[R-G] A Modest Proposal: Eco-Friendly Stimulus

[Yoshie Furuhashi]

<http://www.nytimes.com/2008/07/27/business/27view.html>
July 27, 2008
Economic View
A Modest Proposal: Eco-Friendly Stimulus
By ALAN S. BLINDER

ECONOMISTS and members of Congress are now on the prowl for new ways
to stimulate spending in our dreary economy. Here's my humble
suggestion: "Cash for Clunkers," the best stimulus idea you've 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. Here's how.

A CLEANER ENVIRONMENT The oldest cars, especially those in poor
condition, pollute far more per mile driven than newer cars with
better emission controls. A California study estimated that cars 13
years old and older accounted for 25 percent of the miles driven but
75 percent of all pollution from cars. So we can reduce pollution by
pulling some of these wrecks off the road. Several pilot programs have
found that doing so is a cost-effective way to reduce emissions.

MORE EQUAL INCOME DISTRIBUTION It won't surprise you to learn that the
well-to-do own relatively few clunkers. Most are owned, instead, by
low-income people. So if the government bought some of these vehicles
at above-market prices, it would transfer a little purchasing power to
the poor.

AN EFFECTIVE ECONOMIC STIMULUS With almost all the income tax rebates
paid out, and the economy weakening, Cash for Clunkers would be a
timely stimulus in 2009. As was made clear during the Congressional
debate last winter, prompt spending is critical to an effective
stimulus program. And the quickest, surest way to get more consumer
spending is to put more cash into the hands of people who live
hand-to-mouth.

Here's an example of how a Cash for Clunkers program might work. The
government would post buying prices, perhaps set at a 20 percent
premium over something like Kelley Blue Book prices, for cars and
trucks above a certain age (say, 15 years) and below a certain maximum
value (perhaps $5,000). A special premium might even be offered for
the worst gas guzzlers and the worst polluters. An income ceiling for
sellers might also be imposed — say, family income below $60,000 a
year — to make sure the money goes to lower-income households.

The numbers in this example are purely illustrative. By raising the 20
percent premium, lowering the 15-year minimum age, or raising the
$5,000 maximum price or the $60,000 income ceiling, you make the
program broader and costlier — and create a bigger stimulus. By moving
any of these in the opposite direction, you make the program narrower,
cheaper and smaller.

People who sell their clunkers would receive government checks,
perhaps paid to them at the motor vehicle bureau office where they
turn in their old vehicles. They would be free to spend this money as
they see fit, whether on a new car or truck or some other form of
transportation — or anything else. To ensure that the program really
pulls clunkers off the roads, only vehicles that had been registered
and driven for, say, the past year would be eligible.

The government can either sell the cars it buys to licensed recyclers
for scrap, or refit them with new emissions controls and resell them.
But the government must not ship the cars to poor countries, where
they would continue to belch pollutants.

Cash for Clunkers is not the pipe dream of some academic scribblers.
Local variants are either now in operation or have been tested in
California, Colorado, Delaware, Illinois, Texas, Virginia and several
Canadian provinces. So there is no need for a "proof of concept."
Rather, a national Cash for Clunkers program could learn from all this
experience in building a better system.

THE big need to date has been money, which is why the scope of Cash
for Clunkers programs has been limited. And that, of course, is where
the need for stimulus comes in. We now want intelligent ways for the
federal government to spend money.

Here's a high-end cost calculation for a national program. Suppose we
took two million cars off the road a year, at an average purchase
price of $3,500 (the top price in the Texas program today). Including
all the administrative costs of running the program, that would
probably cost about $8 billion. Compared with other nationwide
income-transfer or environmental policies, that's a pretty small bill.
For stimulus purposes, it would, of course, be better to run the
program on a larger scale, if possible. There are over 250 million
cars and light trucks on American roads, and some 30 percent are 15
years old or older. That's at least 75 million clunkers. At five
million cars a year — an ambitious target, to be sure — the program
would cost less than $20 billion, still cheap compared with the $168
billion stimulus enacted in February.

And what would all this money buy? First, less pollution. The Texas
program estimated that clunkers spew 10 to 30 times as much pollution
as newer cars. Second, the subsidy value (the 20 percent premium in my
example) is a direct income transfer to the owners of clunkers, who
are mostly low-income people. Third, these folks would almost
certainly spend the cash they receive — not just the subsidy, but the
entire payment, giving the economy a much-needed boost.

Oh, and I left out a fourth possible goal. By pulling millions of old
cars off the road, Cash for Clunkers would stimulate the demand for
new cars as people trade up. It need hardly be pointed out that our
ailing auto industry, like our ailing economy, could use a shot in the
arm right now. Scrapping two million or more clunkers a year should
help.

With today's concerns over stimulus, inequality and greenhouse gases,
as well as an aging vehicle fleet, Cash for Clunkers is an idea whose
time may finally have come. Write your congressman.

Alan S. Blinder is a professor of economics and public affairs at
Princeton and former vice chairman of the Federal Reserve. He has
advised many Democratic politicians.