Alan Blinder: "Cash for Clunkers"

Alan Blinder in today’s New York Times, argues for an ostensible stimulus package (hey, since more stimulus packages are probably in the offing, better register your preferences early) that will help the environment. But what I like about it is that it would cost so little that it barely rates in the “let’s goose the economy” category.

The idea is that the government buys old cars of types that are just about certain to be heavy polluters. This is the dirty secret of auto emissions: the vast majority of the damage is done by a comparatively small percentage of cars. The program is means tested, so only those of middle and lower incomes can participate.

Although this initiative would do nothing to remedy America’s dependence on the internal combustion, it’s an interim measure that yields tangible benefits at a comparatively low price.

From the New York Times:

Cash for Clunkers is a generic name for a variety of programs under which the government buys up some of the oldest, most polluting vehicles and scraps them. If done successfully, it holds the promise of performing a remarkable public policy trifecta — stimulating the economy, improving the environment and reducing income inequality all at the same time. Here’s how.

A CLEANER ENVIRONMENT The oldest cars, especially those in poor condition, pollute far more per mile driven than newer cars with better emission controls. A California study estimated that cars 13 years old and older accounted for 25 percent of the miles driven but 75 percent of all pollution from cars….

MORE EQUAL INCOME DISTRIBUTION It won’t surprise you to learn that the well-to-do own relatively few clunkers…

AN EFFECTIVE ECONOMIC STIMULUS With almost all the income tax rebates paid out, and the economy weakening, Cash for Clunkers would be a timely stimulus in 2009…

Here’s an example of how a Cash for Clunkers program might work. The government would post buying prices, perhaps set at a 20 percent premium over something like Kelley Blue Book prices, for cars and trucks above a certain age (say, 15 years) and below a certain maximum value (perhaps $5,000). A special premium might even be offered for the worst gas guzzlers and the worst polluters. An income ceiling for sellers might also be imposed…

Cash for Clunkers is not the pipe dream of some academic scribblers. Local variants are either now in operation or have been tested in California, Colorado, Delaware, Illinois, Texas, Virginia and several Canadian provinces. So there is no need for a “proof of concept.”…

Here’s a high-end cost calculation for a national program. Suppose we took two million cars off the road a year, at an average purchase price of $3,500 (the top price in the Texas program today). Including all the administrative costs of running the program, that would probably cost about $8 billion. Compared with other nationwide income-transfer or environmental policies, that’s a pretty small bill. For stimulus purposes, it would, of course, be better to run the program on a larger scale, if possible. There are over 250 million cars and light trucks on American roads, and some 30 percent are 15 years old or older. That’s at least 75 million clunkers. At five million cars a year — an ambitious target, to be sure — the program would cost less than $20 billion, still cheap compared with the $168 billion stimulus enacted in February.

And what would all this money buy? First, less pollution. The Texas program estimated that clunkers spew 10 to 30 times as much pollution as newer cars. Second, the subsidy value (the 20 percent premium in my example) is a direct income transfer to the owners of clunkers, who are mostly low-income people. Third, these folks would almost certainly spend the cash they receive — not just the subsidy, but the entire payment, giving the economy a much-needed boost.

One has to be mindful of perverse outcomes. A large-scale version of the program would drive up the cost of clunkers and over time distort blue book values. There is also the problem of what do you do for transportation once you’ve sold your cheap old car? It’s not as if a 20% premium is going to enable sellers to trade up to a much better car. They’ll most likely be trading out of a very old car to a slightly less old car.

It’s the need to obtain some replacement form of transportation that would enable the program to stimulate the economy. Although this year’s rebate checks were not targeted at lower income groups, economist Gary Shilling estimated that 80% of the proceeds went to savings, not spending. For the less affluent, that might take the form of getting some headroom on debt payments (reduction of indebtedness is a form of savings)

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  1. Tom Lindmark

    Explain to me why the “richest” who pay the lions share of taxes deserve nothing when it’s time to rebate some of those taxes.

