More details are emerging about the “cash for clunkers” incentive program that was approved by the Senate this week. It sounds better than what had been proposed back in January. From the AP:
Here’s how the plan works: Car owners could get a voucher worth $3,500 if they traded in a vehicle getting 18 miles per gallon or less for one getting at least 22 mpg. The voucher would grow to $4,500 if the new car’s mileage was 10 mpg higher than the old vehicle. The mpg figures are listed on the car’s window sticker.
Owners of sport utility vehicles, pickup trucks or minivans getting 18 mpg or less could receive a voucher for $3,500 if their new truck or SUV got at least 2 mpg higher than their old vehicle. The voucher would increase to $4,500 if the mileage of the new truck or SUV was at least 5 mpg higher than the older vehicle.
The program was aimed at replacing older vehicles _ built in model year 1984 or later _ and would not make financial sense for someone owning a vehicle with a trade-in value greater than $3,500 or $4,500.
The MPG stipulation makes sense, and it’s not $10,000 as had been proposed earlier. Steven Levitt on Freakonomics blog is still skeptical, however:
Let’s say you own one of those vehicles which you could sell for $3,000. If you use Cash for Clunkers you get an extra $1,000 for your vehicle. So of those 5 million people driving gas-guzzling old beaters that are worth almost nothing, how many of them are going to be pushed over the margin to buy a fancy new vehicle because of a $1,000 subsidy?
I have no idea where he’d find a car that would qualify for the subsidy that could get $3000 on the open market. Even pre-1990 Volvos barely pull $2000. Good luck getting even that much for a 1983 Ford Escort.
But Steven’s original argument is still strong: people who are driving cars that qualify for the incentive program probably aren’t in the market for a new car. Those who are in the market have a great incentive to search for any old P.O.S. to limp into the dealer for a nice $4500 rebate. The secondary market that will arise would be an indirect consequence of this silly program.