How Would We Figure Out Whether Cash-for-Clunkers Makes Sense?
Andrew Samwick makes the intelligent criticism of cash-for-clunkers:
And for an Encore, Let's Condemn Office Buildings and Rebuild Them Nearby | Capital Gains and Games: By my reading, Stan did not disagree with anything I posted about Cash for Clunkers. None of the three criticisms of the C4C program that he addressed were leveled by me. My criticism is that it is a waste of assets, and that a waste of assets necessarily makes us poorer...
A clunker burns a lot of fuel that has a social cost a lot bigger than its private cost. The destruction and replacement of a clunker by a more fuel-efficient car boosts spending (somewhat) and do reduces the Okun gap (somewhat).
Clunkers are made up of (a) cars that would have been junked anyway and (b) cars that had positive value but value less than $5,000. Suppose we set $2,000 as the value of the assets wasted by destroying clunker, and $2 a gallon as the social waste in carbon-fueled gasoline, and 12 mpg as the average differential mileage between a clunker and its replacement. Then destroying a clunker is worth doing on (a) alone if...
... the clunker would otherwise have been driven more than 12,000 miles before being replaced.
And, of course, there is factor (b) to consider as well.
It doesn't look like an overwhelming benefit-cost ratio--there are other things we could be doing that are much lower hanging fruit. But I would not feel confident arguing for Andrew's position that "it is a waste of assets, and that a waste of assets necessarily makes us poorer..." without doing a bunch more work.
Anybody seen anything serious on this?
**UPDATE: Touche. If the clunker gets 12 mpg, then it is not 12K but 24K that the clunker must have been driven before replacement for the program to make sense based on (a) alone...
