! It would be nice if something was REALLY done for the TAXPAYERS!

    14. Chris, Iowa says:

      Obama really knows how to sell crap sandwiches. He's packaged this, along with all the rest of his "wonderful ideas full of hope and change" with such flowery rhetoric that it's selling. It won't be until it's passed…and make no mistake, it will; until people realize just how big of a mistake it was. Has anybody heard anything on how this will affect people with "antique" or "classic" cars? What about Joe Schlebotnik's '55 Olds land barge? What about car shows? Cruise nights? Can anybody here imagine NASCAR racing the little putt-putt cars Obama Motors will be cramming down our throats?

      Anybody got some ketchup for this crap sandwich? We're stuck with it…might as well make it tasty.

    15. Joe, Michigan says:

      Even if one agrees with the concept, the bill is flawed. As long as your give-up car is rated at 18 mpg or less and you purchase one at 22 mpg ( an improvement of 4 mpg), you get the money. If your give-up car is rated at 19 mpg and you purchse one rated at 25 mpg ( a 6 mpg improvement), you qualify for nothing. The program should have been soley based upon the improvement in mpg between the old and new car.

    16. Frank, Philadelphia says:

      So, anyone in the market for a new, fuel efficient car should go to a junkyard and buy a 1984 Crown Vic (or something similar) for $500. Then the government will give you $4500 if you trade it in for something like a Honda Civic.

      $4000 for essentially very little effort. Then, you can sell the car (let's say a 94 Mustang) that you would have traded in (or donate it to Kars for Kids).

      In this scenario, the program does nothing to keep old, inefficient cars off the road. The '84 Vic wasn't on the road to begin with. The Mustang is still on the road. And now we have a new Civic on the road. So it really doesn't do anything on the "green" front.

      It will help stir the auto industry a little. That's a good thing, especially since we've gone all in on GM and Chrysler.


    17. Moc, DC says:

      What about those of us who have been conscientious all along? This is like penalizing us for the effort. I'm in the market for a new car, too, but I'm driving a 15 year old Civic. Thanks for the encouragement!

    18. Steve, Twin Cities says:

      I am extremely upset that the govt has set a 18mpg or less limit on the program!!! I have a 1999 Ford Taurus that runs great but gets 20mpg. I would love to take advantage and upgrade to a much more fuel efficient vehicle. I don't get the idea behind this limitation. If the goal is to get more fuel efficient vehicles on the roads, should the trade-in's mpg really matter? If I go from a 20mpg car to a 40mpg car, why would the govt not want to help me help the planet? Come on… "help me, help you"!!!! Leave it up to politics to mess up a potentially good thing!

    19. gob bluth, san diego says:

      So much misinformation to outright lies posted here. The program has been a success, and none of the 'sky is falling' points made in the article have come true. Why do you people hate america?

    20. David, Albuquerque says:

      Let me see if I understand this program. If you were a good citizen concerned about the environment and bought a fuel-efficient car some years ago (above 18 mpg), you get no help in purchasing and even more efficient car. But, if you bought a gas guzzler some years ago and have been using more than your fair share of scarce oil resources you get a $4,500 bonus from the US even if you only improve your gas mileage by a few mpg. Brilliant! Who elected these dimwits. Reward good behavior, penalize bad behavior – a principle as old as mankind.

    21. chris, new york says:

      we don't hate america. most of us care very much about it and that's why we are furious with the incompetance of people who propose these stupid ideas. Before anyone considers this program a success and claim it's good for the environment maybe you should review the following:

      1) how much energy is consumed in the process of making a new car with all the plastics, rubber, etc?

      2) how many miles will a person have to drive their new efficient car to make up for the consumption of raw materials caused by simply manufacturing that car?

      3) Hybrids: can anyone say battery acid?

      4) last but not least: cost….let's see, they budget 1-Billion yet in a week they need 2-Billion additional for a simple car trade in program. What was the initial proposed cost of the health care reform? Anyone want to take a guess at how far off they will be on those figures?

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