Conor Friedersdorf, one of my favorite conservative bloggers, highlights two “sound” and “serious” arguments against the cash for clunkers, or CARS, program, which offers car buyers a government-financed rebate when they trade in a car for a higher-mileage car (some limitations apply). The traded-in “clunker” is turned into scrap metal.
The first serious argument Conor quotes comes from Radley Balko (a blogger I read religiously — seriously, if you’re not reading Radley, you’re missing one of the best bloggers on the planet). Radley, in the midst of a post critiquing the Daily Show, writes:
There’s also the laughable idea that the government is ordering the destruction of tens of thousands of used automobiles it paid people thousands of dollars to exchange . . . for new cars that may get no more than an added four miles per gallon. And all in the name of saving energy. I’m no television comedy writer, but if they wanted to, the creative minds at TDS could certainly have gotten some mileage (sorry) out of the idea that the government’s energy savings equation looks something like this:
(all of the energy that went into making the old car) + (the energy it will take to destroy it) + (all of the energy it took to make the new car) + ($3,500) < an extra four miles per gallon!
Obviously, Radley’s tone was a bit tongue in cheek, but since it’s one of the two “serious” arguments Conor chose to quote, I’ll address it seriously. There are two problems with the formula Radley presents.
It’s true that some trade-ins would qualify for just a four mile per hour difference — and it was based mostly on that, a month ago, I thought the CARS program sucked. But in practice, it appears consumers are eager for more substantial improvements:
Transportation Secretary Ray LaHood said the average mileage of new vehicles purchased through the program is 9.6 miles per gallon higher than for the vehicles traded in for scrap. Buyers of new cars and trucks that get 10 mpg better than their trade-ins get the $4,500 rebate. People whose cars get between 4 mpg and 10 mpg better fuel efficiency qualify for a smaller $3,500 rebate.
LaHood said some 80 percent of the traded-in vehicles are pickups or SUVs, meaning many gas-guzzlers are being taken off the road.
I’d argue for more stringent mileage requirements, but regardless, clearly the CARS program has been doing much better than just 4mpg. To imply that CARS gets an improvement of just 4pmg isn’t a “serious” argument.
Radley’s formula is also mistaken because it includes costs that would have been incurred regardless of whether or not the CARS program existed. For instance, “all of the energy that went into making the old car” was expended before the CARS program began, which makes it a sunk cost; blaming that energy cost on the CARS program is irrational.
Similarly, many of the new cars would eventually have been manufactured and sold at a later date — when the sales wouldn’t do as much good for the environment (because sooner is better than later), and when the economy might not need the boost as much. To whatever degree the CARS program displaces demand from other times, rather than creating it, it wrong to hold CARS responsible for “all of the energy it took to make the new car.”
Working out ecological benefits of government programs is hard. But on the whole, this program appears to be, if not perfect, definitely beneficial. That’s worth something.
Conor then quotes National Review’s Rich Lowry:
The fundamental mistake is to think that the government can magically induce economic activity with no countervailing downside. The Clunkers program is really just shifting around sales, creating the illusion of a demand for cars conjured out of nowhere. To the extent the program has enticed people to speed up or delay their purchases to take advantage of the rebate, it has borrowed demand from earlier this year or the future for a burst of sales in the summer of 2009.
This is a less intelligent argument than Radley’s (presumably reflecting the big drop in economic literacy when one shifts from reading Reason to reading NR). But first, let’s note that this argument entirely contradicts Radley’s argument. If — as Rich claims — “the Clunkers program is just shifting around sales,” without creating any new demand, then none of the “energy it took to make the new car” can be blamed on CARS, since the new car would have been created regardless. If Conor noticed the contradiction, he didn’t mention it in his post.
That aside, Rich is correct that there’s a downside. Specifically, the downside is the billion dollars it cost taxpayers (soon to be three billion, once the Senate votes to extend the CARS program). Stimulus costs money — even stimulus that’s beneficial in the long run. This isn’t news.
The rest of Rich’s argument is preposterous. For Rich’s argument to be true, we’d have to believe that demand for cars at the current price, and demand for cars at the current price minus $4500, are the same.
There are inevitably going to be some prospective car-buyers who won’t trade in their current car at current prices now or in the future, but who will do so if the price is $4500 lower. To illustrate this, I’ve done something I haven’t done since college: I’ve drawn a supply and demand graph. (Well, really, just demand.)
This is very basic economics. As prices drop, demand increases, leading to increased sales. That in turn leads manufacturers to produce more cars (supply goes up), which will get them to hire more workers, or at least slow down layoffs.
Aren’t conservatives supposed to know about supply and demand? Apparently, that’s not something they teach writers for the National Review.
It’s true that some of the increased sales due to CARS are sales displaced from other times — either pent-up demand from the past year, or people who would have bought a new car anyway, sometime in the future. Contrary to what Rich thinks, displaced sales are a strong argument in favor of CARS, because the economy needs the stimulus more now than it will a year from now. (We hope.)
But some of the demand must be new demand, created by lower prices. Unless we assume basic economics have ceased to function.
There’s a lot I’d criticize about the CARS program — it should have been more stringent about improved mileage, it should have included older cars, and perhaps it should have been extended to used car buyers, as well. (I’m not sure about that last point only because I’m not sure how much lower the stimulus effect would have been.) But on the whole, the program appears to be a success. If the arguments Conor quoted are the “sound” and “serious” arguments against the program, then cash for clunkers looks pretty damned good.