Synergies in public policy: Cash for clunkers

I’m a fan of ‘synergies’ in policy – doing more than one thing you want done with one policy. Killing two birds, that kind of thing. These opportunities come up all the time, but we’re very often too flat footed to catch them. The last time Australia was good at this kind of thing was during the Hawke years when various deals with the unions had multiple worthwhile goals – like dealing with short and medium term macro objectives at the same time as contributing to longer term micro-economic objectives.

Anyway, over the fold is Alan Blinder’s ‘cash for clunkers’ proposal.  Note, don’t try this trick at home, or if you do, don’t expect it to do as much good here as it could do in the US – because we’re not in a recession and because even if we were, we make less than 20% of the cars we use – and they’re not particularly fuel efficient.

A Modest Proposal: Eco-Friendly Stimulus, by Alan S. Blinder, Economic View, NY Times: Economists and members of Congress are now on the prowl for new ways to stimulate spending in our dreary economy. Heres my humble suggestion: Cash for Clunkers, the best stimulus idea youve never heard of.

Cash for Clunkers is a generic name for a variety of programs under which the government buys up some of the oldest, most polluting vehicles and scraps them. If done successfully, it holds the promise of performing a remarkable public policy trifecta stimulating the economy, improving the environment and reducing income inequality all at the same time. Heres how.

A CLEANER ENVIRONMENT … A California study estimated that cars 13 years old and older accounted for 25 percent of the miles driven but 75 percent of all pollution from cars. …

MORE EQUAL INCOME DISTRIBUTION …Most 1 are owned … by low-income people. So if the government bought some of these vehicles at above-market prices, it would transfer a little purchasing power to the poor.

AN EFFECTIVE ECONOMIC STIMULUS With … the economy weakening, Cash for Clunkers would be a timely stimulus in 2009. … And the quickest, surest way to get more consumer spending is to put more cash into the hands of people who live hand-to-mouth. …

People who sell their clunkers would … be free to spend this money as they see fit, whether on a new car or truck or some other form of transportation or anything else. …

Cash for Clunkers is not the pipe dream of some academic scribblers. Local variants are either now in operation or have been tested in California, Colorado, Delaware, Illinois, Texas, Virginia and several Canadian provinces. So there is no need for a proof of concept….

The big need to date has been money, which is why the scope of Cash for Clunkers programs has been limited. And that, of course, is where the need for stimulus comes in. We now want intelligent ways for the federal government to spend money.

Heres a high-end cost calculation for a national program. Suppose we took two million cars off the road a year, at an average purchase price of $3,500… Including all the administrative costs of running the program, that would probably cost about $8 billion. … For stimulus purposes, it would, of course, be better to run the program on a larger scale, if possible. There are over 250 million cars and light trucks on American roads, and … at least 75 million clunkers. At five million cars a year an ambitious target, to be sure the program would cost less than $20 billion,… cheap compared with the $168 billion stimulus enacted in February.

And what would all this money buy? First, less pollution. … Second, the … direct income transfer to the owners of clunkers, who are mostly low-income people. Third, these folks would almost certainly spend the cash they receive not just the subsidy, but the entire payment, giving the economy a much-needed boost.

Oh, and I left out a fourth possible goal. By pulling millions of old cars off the road, Cash for Clunkers would stimulate the demand for new cars as people trade up. It need hardly be pointed out that our ailing auto industry, like our ailing economy, could use a shot in the arm right now. Scrapping two million or more clunkers a year should help. … Cash for Clunkers is an idea whose time may finally have come. Write your congressman.

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Ken Lovell
15 years ago

Plus artificially increase the prices of used cars less than 13 years old, because presumably people who sell their clunkers will not buy a new car but another second hand one?

Joshua Gans
15 years ago

Nicholas, for $3,500 my 1994 Camry is yours today.

But please let’s call it bucks for bombs.

15 years ago

why did he have to entitle it “a modest proposal” ? Not very Swiftean.

I really question modern economics when a proposal is made to destroy some stuff and make some new stuff, just for the sake of it, for the sake of jobs. It’s a mentality that is ultimately really unhealthy and unsustainable.

However, getting old cars off the road would have significant safety benefits as well.

I wonder what $20 billion on expanded transit would do for smaller US cities and outer suburbs?

derrida derider
derrida derider
15 years ago

I dunno – I was always taught that “one target, one instrument” is better policy, not “multiple targets, one instrument”. The reason is that it is more difficult to gauge the effectiveness, both ex ante and post hoc, of a program with multiple goals because those mutiple goals then have to be given an explicit weight. That’s hard but doable when the multiple goals don’t conflict but in real life they often do.

But if we’re going to make such a thoughtful gesture to the car manufacturers why not save a bit of money and flog the bombs to third countries? The Japanese do this to build an artificial domestic market for new cars (they don’t buy the used cars, they just make it near-impossible to register them). It’s the reason that 2-5 year old Japanese used cars in NZ typically cost under half what they do in Australia.

Of course the price the Japanese pay is that they sell fewer new cars in NZ, plus of course there’s the obvious burden on Japanese consumers. But our car industry doesn’t export most places anyway, and consumer/taxpayer interests are of as little concern to the industry here as in Japan.

derrida derider
derrida derider
15 years ago

I’m just having a gentle dig at yet another proposal to coddle our over-coddled car industry.

Of course real world programs very often have to aim at more than one target, for your reason (1) above. But public policy students get taught that it’s undesirable for the reason I mentioned.


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