Three Problems with Congress Extending Cash for Clunkers

All indications out of Washington are that the Senate will extend the Cash for Clunkers, bringing the grand total of the auto revitalization program to $3 billion. I've written quite a bit about C4C in the last week, and readers seem pretty evenly divided into two camps. The first camp thinks we're wasting billions on a make-believe stimulus that won't help the environment. The second camp thinks I'm crazy to question the effectiveness of a stimulus program that was so effective it was spent in a week.

I think I've made it pretty clear where I stand on Cash for Clunkers.



I'm more sympathetic to the first camp. This isn't really about the environment. No, the program

isn't exactly LEED-certified -- the economist who devised it is disappointed -- but $3 billion of rebates isn't about saving the world, it's about selling cars (that don't pollute it as much). And it appears that we are selling cars that don't pollute as much. Mickey Kaus leads me to this list on our right of the top ten clunker sales, and they all have very attractive mileage numbers.

So my main problem with the program, I'll say again, is that I don't think it's a real stimulus. But Derek, the money ran out in a matter of days! It's the greatest stimulus ever made! Here's why I disagree:

1) There is overwhelming evidence of an historic pent-up demand for car purchases. The average age of our current fleet is at an all-time high, and as early as March, economists were predicting a surge in late-2009 car purchases. It seems very likely to me that what we're seeing is a mad-rush of car buyers moving their third/fourth quarter purchases into the one week in which the government has agreed to pay them $4500 if they buy RIGHT NOW. If I'm right, we'll see a dramatic fall-off in the auto market in the fourth quarter (and I'll be thrilled to declare myself wrong if cars continue to sell gangbusters for the next six months). I've received lots of comments and emails from people who say they weren't going to sell their car any time soon but were really, truly incentivized to trade up for a hybrid. And to that I have a second point:

2) I think there's a good argument to be made that we shouldn't be paying people to destroy productive capital. The cars being traded in must be insured for a more than a year, which means that we're destroying working vehicles for money. That sounds to me like the definition of waste. Dealers are required to destroy the engine, which makes fewer car parts salvageable for recyclers. But if these cars still have good years in them, and there is obviously a demand for used vehicles, it's an incredible waste for the government to be spending money to force dealers to destroy them.

3) Finally, speaking of used cars, I think Time's Justin Fox makes a great point here. The used-car market is being sidelined in C4C, which is a clear blow to efficient markets:

A cash-for-scrappage program--which is what Blinder was suggesting a year ago--could potentially be a boon to poor people who could replace their clunkers with less-polluting and more fuel-efficient but still cheap used cars. In the interest of boosting the beleaguered auto industry, the current cash for clunkers program requires that those who turn in old cars buy brand-new ones. No help for the poor there.