Money

Is 'Cash for Clunkers' Just Another Bailout?

| by Heritage Foundation

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:

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.

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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 “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 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 “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.
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 the USA Today about the cash for clunkers program, one question reads, “What will the dealer do with my old car?” The answer:
“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 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 than what they initially budgeted. And intended to stimulate the economy, 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.”

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.