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Cash for Clunkers?

Congress is considering legislation to provide vouchers of up to $4,500 to help consumers scrap their gas guzzlers and buy more fuel efficient new cars.  Details of the proposal, from the House Committee on Energy and Commerce, are available here.

Proponents argue that in addition to saving oil and curbing greenhouse gas emissions, the measure would provide much needed economic stimulus.  Germany, which recently enacted a similar measure, is the only country in which automobile sales increased last year.

Is this program a good idea?

It depends on what the alternative is.  If it’s to do nothing, the proposal is a clear winner—even if we completely ignore its environmental impact.  But the mere fact that a program is better than doing nothing does not mean that we should adopt it.  Adopting this program means not adopting some other variant of it.  And with a few simple modifications, the existing cash-for-clunkers proposal could deliver much better results. 

Unemployment and idle capacity in the American auto industry are at their highest levels in decades. As the German experience indicates, auto vouchers are likely to produce an immediate surge in auto sales.  This would put people to work who would otherwise be doing nothing.   A $4,500 voucher that leads to production of an additional $25,000 car would generate $25,000 of additional income along the value added chain, which in turn would generate more than enough tax revenue to pay for the voucher. 

For one thing, the program could offer much stronger incentives choose cars with better fuel economy.  As the House proposal stands, a consumer gets a $3500 voucher for abandoning an 18 mpg vehicle for one that gets 22 mpg, but only $1000 more for switching to one that gets 28 mpg or more.  The real fuel savings and emissions reductions come when someone swaps a 10 mpg Ford Excursion for a 41 mpg Ford Fusion hybrid.  New car purchases have long-run consequences.  If we’re going to encourage swaps in the first place, why not provide stronger incentives to make the right ones? 

What happens to the gas guzzlers that voucher recipients unload?  Environmentally, sending them to the scrap heap isn’t necessarily a good idea, since keeping them on the road a little longer would spare the substantial energy use and additional emissions that accompany new vehicle production.   By creating a huge boost in the supply of used gas guzzlers, a voucher program would produce an immediate steep decline in their price, which would make them an economical choice for many drivers who use their vehicles only sparingly.  Although the per-mile cost of operating these vehicles would still be high, owners would be compensated for that by their low purchase price.

But an even more effective way to encourage reduced emissions and fuel use would be to couple the voucher program with a steep new tax on gasoline whose gradual phase-in would begin only after the economy has again reached full employment.  The revenue from such a tax could be used to help pay for a cash-for-clunkers program with even stronger incentives to purchase more efficient new vehicles.

Another problem is that the current cash-for-clunkers bill refers only to fuel economy, not emissions.  Although only 10 percent of cars on the road in Los Angeles are more than 15 years old, these vehicles, which are exempt from emissions control laws, account for a majority of the smog in the area.  Many of them would be ineligible for a voucher under the proposed legislation, even though the environmental case for including them is compelling. 

The real imperative, however, is to act quickly.  Unemployment is like empty seats on a commercial airliner.  In each case the opportunity to produce something of value is lost forever.  If congressional leaders cannot muster the votes necessary to pass the right cash-for-clunkers bill, even the current version would be much better than doing nothing.