  2. Doc Holiday

    Although this would help consolidate the auto parts business and perhaps impact the collector market in the future, I like the idea of destroying old cars and then having people buy more expensive insurance. The cost of higher insurance however, would be offset by greater fuel economy and a safer car, with air bags and greater efficiencies.

    A car that can obtain a 40% increase in fuel efficiency would start to make more and more cents after a few thousand miles and a few years of going over the same ol ground….. year after year…

  3. Anonymous

    1. The US had much higher growth rates when taxes were more progressive

    2. The “rebates” were rebates in name only. The idea of an economic stimulus is to increase spending. The rebate proposal was widely derided as providing something like 70% of the proceeds to middle income consumers who do not have as high a propensity to spend as lower income people. Economists argued that the best bang for the buck, stimulus wise, would be to increase food stamps and extend unemployment coverage.

    3. The rich have a hugely favorable tax regime thanks to low capital gains taxes and no taxes on corporate dividends. And since stock issuance is a trivial source of funding for businesses (less than 2%; retained earnings and debt are the big sources) the idea that the stock market is vital to the funding of American businesses is way overplayed. Big companies, the kind that fund in the stock market, have if anything been saving (which means getting smaller) as opposed to growing, in balance sheet terms, thanks to outsourcing and cost cutting.

  4. Anonymous

    Let’s see. I drive a 21 year old mini pick up truck, that gets 21 miles per gallon, that still passes California emission standards. And I should turn in my little truck which doesn’t chew up federal highways because a Hummer or Esplanade is better for the environment.

    Here’s a better idea: how about first eliminating the tax incentive for humongous trucks for men with masculinity issues and work towards getting people into smaller cars with significantly higher mileage. Because I would gladly purchase a new mini pick up that got 50 mpg if such a thing actually were available in this country.

  5. Eoghan

    I have a problem with the idea that old cars are more polluting. The pollution costs of constructing a car overwhelm the polluting costs of running a car. So we should be squeezing every last drop of life out of old cars as replacing them with new ones before the end of their lives is inefficient. Call this plan like it is – a bailout for the auto industry.

  6. Independent Accountant

    I agree with you. This is the first installment in the “GM-Ford” bailout. We don’t need more “stimulus”. Where does Blinder think the money will come from? My answer: Helicopter Ben’s printing press. I love Blinder; there’s never been an excuse to print money he didn’t like. As for reducing pollution, we don’t need that either. California tests all cars two or more years old, for emissions annually. If they fail, they must be repaired. The cars in question average 13 years old. That means they will come to the end of their life sooner or later. What is their current “life expectancy”? Two or three years? How much will the federal agency cost to run which will adminster this program? When will the program end? Will it be as temporary as New York City’s rent control? I say as Nancy Reagan did in another context: “Just say no”.

  7. Audrey

    Tom Lindmark said…

    "Explain to me why the "richest" who pay the lions share of taxes deserve nothing when it's time to rebate some of those taxes."

    Because the rich have already gotten theirs. As the incomes for middle and lower class have stagnated and fallen, incomes and net worth for you rich people has gone up to historically unprecedented levels. (If I could put tags in I'd link to any number of hundreds of data sources showing the outrageous wealth gap trends)

    So shut the f*&k up. And do something to help your country for once you selfish, rich pigs.

  8. Anonymous

    "So shut the f*&k up. And do something to help your country for once you selfish, rich pigs."

    This says it all doesn't it? I can hear you whine while saying "Do something for me"
    Don't you realize the ONLY difference between you and a rich guy is the way you think.

  9. Anonymous

    I think just like him and I’m rich too. I just don’t have that petit borgeois anxiety. You ought to get over that.

  10. Anonymous

    “Explain to me why the “richest” who pay the lions share of taxes deserve nothing when it’s time to rebate some of those taxes.”

    The rich have gotten all the fruits of decades of soaring productivity (and increases in working hours). The working stiff has gotten nothing but higher bills, debt, and now plunging home values.

    Rich dude, that makes you a thief and a crook.

    A little more whining like this and it will be time to heat up the bucket of tar.

