In 2009 the government ran a program called
Car Allowance Rebate System, or "Cash for Clunkers", where they offered to pay people $3,500 to $4,500 to trade in an old car for a new one. Basically, the rules said you must buy a new car and not just a newer used car, that the trade-in must get less than 18 miles per gallon, and that the trade-in must be destroyed and not re-sold. (There are additional technicalities to the rules, but we needn't get into that here.)
Like all government programs, the sponsors boast of how much it will help the economy and how successful it is. In this case, the stated objective is to help the auto industry by stimulating new car sales, and to help the environment by getting cars with poor gas mileage off the road.
I think this is an excellent subject for "economic thinking". Namely, Who wins and who loses?
Therre are two categories of obvious winners:
- People who were already planning to trade in an old car for a new one and who suddenly get a lot more for their trade in than they anticipated, or who were not quite able to afford to buy a new car but who can with this program.
- The auto manufacturers and new car dealers, who are seeing improved sales with this program.
Are there losers? Of course.
- Rich people. Few rich people drive the older, low-mileage cars that are eligible for this program. So they must pay higher taxes to support the program, but gain no benefit. But I suppose few people will be crying for the unfortunate rich man who can't qualify for a government subsidy when he trades in his old 2007 Cadillac for a 2009 Rolls-Royce. So let's move on.
- Middle-class taxpayers who can't afford to buy a new car this year even with this program. Now they have to pay higher taxes in order to subsidize the car purchases of people richer than themselves. So if Al makes $30,000 and just can't afford to buy a new car right now, while Bob makes $60,000 a year and is buying a new car, Al must pay higher taxes to help Bob buy a new car, while Al is stuck continuing to drive his old clunker.
- People who buy used cars. Not only are used cars not eligible for subsidies under this program, but a stated goal of the program is to take millions of used cars off the road. This means fewer used cars available for lower-income people to buy. Elementary supply and demand says that this will force up the price of the remaining used cars. Some number of poor people will end up not being able to afford to buy a car at all, making it difficult for them to get jobs.
- Probably, anyone who breaths air. While a stated goal of this program is to reduce pollution by getting poor-mileage vehicles off the road, it is not at all clear that this will be the result. This program will encourage a large number of people to buy new cars instead of used cars. That's the intended goal and a likely result. New cars are built in factories. Factories produce pollution. The program envisions the new cars getting 2 to 4 miles per gallon more than the old cars. Will that be enough to offset the pollution produced in the process of making the new cars? It's a complex calculation based on a lot of unknowns, which I don't see that anyone has made.
© 2009 by Jay Johansen