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What?! No More Cash for My Clunker?

July 31st, 2009 . by economistmom

So all this week I’ve been planning to start a series of posts about the new “Cash for Clunkers” government rebate program which has just gotten underway.  The program is designed to help stimulate the economy (and the auto industry in particular) by encouraging people to turn in their fuel-hogging vehicles (18 mpg or less) and purchase new, more fuel-efficient vehicles.  It turns out I have a “clunker”–a 2004 Ford Freestar minivan (official EPA-estimated fuel efficiency of just 17 mpg) that I’ve really wanted to trade in anyway for several months now, for a new compact car (probably another Ford Focus, if I stay loyal to my sister’s employer).  It’s too big for my needs now (I never transport all four of my kids at once anymore, now that some of them are driving their own vehicles), and it’s felt just plain wasteful for me to drive (just) myself to work in it.  (And it doesn’t really fit in my parking space, either.)  Well, it turns out the trade-in value of my Freestar, given its mileage and condition, is right around $4500–coincidentally the value of the government rebate I would receive under the Clunkers program.

So it’s pretty much a toss-up for my own pocketbook:  I’d get a $4500 rebate credit under Clunkers for “trading” my Freestar for the Focus, or I’d likely get a $4500 trade-in credit from the dealer for literally trading in the Freestar for the Focus.  But the outcome for society would be quite different under the two options:  under the Clunkers program, the Freestar would have to be destroyed (insuring that it is “taken off the road” but also destroying any value still present in the decently-functioning vehicle), and the government (i.e., the taxpayer or rather the future taxpayer given the deficit financing of the program) would be giving me the $4500.  Under a normal trade-in, someone would eventually get more utility than I do from driving my used Freestar (instead of zero utility from a bunch of shredded metal), and the $4500 would be paid by the dealer, not the taxpayer.  So I’m thinking that ironically, a program designed to encourage us to be more socially conscious, might actually encourage me to be more wasteful with my Freestar.  Not only would the government (future taxpayers) be paying me $4500 for something I would have done anyway (buy a new, fuel-efficient car), but the program would be encouraging me to “waste” (destroy) any remaining value in the old vehicle instead of transferring the vehicle to someone (the highest bidder) who values it more than I do.

As these MSNBC and CNN-Money articles explain, the Clunker deal is an especially “sweet” one if your old vehicle has a trade-in value considerably less than $4500.  Then you (personally) are clearly better off participating in the Clunker program and having your vehicle destroyed.  You’re also more likely to have been more anxious to buy a new car anyway (given the low value of your old car), and hence more likely to be getting this big subsidy without it necessarily changing your behavior (unless you would not have otherwise chosen a more fuel-efficient vehicle for your new one).  And because it’s such a sweet deal for no doubt many people with gas-guzzling vehicles with trade-in values of less than $4500, it turns out many people seized the opportunity this week–so many that earlier this evening it looked like the government would have to suspend the Cash for Clunkers program (and perhaps spare me the social dilemma), less than a week after it got started.  From tonight’s CNN-Money report:

NEW YORK (CNNMoney.com) — This much seems certain about the Cash for Clunkers program: Consumers are happy to take government rebates to buy new cars.

The fate of the $1 billion trade-in program was up in the air late Thursday over concerns that it may have already burned through its funds less than a week after it was launched.

Congressional sources said earlier in the day that the program would be suspended…

As of Wednesday afternoon, nearly 30,000 Clunker transactions had already been submitted to the National Highway Traffic Safety Administration, the agency said, with requests totaling almost $96 million in disbursements.

But later this evening (around midnight), the story was revised to say (emphasis added):

A White House official and a source at the Department of Transportation later said the program would not be suspended. The DOT official said the administration would try to work with Congress to find more funds to keep it going.

Indeed, one of the program’s main champions in Congress, Sen. Debbie Stabenow, D-Mich., called on the administration and Congress to appropriate more money for it.

So we’ll see how this turns out and whether I’ll be able to keep writing about my Freestar becoming a possible “clunker” after all.  If the program isn’t suspended, the first thing I’ll need to do is see what the dealer would give me if I trade it in, the “normal” way.  Stay tuned.

3 Responses to “What?! No More Cash for My Clunker?”

  1. comment number 1 by: Sherry Jarrell

    Well said! I am going to have to visit your site more often. If you have a chance, check out my new blog on All Things Finance and Economics at http://www.SherryJarrell.com. Here’s a relevant recent at post:http://www.sherryjarrell.com/2009/07/no-doubt-economy-would-be-stronger-if-not-for-bailout.html

    There is absolutely no doubt that the economy would have been better off today without the bailout and the omnibus spending bill. See my previous posts on the Damage of Government Spending and the True Cost of Government Spending. Every dollar of tax revenues sucked out of the private economy and used as government spending costs the economy upwards of 50 cents. Every dollar of tax revenue kept in the private economy is either used as consumption which keeps the economy going in the short run (presuming they are consuming products and services produced by the private economy), or investment in capital and equipment and innovation, which is the sole source of productivity and growth in this economy - nay, in the world economy.

