The CARS legislation, popularly known as "Cash for Clunkers," now appears certain to get additional funding. The program provides an excellent example of a typical public policy question and the dilemma for decision makers.
Any new program has a range of impacts. Some of these are obvious to all. It is easy to trace cause and effect for these highly visible results.
The professional policy analyst has a more extensive tool kit. The range of questions is wider and the analysis is much more sophisticated. The average person may not find the results of this analysis to be persuasive.
A simple example is policy to expand free trade. Jobs put at risk from foreign competition are highly visible. Anyone can understand the consequences for domestic workers. Jobs gained from increased exports and an improved economy cannot be "proved" to the satisfaction of the lay observer. It is an issue where there is a great discrepancy between the views of professional economists, who overwhelmingly favor free trade, and the average citizen.
Cash for Clunkers
The CARS legislation provides an incentive payment to people who trade in a vehicle that gets poor gas mileage for one that is better. This might still be a 15 MPG SUV, but it is better than the trade-in vehicle. To make sure that the old vehicle is taken off of the road, the engine must be destroyed. The incentive ranges from $3500 to $4500.
From a policy analysis perspective the CARS program seems dubious, involving many significant questions.
- Does it really help the environment? Nina Shen Rastogi, writing for Slate, suggests that the cost is ten times too much, when one considers the environmental impact of building the new car.
Was spending $1 billion a particularly cost-effective way to achieve those CO2 reductions? Probably not. Assuming the above calculations are correct and that each consumer keeps his or her car for 10 years, then the total savings should be a little less than 5.7 million tons of carbon dioxide. That means each ton of carbon dioxide would be worth about $175.53 to the U.S. government. As the Washington Policy Center pointed out on its blog in June, a ton of CO2 currently goes for about $17.50 on the European Climate Exchange.
- Does the program really add new sales? How many? Avery Goodman suggests that the program cost is actually more than $45,000 per vehicle. Citing data from the online auto service Edmunds.com, Goodman makes a key point. The program pays off even for those who would have bought a car anyway, not just for the incremental buyer. If you look at the "counterfactual", what would have happened in the absence of the program, the net gain in sales is much smaller.
- The overall program is small. Doug Kass suggests that this is a minor and temporary stimulus to the economy, although the psychological effect might be important.
- James Hamilton laments the waste from destroying the old engines.
One of the more embarrassing features of the New Deal was the Agricultural Adjustment Act of 1933, which paid farmers to slaughter livestock and plow up good crops, as if destroying useful goods could somehow make the nation wealthier. And yet here we are again, with the cash for clunkers program insisting that working vehicles must be junked to qualify for the subsidy.
- Bob McTeer says it best: "What was the evidence of success? What lesson was learned? Well, apparently, if the government offers to give people money, quite a few of them will take it."
The Popular Viewpoint
If one looks only at the highly visible policy results the story is different. The program created a buzz in dealerships, including traffic from those who might not qualify for the program. The plan is working in a way that is more obvious than other "shovel-ready" programs.
There are highly visible benefits for consumers, car makers, auto workers, parts makers, and the local economies in the auto states.
These stories are easy to present in the media, and easy for political leaders to embrace. It is no surprise that the GOP leadership is going along with the extension and expansion of the program.
We cite this as an example of how public policy decisions are reached. While the program has many flaws, it illustrates the reality of the policy-making process -- a compromise where there are obvious beneficiaries.