Burn, Baby Burn --- And Save The World Economy
Niranjan Rajadhyaksha -
Wednesday, April 01, 2009 3:03 PM
The latest fashionable idea that has grabbed the attention of desperate policy makers is cash for clunkers --- or the proposal that governments in recession-hit countries should pay consumers to trade it their old vehicles and buy new, fuel-efficient cars.
The underlying belief is that demand for new cars will rise and give recession-stricken economies a much-needed boost.
France, Italy, Spain and Germany have already been bribing citizens to do the trade. Barack Obama is a new convert as well.
Princeton economist Alan Blinder calls it "the best stimulus idea you have never heard of".
"Cash for Clunkers is a generic name for a variety of programs under which the government buys up some of the oldest, most polluting vehicles and scraps them. If done successfully, it holds the promise of performing a remarkable public policy trifecta — stimulating the economy, improving the environment and reducing income inequality all at the same time," he writes in the New York Times.
Read his entire article here.
It all sounds reasonable until Willem Buiter directs his wrecking ball at the theoretical edifice of the plan in this blog post.
"This artificial shortening of the economic life of a car seems nuts. It’s worse than getting paid to dig holes and fill them again. It’s like being paid to burn down your house to encourage the residential construction industry. In Iceland, where economic calamity has befallen a population that was until the autumn of 2008 among the richest in the world, people torch their SUVs for the insurance money. Iceland doesn’t produce any cars, let alone SUVs, so this does not do their GDP any good, but think of the global externalities! Perhaps the G20 could propose the world-wide legalisation and subsidisation of the willful destruction of consumer durables, residential property and infrastructure (schools, hospitals, prisons etc.) as a global stabilisation policy measure.
The most disingenuous argument for subsidising the early scrapping of cars and their replacement with new cars is the environmental one: new cars are likely to be less environmentally damaging than old cars. Save the environment - buy a shiny new energy-efficient car.
Even if the new cars that are subsidised were just the most environment-friendly ones (hybrids, 80 miles per gallon marvels etc.) - which is not always the case - the production of these new vehicles is, when you put it through the appropriate global input-output matrix, an environmentally damaging affair, requiring lots of metals, plastics and energy. You have to weigh the environmental benefits from running a new car (a lower flow production of greenhouse gases, say) against the one-off environmental cost of a higher volume of car production.
If the replacement incentive is sufficiently short-lived, there need not be any long run effect on the level of car production, and even little if any effect on the (undiscounted) cumumulative volume of car production. A given cumulative volume of current and future car production would simply have its time-profile shifted from the future to the present. But if the scrapping subsidy were longer-lasting, cumulative car production would increase, resulting in greater environmental damage. The net balance of environmental benefits and costs is by no means obvious. Clearly, if car owners were incentivised to buy a new car every week, the environmental costs of producing the new cars with their very short economic lives would swamp the lower environmental running costs of these new cars.
I’m not convinced of the environmental benefits of the cash-for-clunkers scheme. I would be a major beneficiary of the scheme should the UK decide to introduce one. I drive an 18-year old hooptie that has bits falling off all the time (it’s easy to stick them back on, however, with superglue, miracle putty and duct tape). These policies to promote accelerated obsolescence of consumer durables also leave a more generic bad taste. I’ll keep my old banger on the road as long as the laws of physics allow it."
I think Buiter's critique makes eminent sense.