As Republican senators rush to kill Obama's wildly popular Cash for Clunkers, which gives new car buyers up to $4500 for their old cars, it's time to think seriously about whether we should spend another $2 billion on this giveaway. I wrote a fair amount about this program last week including an FAQ and an update, but now I'm pretty sure that Cash for Clunkers is a bad policy that doesn't deserve a $2 billion double-down.
Cash for Clunkers should be clunked because it's bad for the environment and bad for the tax payer, and because we're paying people to trade up cars that they were going to replace anyway.
Bad for the Environment
The program is designed to help the ailing car industry and the environment by rewarding consumers who want to trade up for an environmentally friendly car. But C4C is much easier on SUV buyers than car buyers. Let's say you want to trade up for either a car or an SUV, both with a 2 MPG improvement. The SUV will qualify for a $3500 rebate. The car won't. So we're still paying people to choose SUVs with worse mileage than cars, even after Detroit's implosion. What's worse, Michigan lawmakers are trying to make it even easier for buyers to trade up for SUVs with the next $2 billion batch. Subsidies distort the market, but a subsidy designed to crystallize Detroit's backward SUV-centric default is a stupid investment in the environment, and a terrible investment in the long-term sustainability of General Motors and Ford.
Bad for the Tax Payer
Cash for Clunkers was designed to last until October. Instead the program ran out of money in less than a week. That's good news for the auto industry, because it confirms what many analysts long suspected: That the pent-up market for cars was historic and primed to go gangbusters. But in all likelihood, these sales were going to happen anyway -- the current age of our auto fleet is at an all-time high. If we should be paying people to trade in cars that they are going to replace in a few months anyway, then the argument for Cash for Clunkers is essentially an argument for government giveaways for any consumer activity. The CEO of Edmunds.com, a new and used car sales website, says he's not convinced Cash for Clunkers will increase yearly sales in any noticeable way.
Obama officials have called C4C the most effective stimulus program they could have dreamed up. But the point of public stimulus spending is to replace demand that does not exist, not to spend billions of dollars to take three months worth of sales and cram them into a frenzied week.