More Cash for Clunkers

I admit it. I have a bug up my butt about this Cash For Clunkers program. I have a bug up my butt about health care reform too (at least all of the proposals currently on the table), but health care reform is ridiculously complex, and I don't feel I have my act together enough to opine (yet). Cash For Clunkers, however, is straightforward enough that it can perhaps be a teachable moment, as certain moral preeners like to say.

Positive news stories about Cash for Clunkers have dominated media coverage in the last week as the Senate ponders whether to join the House in adding $2B to the program. I see web video interviews with happy car buyers who just traded in their 15 year-old pickup truck to buy a hybrid SUV. I see Wall Street research papers about the positive effect on GDP -- upwards of 0.40% boost this quarter, and I see administration flacks talking up how good the program is for the economy and the environment. Most people believe that this government program is a smashing success (no pun intended).

I was gratified therefore to see Jonah Goldberg's article today. Jonah gets to the nub of the issue, which is Frederic Bastiat's main theme in his 1850 essay That Which is Seen and That Which is Unseen.

In this case, the government is managing to juice GDP this quarter by encouraging new car sales, but it will come at the expense of GDP in future quarters. What is unseen here is that many people made the decision to buy a new car only because the government was essentially giving them several thousand dollars off of the dealer price. Those who were planning to buy a new car anyway have done so earlier than they were planning but won't need another for quite a while. Those who weren't planning on buying a new car now have a lot less spending power to use for a new refrigerator or a new computer or for remodeling a bathroom. That is an unseen loss to GDP.

Then there is the unseen effect of removing cheap cars from the market. Perhaps a landscaper was getting ready to start a business, but he can only afford to purchase a clunker pickup for $3,000 to get started. Alas, they are not available anymore. The lowest price he can pay now is $5,000 because of the diminished supply.

The simplest analysis though focuses on what was destroyed. The government is paying people to destroy something of economic value. That something could have been used for recreation, or it could have been used to contribute to GDP. To make matters worse, resources were used to destroy those things (the car demolition and towing operators' resources), and even more resources (the car manufacturers' resources) were used to create expensive replacements for the things that were destroyed.

I hope Jonah's article is the beginning of some pushback from people who actually understand economics.

There is one other idiocy in the program. As my friend DJ pointed out with respect to the (admittedly stupid) CAFE standards, the government at least gets the math correct for CAFE by calculating the arithmetic average of the gallons per mile that cars get rather than miles per gallon. The reason is that all other things being equal, a 10mpg car uses twice as much gas as a 20mpg car, but a 20mpg car only uses 50% more gas than a 30mpg car.

The Cash for Clunkers program, of course, only looks to the arithmetic improvement (in the case of a new SUV/minivan/pickup truck, 2mpg-4mpg for the $3,500 rebate and 5+mpg for the $4,500 rebate). The improvement is 50% when you go from a 10 mpg SUV to a 15mpg SUV, but it is half as much in going from an 18mpg SUV to a 23mpg SUV. True to form, the government has a floor mpg on new SUVs of 18mpg, thereby ensuring that you are in the un-sweet part of the non-linear gas mileage improvement curve.

This brings me to yet another point in my rambling screed. The theory behind laws based on gas mileage (like CAFE and CARS) is that gas mileage is a good measure of how efficient a vehicle is. But it really isn't because gas mileage scales inversely with the weight and size of a car. Extra size and weight usually means extra passenger safety and extra carrying capacity. I have seen plenty of discussion about the tradeoff between passenger safety and higher CAFE standards, but I haven't seen much about the tradeoff between carrying capacity and higher CAFE standards.

The government obviously recognizes this tradeoff to some extent because it exempts larger trucks and buses from the CAFE standards, but I wonder why it doesn't distinguish between an 8-passenger minivan and a 4-passenger Ford Focus. A family with 3 kids in car seats isn't going to fit into most sedans, yet it fits comfortably into any minivan, with plenty of room for storage. Would the government rather the family drive two "fuel efficient" cars to its holiday destination or one gas-guzzling minivan?