Tim Haab likes cash for clunkers

Env-Econ directs us to cash for clunkers.

NEW YORK (CNNMoney.com) -- With auto sales at crisis levels, Washington is trying to figure out how to get Americans buying cars again.

Several ideas are on the table, but two of them are really making the industry pay attention. One plan is to make new car costs tax deductible. The other is to give rebates to Americans with old cars so they can better afford to buy new ones, a program otherwise known as "cash for clunkers."


The second plan is more politely known as "fleet modernization." It combines economic as well as environmental goals in one package.

Under a bill introduced by Sen. Dianne Feinstein, D.-Calif., owners of older cars would get vouchers worth thousands of dollars toward the purchase of newer, more fuel-efficient vehicle. For the customer to get that cash, the car dealer would have to certify that the trade-in was getting scrapped and not resold. The car's vehicle identification number (VIN) would be tracked to make sure it never shows up on a vehicle registration again.

Crushing the old car has two benefits. First, it ensures that the consumer's purchase of a more efficient vehicle actually has a net environmental benefit. Second, it prevents a glut of used cars on the market, which would reduce trade-in values for new car buyers, which would cut into the sales incentive effect.

In addition to boosting car sales, the plan could save an estimated 80,000 barrels of oil a day, a spokesman for Feinstein's office said. Because it holds appeal for both environmentalists and the auto industry, the cash-for-clunkers idea seems to be generating the most discussion.

Tim Haab likes the idea. Steven Levitt disagreed with the idea back in August 2008. Levitt is worried about buying clunkers that aren't being driven very much. Levitt apparently has never lived in California. But August seems like a lifetime ago in the auto industry and economy as whole.

Anyway, there has been research on this topic. I think the seminal paper is by Alberini, Harrington, and McConnell. Levitt should have checked it out. The benefits in terms of pollution reduction aren't bad, and I don't think earlier studies counted carbon. Today this seems like a policy that would have a double dividend of a high multiplier effect in a sagging economy plus pollution reduction. I think I'd like this idea even if it were more than $1300 per car.


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