ECONOMISTS and members of Congress are now on the prowl for new ways to stimulate spending in our dreary economy. Here’s my humble suggestion: “Cash for Clunkers,” the best stimulus idea you’ve 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. Here’s how.
A CLEANER ENVIRONMENT The oldest cars, especially those in poor condition, pollute far more per mile driven than newer cars with better emission controls. 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. So we can reduce pollution by pulling some of these wrecks off the road. Several pilot programs have found that doing so is a cost-effective way to reduce emissions.
MORE EQUAL INCOME DISTRIBUTION It won’t surprise you to learn that the well-to-do own relatively few clunkers. Most are owned, instead, 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 almost all the income tax rebates paid out, and the economy weakening, Cash for Clunkers would be a timely stimulus in 2009. As was made clear during the Congressional debate last winter, prompt spending is critical to an effective stimulus program. 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.
Here’s an example of how a Cash for Clunkers program might work. The government would post buying prices, perhaps set at a 20 percent premium over something like Kelley Blue Book prices, for cars and trucks above a certain age (say, 15 years) and below a certain maximum value (perhaps $5,000). A special premium might even be offered for the worst gas guzzlers and the worst polluters. An income ceiling for sellers might also be imposed — say, family income below $60,000 a year — to make sure the money goes to lower-income households.
The numbers in this example are purely illustrative. By raising the 20 percent premium, lowering the 15-year minimum age, or raising the $5,000 maximum price or the $60,000 income ceiling, you make the program broader and costlier — and create a bigger stimulus. By moving any of these in the opposite direction, you make the program narrower, cheaper and smaller.
People who sell their clunkers would receive government checks, perhaps paid to them at the motor vehicle bureau office where they turn in their old vehicles. They 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. To ensure that the program really pulls clunkers off the roads, only vehicles that had been registered and driven for, say, the past year would be eligible.
The government can either sell the cars it buys to licensed recyclers for scrap, or refit them with new emissions controls and resell them. But the government must not ship the cars to poor countries, where they would continue to belch pollutants.
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.” Rather, a national Cash for Clunkers program could learn from all this experience in building a better system.
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.
Here’s 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 (the top price in the Texas program today). Including all the administrative costs of running the program, that would probably cost about $8 billion. Compared with other nationwide income-transfer or environmental policies, that’s a pretty small bill. 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 some 30 percent are 15 years old or older. That’s 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, still cheap compared with the $168 billion stimulus enacted in February.
And what would all this money buy? First, less pollution. The Texas program estimated that clunkers spew 10 to 30 times as much pollution as newer cars. Second, the subsidy value (the 20 percent premium in my example) is a 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.
With today’s concerns over stimulus, inequality and greenhouse gases, as well as an aging vehicle fleet, Cash for Clunkers is an idea whose time may finally have come. Write your congressman.