Cash for Clunkers: Cash In While You Can

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The Cash for Clunkers program has worked all too well, burning quickly through the initial $1 billion allotted to consumers trading in old cars for more fuel-efficient models. Another $2 billion appears to have been approved for the program. But is this is a success for the economy? Or just for some car buyers who are basically getting a subsidy from taxpayers?

From today’s WSJ:

What the clunker policy really proves is that Americans aren’t stupid and will let some other taxpayer buy them a free lunch if given the chance.

The buying spree is good for the car companies, if only for the short term and for certain car models. It’s good, too, for folks who’ve been sitting on an older car or truck but weren’t sure they had the cash to trade it in for something new. Now they get a taxpayer subsidy of up to $4,500, which on some models can be 25% of the purchase price. It’s hardly surprising that Peter is willing to use a donation from his neighbor Paul, midwifed by Uncle Sugar, to class up his driveway.

On the other hand, this is crackpot economics. The subsidy won’t add to net national wealth, since it merely transfers money to one taxpayer’s pocket from someone else’s, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years.

And from a WSJ story last week:

George Fowler, a Pontiac-Buick-GMC dealer in Dearborn, Mich., said he has made seven sales so far through the program. More than 30 people have come in hoping to buy, but most didn’t meet the qualifications. Most of those participating, he said, would likely have bought a new vehicle in the coming months regardless of the discount.

“These are people who would have been in the market anyway, and they have a trade that was worth $1,500 and now is worth $4,500,” he said.

Regardless of whether this is nothing more than a handout—to consumers who are lucky enough to have older cars that fit into the “clunker” profile, and to car dealers who can mark down their prices thanks to government subsidies—if you’re eligible for the handout, get moving. Consumers aren’t dumb. They’ve been told that something they own is suddenly worth several thousand dollars more than it was worth just a few weeks ago, so of course they’re going to take advantage. The newly approved funds probably won’t last for long, and there’s been so much confusion about the program (starting and ending dates? who qualifies? what sort of paperwork do you and the dealers need?) that no one should be surprised if Cash for Clunkers changes or disappears within days.

Also, before heading to the car dealership, check out some of what Cash for Clunkers really means. Hint: It’s not really about saving the environment. Read over the many caveats for eligibility, and some of the comments in an online discussion of people’s experiences—good, bad, puzzling, frustrating, and more—with the program.