Is cash for clunkers like paying farmers to plow up perfectly good crops?

Jim Hamilton over at econbrowser doesn't like cash for clunkers. He compares the policy to the Agricultural Adjustment Act of 1933, which paid farmers to slaughter livestock and plow up perfectly good crops.

It does seems strange to destroy perfectly useful capital. But destroying old and polluting capital (clunkers) can be a bit different than destroying nondurable goods like crops. It's different because old cars pollute more than new cars and because this is an unusual time when a lot of excess car production capacity sits idle. If destroying a few clunkers causes idle factories and labor to be put to good use producing new less-polluting cars, then there could be a genuine social benefit. Indeed, it would seem that, as a first approximation, each clunker clunked would be replaced by a new car produced using resources that would otherwise be sitting idle. Since each new car created clearly embodies more social value than each car destroyed, it doesn't seem such a bad deal. And I'm not even counting multiplier effects.

But I do concur with Professor Hamilton's assessment of the Agricultural Adjustment Act of 1933. Destroying crops and livestock didn't stimulate new demand or otherwise put people back to work. It just raised prices by shifting supply inward, which made matters worse.

A key difference is that the short-run supply curve for agricultural goods is almost vertical due to scarcity of viable cropland while the supply curve for cars is flat, especially when there is a lot of excess capacity.

Update:From bloomberg:
Vehicles to be scrapped under the cash for clunkers, aimed at boosting U.S. new car sales, averaged 15.8 miles per gallon, compared with 25.4 miles per gallon for the new vehicles purchased, according to Transportation Department data.

...As of today, the Transportation Department had received about 157,000 dealer applications for funds totaling $664 million, as the agency works through a backlog that reached hundreds of thousands of online submissions, LaHood told reporters today.
So about 73% are going for the $4500 credit for a 10 MPG increase over the $3500 for a 4 MPG increase. Most people seem to be trading their SUVs for fuel-efficient sedans.


  1. Let me sympathize with Hamilton for a moment. I am currently a college undergraduate, and a poor one at that, so I don't drive my 2004 Chevy Blazer all that much (rated at 16 MPG). I purchased it secondhand, it was 4 years old at the time with only 30,000 miles, and presumably had it been purchased by anyone else it would see more time on the road (based on the fact that it's fairly young and in good condition) and thus emit more pollution.

    Under the cash-for-clunkers program, however, I qualify for a nice rebate. I could hypothetically buy a Hyuandai Accent, new, rated somewhere around 30 MPG, for about five or six thousand dollars. But I wouldn't be doing too much for the environment because I don't drive that much - in fact, doubling my gas mileage probably would allow me to drive more. Instead of moving myself in with one trip, I'd need the parents to make a round trip in their minivan next month, and again in May to move me out. I readily admit my ignorance regarding the specific numbers, but in my case I doubt the social benefit of me using the program is high. Because of the limited resources of the program, I likely would be pushing someone with more fixed driving habits, who creates a higher social benefit by trading in his car, out of the program.

    Another question I have about the program is how much it's actually done to stimulate demand for cars. In my mind, many consumers considering car purchases in June or early July would have, whenever possible, delayed their purchase to coincide with the rebate. So is the rush of sales the result of increased demand, or simply a lot of delayed purchases coming to fruition?

  2. Thanks for your comment Pete, and for your encouraging words in your other comment.

    I can't disagree much with what your saying here--it all makes a lot of sense. My point is that this situation is a lot different than destroying crops in the middle of the great depression. I think JDH's analogy was a little extreme. But note that I'm a huge fan econbrowser and JDH in particular--you may want to trust his judgment over mine.

    As far as macroeconomic stimulus goes, I think subsidizing new car purchases (and new home purchases) makes sense. It's easy, transparent, fast, temporary, and really seems to work.

    As far as destroying the old clunkers goes, we need to balance the environmental benefit against the private value of used cars. I honestly don't know how that calculation would balance out. If I can find some time I'll dig up some data and make some back-of-the-envelope calculations.

  3. WEe probably will store strategic wheat reserves as soon as AGW hits harvests and there are no potential under-researched ocean cycles to blame like in Australia now (2008 German Model says 2025-2030?). The climate negotiations should include heirachical access to future wheat stores (maybe wait until GMO crop engineered specifically for storability or for some anti-fungal/dry/inert-gas/cold storage building Materials Science advance).

    Today I realized just like big oil deprives future African/Asian children of water and food; you can engineer social systems to deprive present oil-exec children, dirty corporations and nations, of a share of the strategic wheat reserve in the 2030s. I think you solve AGW by starving rich people. Or they wind up lower on the wheat Totem Pole, or they pay MUCH more.
    Visualizing your silver spoon child digging up ant hills as an adult instead of bank internship...wheat costs 2%/yr to store now, need to be cheaper. Rich people can afford to initiate these novel long-term commodity contracts now, but they will assume government grain bailout.

    About the thread, I'm glad it is just $3B. IMPACT is a $30B programme to retrofit car plants to make windows for solar and drivetrains for wind. Happy at the size of such a novel and uncertain-economics investment. $3B won't cannabalize much.

    IDK if $30B is good or bad value, but it is exactly the kind of thinking that keeps one's workforce cutting edge through globalization (Asia won't buy many NA cars, will buy NA wind components/turbines).

    C4C cost effectiveness depends on the velocity of fuel/emissions improvements. When you have a good design then subsidize it. Could be wrong but I'd think you'd want to retrain (if needed) and retool in recessions, not subsidize the equivalent of late 1980s Eastern Europe heavy industries.


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