Cash for Clunkers?

The proposal is better than nothing, but could easily be improved.

Congress is considering legislation to provide vouchers of up to $4,500 to help consumers scrap their gas guzzlers and buy more fuel efficient new cars. Details of the proposal, from the House Committee on Energy and Commerce, are available here.

Proponents argue that in addition to curbing greenhouse gas emissions, the measure would provide much needed economic stimulus. Germany, which recently enacted a similar measure, is the only country in which automobile sales increased last year.

Is this program a good idea?

It depends on what the alternative is. If it’s to do nothing, the proposal is a clear winner—even if we completely ignore its environmental impact. Yet the proposal is deeply flawed. With a few simple tweaks, it could be made much better.

Unemployment and idle capacity in the American auto industry are at their highest levels in decades. As the German experience indicates, auto vouchers are likely to produce an immediate surge in auto sales. This would put people to work who would otherwise be doing nothing. A $4,500 voucher that leads to production of an additional $25,000 car would generate $25,000 of additional income along the value added chain, which in turn would generate more than enough tax revenue to pay for the voucher.

But the mere fact that a program is better than doing nothing does not mean that we should adopt it. Adopting this program means not adopting some other variant of it. And with a few simple modifications, the existing cash-for-clunkers proposal could deliver much better results.

For one thing, the program could offer much stronger incentives choose cars with better fuel economy. As the House proposal stands, a consumer gets a $3500 voucher for abandoning an 18 mpg vehicle for one that gets 22 mpg, but only $1000 more for switching to one that gets 28 mpg or more. The real fuel savings and emissions reductions come when someone swaps a 10 mpg Ford Excursion for a 41 mpg Ford Fusion hybrid. New car purchases have long-run consequences. If we’re going to encourage swaps in the first place, why not provide stronger incentives to make the right ones?

What happens to the gas guzzlers that voucher recipients unload? Environmentally, sending them to the scrap heap isn’t necessarily a good idea, since keeping them on the road a little longer would spare the substantial energy use and additional emissions that accompany new vehicle production. By creating a huge boost in the supply of used gas guzzlers, a voucher program would produce an immediate steep decline in their price, which would make them an economical choice for many drivers who use their vehicles only sparingly. Although the per-mile cost of operating these vehicles would still be high, owners would be compensated for that by their low purchase price.

But an even more effective way to encourage reduced emissions and fuel use would be to couple the voucher program with a steep new tax on gasoline whose gradual phase-in would begin only after the economy has again reached full employment. The revenue from such a tax could be used to help pay for a cash-for-clunkers program with even stronger incentives to purchase more efficient new vehicles.

Another problem is that the current cash-for-clunkers bill refers only to fuel economy, not emissions. Although only 10 percent of cars on the road in Los Angeles are more than 15 years old, these vehicles, which are exempt from emissions control laws, account for a majority of the smog in the area. Many of these vehicles would be ineligible for a voucher under the proposed legislation, even though the environmental case for including them is compelling.

The real imperative, however, is to act quickly. Unemployment is like empty seats on a commercial airliner. In each case the opportunity to produce something of value is lost forever. If congressional leaders cannot muster the votes necessary to pass the right cash-for-clunkers bill, even the current version would be much better than doing nothing.

Update Will Schroeer of Smart Growth America dissents:

Robert Frank endorses, with suggestions for improvement, both the environmental and economic stimulus benefits of proposed “cash for clunkers” legislation. I take issue with only two parts of his analysis: the environmental part and the stimulus part.

1. Let’s start with the claimed environmental benefits. Prof. Frank observes that “the program could offer much stronger incentives to choose cars with better fuel economy”, but this is a pretty weak objection to the bill’s almost complete lack of actual GHG benefits. If you trade one SUV for a slightly more efficient new one as subsidized by legislation, you will take 20 years to work off the GHG emissions of building the SUV…and only then will you start producing GHG reductions of 11% per mile.

Next, Prof. Frank moves to smog-reduction benefits: the current legislation doesn’t aim at these at all, and he wants it to. True, older cars produce the majority of smog emissions. And he has some history on his side: there were a variety of “cash for clunkers” programs in the early 90s, several of which performed so well environmentally that EPA under Bush I issued guidance on how programs could take credit under the Clean Air Act for the emissions reductions they would produce. (I wrote that guidance, and remarkably, it’s up on the web.)

But a lot has changed since 1991. The difference between old and new cars drives (ahem) benefits from scrappage, and that difference has shrunk substantially. In 1991 the emissions differences between old and new car emissions were as high as 70x.

Since the 90s, there’s been enormous fleet turnover, and with some exceptions, the 70x criteria polluters are gone. There are still occasional serious emissions control failures thanks to complicated modern electronics, but as far as I know the kind of differentials you used to see on the criteria side just aren’t there anymore.

2. Pressed on environmental benefits, scrappage proponents generally revert to economic stimulus benefits, and Prof. Frank is with them 100% on this point: “Is this program a good idea? It depends on what the alternative is. If it’s to do nothing, the proposal is a clear winner—even if we completely ignore its environmental impact.”

But our choices are not limited to 1) a bad scrappage program, 2) a better scrappage program, or 3) “do nothing”. If the goal is stimulus, and/or the economic health of autoworkers, there is a long list of policies that handily beat these three.

What most concerns me is that someone as consistently sensible on these subjects as Prof. Frank seems to buy the idea that building new cars is a de facto worthy goal: “Unemployment is like empty seats on a commercial airliner. In each case the opportunity to produce something of value is lost forever.” Yes, but society is made no better off by sending someone on a JetBlue flight to LA if he doesn’t need to go there, just to fill the seat. Ditto new cars if we don’t need them. And people today are driving less and shedding cars.

How to help unemployed autoworkers is a very real problem. But having them build cars for the sake of building cars is not the answer.

Author: Robert Frank

Robert H. Frank is the Henrietta Johnson Louis Professor of Management and Professor of Economics at Cornell's Johnson Graduate School of Management and the co-director of the Paduano Seminar in business ethics at NYU’s Stern School of Business. His “Economic View” column appears monthly in The New York Times. He is a Distinguished Senior Fellow at Demos. He received his B.S. in mathematics from Georgia Tech, then taught math and science for two years as a Peace Corps Volunteer in rural Nepal. He holds an M.A. in statistics and a Ph.D. in economics, both from the University of California at Berkeley. His papers have appeared in the American Economic Review, Econometrica, Journal of Political Economy, and other leading professional journals. His books, which include Choosing the Right Pond, Passions Within Reason, Microeconomics and Behavior, Principles of Economics (with Ben Bernanke), Luxury Fever, What Price the Moral High Ground?, Falling Behind, The Economic Naturalist, and The Darwin Economy, have been translated into 22 languages. The Winner-Take-All Society, co-authored with Philip Cook, received a Critic's Choice Award, was named a Notable Book of the Year by The New York Times, and was included in Business Week's list of the ten best books of 1995. He is a co-recipient of the 2004 Leontief Prize for Advancing the Frontiers of Economic Thought. He was awarded the Johnson School’s Stephen Russell Distinguished teaching award in 2004, 2010, and 2012, and its Apple Distinguished Teaching Award in 2005.