President Barack Obama yesterday signed into law the Consumer Assistance to Recycle and Save Program (CARS), or “Cash for Clunkers.” Its detractors are labeling it a classic waste of government money—and many supporters are wondering what went wrong.
When economist Alan Binder first proposed the scrappage program in a July 2008 New York Times Op-Ed piece, a struggling auto industry banded together with emissions hawks to champion a potential victory for both the economy and the environment. Is the law signed by President Obama a victory for the partnership—or a clunker itself? That depends on who you ask.
For the auto industry—whose support for the bill came not only from Detroit but from Japan as well—the essential mission of this legislation was getting Americans back into dealerships and shopping for cars. To that end, any trade-in program would have been a step in the right direction. But Detroit worried that if fuel economy standards were set too high, it would lead consumers into the arms of foreign car companies like Toyota and Honda, whose offerings are generally cheaper and more fuel efficient than their American counterparts.
Enter Senators Debbie Stabenow (D-Mich.) and Sam Brownback (R-Kansas), who co-sponsered the version of the legislation which would eventually pass. Stabenow’s version of the bill increased the maximum fuel economy of cars eligible for trade-in to 18 mpg and decreased the incentive to buy truly fuel efficient cars by lowering the minimum improvement to 4 mpg. Boosters of the American auto industry would have liked to have the bill limited to cover only domestic cars—a violation of international trade laws—but with the incentive to buy Priuses and Insights gone, Detroit’s only qualm might now be that the program’s total funding was slashed to $1 billion—less than a quarter of the proposed $4.5 billion.
Green Car Backers
An alternate version of the legislation was introduced by Senators Dianne Feinstein (D-Calif.) and Susan Collins (R-Maine) which would have established a three-tiered incentive system. Fuel economy improvements of 7 mpg would be rewarded with $2500, 10 mpg boosts would get $3500, and 13 mpg increases would net $4500. When cries of protest from Detroit led to this proposal’s demise, Feinstein and Collins published an op-ed in the Wall Street Journal calling Stabenow’s bill “bad policy” and “another big bailout.” Both Senators would eventually end up voting for the bill, but voiced disappointment that pressure from the auto industry had sunk a superior bill.
A third contingent of politicians and analysts opposed Cash for Clunkers simply because they didn’t think it would be an effective use of money. On The New York Times’ Freakanomics blog, economist Steven Levitt wrote as early as August of last year that the incentives provided by scrappage laws simply don’t work.
Unless the price the government pays for the clunkers is very high, the majority of vehicles that are turned in will not have been driven much, if at all. Indeed, I suspect one of the most visible responses to this program will be a new market for mechanics fixing up cars that don’t run at all just enough so that they can be driven to the government’s lot to collect the cash… (It) seems to me that any effect on the demand for new cars would be extremely limited. People who drive clunkers are generally not in the market for new cars.
An American public fatigued by the recent parade of government bailouts, seems to agree with the skeptics. A survey by Rasmussen Reports this week found that 54 percent of Americans oppose the program while only 35 percent favor it.
A Continental Perspective
As politicians and pundits debated the merits of Cash for Clunkers in the United States, similar programs instituted in eleven European Union countries over the course of the past year were in full swing. Though the details of these programs varied, most had no efficiency standards written into them at all—most simply mandated that a car had been purchased before a certain year. Since fuel economy of newer cars has increased dramatically across the continent in the past decade and with gas prices in Europe providing a built-in incentive to buy a fuel-sipper, there was no need.
For the most part, these programs found success, at least in terms of participation. In Germany, auto sales increased 40 percent over the course of the program, and carmakers there are clamoring for an extension in the hopes that the sales keep up.