I'm curious -- does it make economic sense to pay people money to destroy cars that still have value? I realize their goal is to stimulate the economy and save the environment, but it seems to me that the $3 billion in the cash-for-clunkers program could be better spent. Why ruin working cars?
I think the "stimulate the economy" argument for Cash-for-Clunkers is a bit overblown. (So does the WSJ editorial page.) Even if the government spends $3 billion on this program (and causes consumers to spend tens of billions more of their own money) this is really small potatotes compared to the US GDP of about 13 trillion.
On top of that, it's pretty clear that destroying valuable things isn't a good idea.
Unless, that is, the things are privately valuable but not socially valuable.
Suppose, for example, that a clunker-driver values his clunker at $500, but the rest of society bears $600 of costs because the clunker is being driven. Why might a driver impose costs on others just from the mere act of driving an old car? I can think of three possible reasons: dependence on "foreign oil", local pollution, and global warming. With the numbers in my example, the private value of the clunker is $500, but the social value is -$100. Society overall would be better off if the clunker didn't exist.
An example policy response to foreign oil, local air pollution or global warming would be to raise emissions and fuel economy standards for new vehicles. However, all that new technology costs money, so raising standards for new vehicles will make new cars more expensive. And if new cars are more expensive, consumers will naturally avoid them and hold on to their clunkers a bit longer. And this defeats the whole purpose of raising emissions and fuel economy standards, since these old cars are dirty and low-MPG.
So what can be done about this? One option is to raise the price of old vehicles as well --- if consumers see that the prices of both old and new vehicles rise, then we won't see (as much of) the substitution away from new to old. Instead, we'll see more substitution from new and old cars to things that aren't cars at all --- bikes, buses, scooters.
How can we raise the price of old vehicles? There are two things that change prices --- demand and supply. And that's where Cash-for-Clunkers comes in. Destroying the old cars decreases supply and will raise prices. And this could be good for the world if there are negative externalities associated with dependence on foreign oil, local pollution, and global warming.
Here's an article outlining more of this reasoning.
I've seem some suggestions in the blogosphere that instead of putting sodium silicate in clunker engines, we should give the cars to poor people. It's true that Cash-for-Clunkers will make used cars more expensive, but, as I noted above, that's the whole point. And the best way to help the poor isn't to distort downward the prices they pay or distort upward the wages they receive --- it's to bolster their incomes directly.
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How would you compare Cash for Clunkers to a tax on older cars (by year of manufacture and vehicle weight)? It seems to me that the tax would lead to a more efficient outcome, but I haven't thought about it much.
Taxing a negative externality (like driving a clunker) and subsidizing a positive externality (like getting rid of the clunker) are similar.
One problem with the current subsidy is that they've drawn a bright line. What I mean by this is that you get the subsidy if your car gets 18 mpg, but not 19. But how different are these cars, really?
A clunker tax added to your yearly vehicle registration that was more of a sliding scale would probably be better.
What you have not shown is that this hypothetical benefit to society exists, much less, is larger than the value of the car.
Destroying value is still a bad idea. This clunker program is the same as the government paying people to burn down houses in order to stimulate the housing market.
I do think the stimulus argument is overblown, and Aaron and I seem to agree on that.
But most economists (Republicans and Democrats both) would agree that this program is different from burning down houses to stimulate the economy.
The reason? If the negative externalities of driving an old car are large enough, then destroying them could be a good idea.
It's well established that there are negative externalities associated with local air pollution. Here are three well-established facts: (1) Air pollution shortens lives, (2) life is valuable, and (3) driving an old car leads to more pollution than driving a new one. Put these together and you get the negative externality.
These three facts form the basis for lots of government intervention in the auto market. There are rules about the types of gasoline that refiners can sell, rules about fuel efficiency, rules about emissions control technology that automakers must put in place, and rules about getting your emissions checked prior to registering your car.
Aaron's right that this doesn't mean that the social value of a clunker is negative, only that the social value is less than the private value.
But that's how to judge this program, not based on the "stimulus" argument. If you really want to assess, in an unbiased, open-minded way, whether this program makes sense, start digging for estimates of the effect of pollution on life expectancy, then look at the implied value of life estimates, and then look at the relative dirtiness of old and new cars.
A long-time reader points out a fourth potential negative externality associated with driving older cars --- safety. If the brakes on a '76 Pontiac fail and it runs a red light, people might get hurt. This explains why there's a mandatory safety inspection (in Utah) when you try to renew your vehicle's registration.
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