Thursday, July 31, 2008

Buying old cars as fiscal stimulus?

Via Mark Thoma, Alan Blinder's cash for clunkers. There's a lot to like about this idea based on the comments. Most of them wanted more details -- mainly how to define a clunker. I'm still driving my 1996 Saturn and I think it would go a few more years and I don't think of it as a clunker. So, I don't know if old cars per se should be the definition of a clunker. The major problem is that these are the cars all the poor can afford. If Alan Blinder is thinking that $3500 per car is too small a stimulus we can always pay them the money AND give them all a Prius.

Update: Freakonomics chimes in:
The biggest problem with this policy, however, is the way it distorts long run incentives. Let’s say the rules of the program say that a car must be at least fifteen years old to qualify for a big government subsidy to scrap it. This gives powerful incentives to people with twelve-year-old cars they were planning on scrapping to keep driving them for three more years to collect the government bounty. Instead of reducing the number of clunkers on the road, this program could actually lead to an increase!
It also seems to me that any effect on the demand for new cars would be extremely limited. People who drive clunkers are generally not in the market for new cars. Presumably their replacement car will be a used car. The increased demand for used cars will lead to higher prices for used cars, which will push some buyers towards a new car, but the likely impact on new cars would be small.

That's why we also need to give them Priuses when they trade in their clunkers!

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