Disagreeing With Andrew And Some Others On Cash For Clunkers

I was inspired by Andrew's post on Cash for Clunkers. I'm not sure I disagree with him completely, it's just that some of what he and others are saying don't quite ring true.

I’ve heard three C4C criticims over the past 24 hours that don't sound right.

1.    C4C isn’t going to increase total sales of new cars; it’s just going to accelerate buying that would have occurred anyway.

There certainly are some people who were already planning to buy a car that have or will accelerate their purchase because they now will be able to do so with less of their own money.  But I personally know two people who had no plans whatsoever to buy a new car in the next year or two that decided to change their minds because of the C4C incentive. 

I’m not suggesting that two people constitute a representative sample of anything.  But it’s at least as possible that C4C is increasing the size of the market as it is simply shifting the timing of purchases.  Given the size of the subsidy, my guess (and admittedly that’s all it is) is that, like unexpectedly lower mortgage rates provide a strong incentive for someone who had no plans to refinance to do so, C4C has brought people to the dealerships that otherwise would have been content to keep driving what they already had.

What I haven’t heard anyone say is whether C4C will cause a net increase in consumer spending or whether other things won’t be purchased because of the new car payments.  That assumes, of course, that the new payments are higher than what the consumer was already spending.  That will be true in some cases, especially where the C4C purchase replaces a vehicle that was already paid for in full.  But in other cases, the new C4C vehicle will have lower monthly payments and, therefore, will free up cash for other purposes.

2.    Environmentally speaking, it costs more to make the new car than the savings that will be realized from driving it.

This sounds right until you realize that most of the new cars being purchased under the C4C program have already been made and whatever environmental damage that caused has already occurred.  Therefore, putting these more environmentally friendly cars into service is what will produce environmental benefits compared to what would have otherwise occurred had the clunkers continued to be driven and the new cars sat on dealers’ lots.  And it’s not at all clear how quickly manufacturers will replace the current inventory and do more damage to the environment in the process.

3.    There’s no evidence we really need an additional $2 billion.

Let’s assume this is correct and that the demand for C4C is figment of the auto industry’s imagination fueled (excuse the expression) by great media coverage.  So what?  If the Senate goes along and the additional $2 billion is provided this week, IT WON’T BE SPENT UNLESS QUALIFIED CAR OWNERS SHOW UP TO CLAIM THE SUBSIDY.  In other words, the funds won’t automatically be spent if they aren’t actually needed even if the additional appropriation is enacted.  In other words, from a budget perspective, no harm no foul.