Thoughts on the Cash for Clunkers Program
I’m going to stick my neck out a bit and blog about something that I don’t think I know that much about: economics. Hopefully some astute reader will set me right through some insightful comments if I’m all wet.
I have been watching the Cash for Clunkers feeding frenzy with some concern. The government contributed first $1 billion, then another $2 billion, to incentivize consumers to trade older, less efficient vehicles for new, somewhat more efficient ones. This was billed as both an environmental and economic incentive.
On the environmental side, many commentators have observed that the benefits aren’t entirely clear: the program only required a modest improvement in fuel economy, which might be overshadowed by the environmental impact of manufacturing the new car and disposing of the old one. This is a concept known as life cycle assessment, which I find fascinating but which hasn’t yet, to my knowledge, analyzed something as big and complex as an automobile in detail. The disposal cost is aggravated by the requirement that the car being returned be rendered undriveable.
On the economic side, I’m all for stimuli that create jobs by building infrastructure. The most famous example of this was FDR‘s creation of agencies such as the Works Progress Administration and the Tennessee Valley Authority during the Great Depression. These projects created infrastructure, much of which we’re still using, that enabled future growth in addition to creating jobs in the short term.
But I see a fundamental difference with Cash for Clunkers. What’s happening generally is that people are accelerating their purchases of new vehicles using the program. With the exception of the remaining life on the “clunkers” being destroyed, the program isn’t creating new demand, it’s accelerating future demand. In other words, it’s mining demand that might occur during the recovery from the current recession and pulling it into the present. It’s making the current recession a bit shallower but wider, and not much different in total volume, at least as far as the automotive industry is concerned.
Are there benefits to a shallower recession? Sure. Not as many workers will be affected, and those that are might reasonably make career changes to other industries. This is much harder than it seems, though — these other industries may not exist where the workers live, and it’s very hard to sell a home in an area with a weak economy. I’m also concerned when I hear that automakers are ramping up capacity to meet the demand of Cash for Clunkers; it is such a short-term program that this is likely to be the wrong thing to do.
Many of the things in President Obama’s stimulus plan build infrastructure for the future, but I wish there was more emphasis there. I won’t be at all surprised if I hear that the automotive industry takes longer to recover than other parts of the economy. After all, we have already gotten the clunkers off the road.