"Cash for clunkers" is a bad idea whose time seems to have come. Congress has added trade-in incentives for old gas guzzlers to a $106 billion supplemental appropriations bill whose primary purpose is to fund military operations in Iraq and Afghanistan. President Obama is likely to sign the measure this week. Still, it could have been worse: Instead of a very large and wasteful cash-for-clunkers program, lawmakers approved only a middle-size wasteful program.
Here's the deal: Motorists who have owned an older car or truck for at least one year may trade in their vehicles and receive vouchers to help pay for new, more fuel-efficient models. The bigger the fuel-efficiency gain, the bigger your voucher, up to a maximum of $4,500. The program, which is expected to start in August and run through October, is supposed to help the troubled auto industry and modernize the U.S. auto fleet. It's modeled on similar plans in many European countries, which have boosted new-car sales in recent months.
The program is capped at a total cost of $1 billion, down from $4 billion in earlier versions. Even $4,500 per clunker may not be enough to help many owners trade up: Clunker "owners are either not looking for an increased car payment or cannot afford to purchase a new vehicle, which averages nearly $30,000," a report by analysts at Edmunds.com concluded. And the plan offers nothing for owners of cars with a trade-in value equal to or greater than $4,500. Edmunds.com believes the program will "struggle" to produce sales of 250,000 vehicles - or half of Congress' goal.
Those paltry results will merely represent the shifting of future demand for cars to the present; they will also come at the expense of sales of other goods that people might have chosen to buy this summer or fall. This is why Germany's program, though it dramatically boosted new-car sales, was also met with criticism from other retail businesses, as well as used-car dealers, spare-parts suppliers and repair shops.
If you think the government could find better uses for its money than subsidizing this shell game, we agree with you. If you think the best way to move current car owners into more fuel-efficient models would be to increase motor fuel taxes, as Europe did in tandem with its cash-for-clunkers programs, we agree with you even more. Alas, this could be just the beginning of cash for clunkers. When the program's initial round disappoints, as seems likely, pressure will mount to expand it. That's the lesson of recent policy moves in the residential real estate market. There are three bills pending in Congress to extend or increase an $8,000 tax credit for first-time homebuyers, which was introduced in July 2008 and augmented in the February stimulus package. The temptation to drain resources from the rest of the economy to "stimulate" troubled industries, especially those backed by powerful lobbies in Washington, is strong. And once Congress starts, it's hard to stop.