"Cash for Clunkers"
A case study of how economic incentives affect behavior
31 Jul 2009 in Regulatory Economics
Apparently the new "Cash for Clunkers" program is a big success. It began on July 24, 2009, and according to the Washington Post, Wall Street Journal, and many other sources, the $1 billion appropriated for it may be running out.
In an unusually rapid response, the House of Representatives has today approved a bill to transfer $2 billion of "stimulus" bill funds to the program. Corey Boles and Josh Mitchell of the Journal write:
The move follows a scramble Thursday after it emerged that the initial $1 billion allocated to the clunkers program may have been close to exhausted after just one week. The legislation would shift $2 billion from the $787 billion stimulus plan to the program.
The House voted 316 to 109 to approve the extension. Because the measure was placed on the suspension calendar, it required two-thirds of lawmakers' support to carry it....
As of Friday morning, the National Highway Traffic Safety Administration, which is handling the clunker rebates, has processed $250 million in vouchers,
The current program offers buyers a $3,500 discount for replacement cars getting 4 mpg more in combined fuel economy and $4,500 for a 10 mpg increase. Only vehicles currently getting a combined 18 mpg or less qualify as "clunkers." (Rules for trucks are different.)
The chart below shows what a replacement car must achieve to be entitled to each of the two discounts. While the government has been surprised by consumer response, data are not yet available indicating what choices consumers have made. Many new vehicles can qualify as replacements under the 4-mpg improvement threshold, but few qualify under the 10-mpg improvement threshold unless the "clunker" happens to be located way to the left side, perhaps with single-digit mpg.
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President Obama has expressed support for replenishing funds for the program. Prospects in the Senate are less clear, however, because those who opposed the original bill on the ground that it was demanded too little improvement in fuel economy may want to reopen debate about the program's design.
This would expose a rift between two competing policy objectives. Some advocates wanted to use the program to significantly change consumers' energy consumption, such as by replacing a low mpg car with one that gets very high mpg. Others wanted to stimulate auto sales generally. As designed, the program is a compromise between these two goals. It appears that the program has stimulated sales, though it may be the case that many consumers delayed making purchases they otherwise would have made, in order to take advantage of the program. The extent to which it has changed participating consumers' fuel consumption cannot be ascertained at least until program data are available to see what decisions consumers have made. Even then, only a preliminary conclusion is feasible because there won't be any data indicating the extent to which replacement vehicles are driven more miles than the clunkers the program removes from the fleet.