    You need look no further than the overwhelming response to the “Cash for clunkers” program which was essentially a tax rebate on a durable good. Imagine where we would be today if the $787 billion “stimulus” program has been used as an across-the-board tax rebate? Better? Okay, now imagine how much better off we would be if the $787 billion had never been confiscated from the private economy in the first place! My point exactly.

    I am not saying that the “Cash for Clunkers” was a smart program. On the contrary, it is a prime example of government manipulation our private lives in a way they think is politically correct. And it is a massive shell game fraught with deception and feel-good sound bites. If I own a clunker, that is my choice. If it pollutes and I choose to keep it and pay the costs of pollution, that is my choice. Clunkers may very well save the life of my 15 year old daughter, who just starting driving. I want her safe and alive should she have an accident. And that is MY choice, not the choice of OBAMA and gang. He can raise his children as he sees fit, and I will do the same, thank you very much. Now why don’t the so-called economists who surround Obama cough up the data showing the REAL costs of this program to the American people: in addition to the price paid for the clunker, we also incur the costs of writing and monitoring the program, the car dealers’ time and expense in implementing the program and filing the paperwork, and the collection and disposal (?????) of the clunkers themselves. And every one of those dollars spent began life as a dollar of OUR HARD-EARNED INCOME. My goodness, talk about your social engineering. What a joke.

  2. comment number 2 by: Anandakos

    Ms. Jarrell,

    The $787 billion for the stimulus was NOT “extracted from the private economy”. It was borrowed from (mostly) the Chinese. Now a portion of it will have to be extracted from the private economy at some time, but it hasn’t been yet. “A portion” because it is very likely the dollar will fall and it will be paid back at some discounted rate.

    It’s true that a lot of the stimulus actually hasn’t yet been disbursed, and the stock market has issued an enormous put that the economy is going to improve. Unemployment is still rising, albeit a bit more slowly. House prices are definitely bottoming, although we do have another big potential foreclosure pool facing us in the immediate future with the Alt-A’s. And the subsidies to the banks which total four times the stimulus bill seem to have helped make them very happily “Too Bigger To Fail”.

    Since these have all occurred without much of the stimulus actually having been distributed except for the UI extension, it cannot be proven that it was necessary, at least in the size passed. But remember that all of these “green shoots” sprouted up in a business environment EXPECTING the 3/4 trillion to be spent within the then-next 18 months. So neither can it be proven that it was not necessary.

    In any case it is frankly ridiculous to hypothesize what would have happened without it. It’s not knowable and can only be manipulated for ideological purposes. Which of course is exactly your intent.

    Cash for Clunkers is a part of the stimulus, and you have some serious cognitive dissonance about it. You call it a “tax rebate on a durable good”. Well, “No”, it’s not. It is a SUBSIDY on a capital good purchase, not a tax credit, refundable or otherwise. It’s a direct payment to the dealer reducing the purchase price. That’s a subsidy, not a tax rebate and it has a dramatically greater impact than a tax credit would, because it’s money toward the purchase now, not next April 15th.

    Another thing pops up in the last paragraph. How do you “pay the costs of pollution” for your clunker? Hint, the short answer is, “I (meaning you) don’t”.

    Yes, since your clunker probably gets lower gas mileage than a new car would, you pay more for the almost free access to consumption of a 120 million year old shrinking resource provided by expensive US government military action throughout the middle east. But that has nothing to do with the costs of the pollution that consumption of it produces. The costs of that pollution are 100% externalized for you as they are for me. I’m no saint concerning the sins of hydrocarbon consumption. I do my best to limit it, but I’m a middle class American in 2009, so absent Herculean efforts to live like a person in 1850 I’m a sinner.

    Since you’re an economist, here’s a little thought experiment for you: imagine all the people from the future who would like to sequester a few barrels of light Arabian for use as chemical feedstocks during THEIR lifetime — instead of ours — lined up in front the NyMex with buckos in their hands to buy them. How much do you think that BBL would go for? A thousand dollars? Ten thousand? A hundred thousand? With all the potential people from the future competing for it, it’s not lunacy to consider that.

    And finally, that is one a silly, close to unhinged frankly, argument you make about the cost to the dealers to “implement the program and fill out the paperwork”. The dealer showrooms have been EMPTY for eight months. They’re ecstatic to fill out some paperwork.

  3. comment number 3 by: Private Fleet

    Will be very interesting indeed to see how the auto industry in US holds up now the cash for clunkers program has ended. Quite a few Australia eyes will be watching closely I think.