  11. Don Thieme

    As several of the above comments note, the problem cars in terms of air quality are not really old clunkers now. The marketplace is shifting away from large SUVs already. The benefits of buying back the SUVs now on the road or on dealer lots are not clear.

  12. Anonymous

    “Explain to me why the “richest” who pay the lions share of taxes deserve nothing when it’s time to rebate some of those taxes”

    As others have already stated, you’ve already taken your ill gotten gains.

    If you think you can buy enough security to protect yourself from an angry mob, keep it up with that attitude. Do you remember the Manhattan of the 1970’s? I do.
    You take your freedom for granted.

  13. Anonymous

    Look, while we all understand being poorer than some, the idea that the wealthy will ever “pay” is retarded. You will never touch them, or get within 500 yards of them. So many have seen this coming and have the means with which to repel the “Golden Hordes” and most are paranoid and neurotic as it is. I get paid to get them to their G-5 so as they can leave this place for another safer place, and you are deluded to think otherwise. Violence begets violence, and trust me, cash talks and you will lose. Start thinking like an 1800’s pioneer, and you will be fine.

  14. S

    Why is it that the ideologues are never short of an idea that wraps their agenda in a flag and call sit a solution. We need more “solutions” like another bullet in the head.

  15. Anonymous

    Isn’t socialism fun. There are so many fun ways of taking money from those that earned it, and give it to people who aren’t as productive or motivated as the “rich”.

    Just another take away!

  16. roger

    My notion of a stimulus involves the government simply expanding its practice that, at the moment, helps the poor, tax soaked rich by kindly lending financial institutions money at 2 percent interest, with which they can loan back the money to the government at 2.5 percent interest, and simply opening the window to the hoi polloi. If the government made available loans to everybody, instead of the poor, beaten down rich (who work so very, very heard to earn their compensation packages in the kind of management and administration decisionmaking that a computer could do for one thousandth of the price), I figure credit card balances would start getting paid off, savings would rise, and we’d all be richer. Since the Fed has become the kindly loan office for the wealthy, why not just extend the window?

  17. Anonymous

    Hey, higher taxes are like running with ankle weights. If you can’t take it, I guess you’re not really smart and capable enough to stay rich. Social Darwinism has weeded out your petit-borgeois loser genotype and all your rich friends are going to snicker at you behind your back.

  18. Anonymous

    ha, ha i spelled petit bourgeois wrong both times and he din’t catch it even though he is one.

  19. Yves Smith

    I’ll grant that there are some elements of this program that can be argued to be sus, and there is a good probability that any version of Federal legislation would be hijacked by the auto industry.

    Having said that, it has been proven repeatedly that a very small number of cars produce a very high proportion of emissions. Cleaning up or getting rid of those cars will have a vastly bigger impact on pollution than tightening requirements for new cars (not that we shouldn’t do that too, but I am giving you a sense of importance).

    Now it is fair to argue that age may be too crude a proxy for these bad cars. A few places have installed cameras to capture the license plates of offenders and make them clean up. Allowing someone to sell the car could be an alternative.

    Also, Blinder in his example discussed $3500 per car. You don’t buy much in the way of new car at that price.

  20. Anonymous

    It seems as if the government is going to be in the used car buisness. At most state and Federal auctions held by the government they do not smog their cars when sold to the general public – this is thousands of vehicles a year, as is the case in Davis, California (ALL SMOG RELATED REPAIRS AND CERTIFICATIONS ARE THE SOLE RESPONSIBILITY OF THE BUYER) LINK: Maybe before we let them help us get greener we should let them pratice getting there own cars greener first!

  21. Anonymous

    I have a company that consults charities on automobile donations. One of the charities we consult current has a program in place where they smog, recycle and sell the cars back to low income families. Currently, they do this to about 5,000 cars a year. The average selling price of these cars is between $2000-$2500.

    I think the concept of the governments program is heartfelt with great intentions – but this is already being done on the charity level and not costing the tax payers while creating jobs at the same time. I can understand fixing something that is broken, but I’m not so sure it is in this case.

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