Policy Potholes Need Attention
“Cash for Clunkers” Can Help Country Quickly — But May Just Subsidize Auto Dealerships
By J. Lange Winckler
One of the most timely and useful ideas coming out of Congress to help America’s economy, energy supplies, and environment is the so-called “cash for clunkers” measure now before the House of Representatives.
Before passage, however, the House and Senate both should pay attention to some policy potholes in the plan. If "clunkers" is merely a designation for a fairly low-mileage car of somewhat recent vintage, without enough attention to the vehicle's mileage performance and pollution contribution, then this bill should be renamed the "Auto Dealership Survival Subsidy."
"Cash for clunkers" is an idea that not only has a proven history – it worked very well in California nearly 20 years ago, and has certainly boosted auto sales in Germany this year – but also might produce visible results in a very short time. However, there are measure may, or may not, be able to address some problems.
Potential shortcomings include of course financing sales of cars not built in the United States, or at least not built with many U.S. parts or much of a labor force contribution. Whether the proposal can at least be tilted somewhat to favor American-made goods is questionable.
Another shortcoming is that this measure definitely subsidizes financially-healthy car buyers. People with poor credit or who are struggling to stay alive, and this includes a very big share of the “clunker” car ownership, may not be able to take advantage of the opportunity. The worst-case scenario for this observation is that car dealers make high-interest financing deals available to marginally-qualified buyers and over the long run actually soak those buyers by using the federal subsidy as substitute for a down payment.
Allied to that problem is that the subsidies may mask profiteering by dealers. Right now auto prices are quite low and competitive, with lots of extras available for purchasers. Sadly many cash-strapped people either lack the confidence and skill to bargain effectively in car purchasing, or fear that if they do so then they will be turned away. Availability of the federal subsidies may divert the buyers’ attention from getting the good prices they deserve.
Scams accompany almost every public incentive program, whether the plans are for health care, solar water heating, or cars. This plan at least offers the country a means of stimulating a major sector of retail sales for durable goods, and a host of allied business activities. It also does help with overall fuel efficiency and a number of aspects of land, water and air pollution prevention.
California very successfully offered a “cash for clunkers” deal for several years to help cut down smog in the Los Angeles basin and other areas. One of the keys of that program was the definition of “clunker.” The incentive program must not simply subsidize early replacement of perfectly functional, advanced design vehicles that are already quite fuel efficient as well as meeting all air quality standards. The present proposal, allowing $3,500 to replace older cars with newer ones that do not offer improved mileages, is a mistake.
A 2008 Hyundai Accent 3-door, for example, is one of the most fuel-efficient standard propulsion cars on the road today, and should hardly qualify as a “clunker.” Not even if such a recent model had been driven relentlessly over two years on the street, should its mileage qualify the car for the program. However, under the proposed law, trading this car in on a 2010 Honda Insight hybrid, with a 41 miles per gallon city-highway EPA rating, will qualify for a $4,500 subsidy.
That is literally wasting public money.
If the “cash for clunkers” law can navigate around many of these policy potholes, it could do a lot to help the country. And it would work very quickly. There aren’t many other proposals quite so promising. And unfortunately, there are not so many programs that may also turn out just to be expensive pork rind.
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J. Lange Winckler is a maritime historian in Tampa, Florida.