New Topic Page: Cash for Clunkers
In the summer of 2009, the government devised a brilliant plan that would accomplish three things at once: reduce carbon emissions by taking high-polluting cars off the road, stimulate the economy through auto sales, and redistribute money to the poor. It was put into law under the name “Car Allowance Rebate System (CARS)”—more commonly known as “Cash for Clunkers.” To find out how the plan worked out, check out the newest topic addition to our library, Cash for Clunkers.
Now, where did the government get the idea for CARS? From Germany, which had implemented a similar program to help consumers trade up to more fuel-efficient cars, but primarily to stave off major layoffs at Germany’s automakers. Indeed, notes BusinessWeek editor Jack Ewing, the German version of Cash for Clunkers did boost sales by 18 percent, thus increasing tax revenues and avoiding unemployment benefit payouts. But, as always, those benefits might be outweighed by unintended negative consequences. Setting aside the $6.6 billion price tag levied on German taxpayers, the program reduced sales and jobs in other areas of the economy, such as auto repair and used-car sales.
The American version was originally funded with $1 billion, and after that money ran out in only one week, Congress appropriated another $2 billion, which extended the program for another month.
Of course, that Cash for Clunkers really accomplished its proposed goals is highly questionable. For one, it is not clear that the increase in auto sales during the duration of the program were actually sales that would otherwise not have come to pass. As John Stossel points out, “[t]hose car buyers were either going to trade in their used cars soon or they weren't. If they were, Cash for Clunkers simply moved up the schedule. The stimulation of the auto industry occurred earlier. Big deal.” By the way, it was not American manufacturers that benefited the most from the increase in sales, but foreign companies such as Toyota and Honda.
And, the poor were most likely more hurt than helped. To qualify for the Cash for Clunkers rebate, you had to buy a new car. New cars are usually more expensive; that is why poor people tend to buy used cars in the first place! Taking perfectly workable used cars off the market by sending them to be scrapped reduces low income people's buying choices.
Moreover, since we are currently running a deficit, the $3 billion spent on CARS will either be financed through inflation (by printing money), which always hits the poor the hardest, or it will be added to our already insane national debt. That debt undoubtedly will result in across-the-board tax increases, which the poor can least afford.
As for positively impacting the environment, Shikha Dalmia explains how CARS may actually do more harm than good: “The engine, combined with the drive train, accounts for about 35% of the value of the used car. But with this destroyed, it will make far less sense for recyclers to incur the cost of cleaning up mercury and other toxins to mine the remaining parts from the discarded vehicle. The upshot is that the car is more likely to land in scrappage with many valuable parts—engine, pistons, brakes—still intact. This will take a huge chunk out of the 80 million barrels of oil that the recycling industry saves the country every year.”
On a related note, people tend to be stingier with the use of an old car because it often costs more to maintain (think fuel and repairs). With new cars, those concerns lessen, and thus people tend to drive them more, especially in the beginning. This and the fact that the program only managed to remove about 2 percent of gas-guzzlers from the road, are two more reasons why a program like CARS might not have an appreciable effect on CO2 emissions.
More fundamentally though, is it morally right to force millions of individuals to pay for the new car purchases of a few? By all accounts, Cash for Clunkers is one lousy deal no reasonable person would accept in a free market.
But let’s not kid ourselves—that is precisely why government needs to force it upon us.
To learn more about Cash for Clunkers, go here. For other great topics, visit our topic page library. Special thanks to intern Keith Cygan for creating this topic! For more information about becoming an intern with ITO, check here.