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Auto buybacks backfire
In my post, Gun Buyback Misfires, I pointed out that a) gun buybacks encourage people to turn in old, low-quality guns that are unlikely to be used in any case and b) gun buybacks can encourage people to buy and hold more guns because the buyback is a form of insurance, if the gun gets old or stops working you can sell it to the police.
In an excellent post Steve Levitt points out that Alan Blinder's proposal for auto buybacks suffers from exactly the same problems.
...the majority of vehicles that are turned in will not have been driven much, if at all. Indeed, I suspect one of the most visible responses to this program will be a new market for mechanics fixing up cars that don’t run at all just enough so that they can be driven to the government’s lot to collect the cash.
The biggest problem with this policy, however, is the way it distorts long run incentives. Let’s say the rules of the program say that a car must be at least fifteen years old to qualify for a big government subsidy to scrap it. This gives powerful incentives to people with twelve-year-old cars they were planning on scrapping to keep driving them for three more years to collect the government bounty. Instead of reducing the number of clunkers on the road, this program could actually lead to an increase!
Posted by Alex Tabarrok on August 11, 2008 at 07:10 AM in Current Affairs, Economics, Law | Permalink
Comments
Both Blinder and Levitt miss the politics of this issue. in my city, Atlanta, we've got a traffic pollution problem, plus cheaper license plates for "antique" cars > 25 years old, emissions insepection exemptions for senior citizens with old cars, and emissions inspections exemptions for anyone who spents at least $750 to repair their clunker without succeeding in improving its emissions. not to mention property taxes based on car value, which penalize new cars compared to old ones.
So, across the board government policy is subsidizing 15-30 year old clunkers, while taxing and emissions-inspecting 3-4 year old cars with modern emissions controls.
Posted by: DK at Aug 11, 2008 8:08:31 AM
It is really stunning to me how many bad proposals to "fix" the economy are getting floated at high-profile outlets. Even the WSJ has hopped on board, running a Jenkins' piece calling for the feds to buy and demolish new houses. (Self-promoting link here.)
Why did Blinder give the recipients of the new money the freedom to spend it as they saw fit? What if they foolishly saved it? After all, we all "know" that stimulus only works if people buy consumption goods.
And his income limits were funny too. As if a rich guy with a clunker can't sell it to a poor guy, who is willing to pay above-market prices because he (the poor guy) will then in turn sell it to the government. The poor guy might even go to one of those payday loan places with unconscionable interest rates to raise the money to initially buy the clunker from the rich guy.
Posted by: Bob Murphy at Aug 11, 2008 9:00:37 AM
My 80s Dodge Colt gets 38 mpg, actual number off the odometer that I have to know because the gas gauge stopped working almost immediately, so I fill up using miles since last filled. Not exactly a clunker. It can't put out more carbon than is in the fuel no matter how much a clunker it might be, in any case; so mpg is the only number in play.
Plus the carbon footprint improvement in not building a new car.
Not that global warming is real in any case.
Posted by: Ron Hardin at Aug 11, 2008 10:09:16 AM
The exemption for senior citizens makes sense if they drive very little, which is probably the case as a class. It doesn't matter what their cars do, if not driven much.
Posted by: Ron Hardin at Aug 11, 2008 10:12:27 AM
plus cheaper license plates for "antique" cars > 25 years old
NJ has historic plates too for antique cars but there's limits on how many miles you can put on them per month. Most cars I see with these plates are true antique cars...not junkers people are plating for cost savings.
I think the place to target the incentive is in the registration fees. In NJ you have to register your car each year for about $42. Add a fee for older cars and turn it into a lump sum credit for registering new cars that get above average mileage. The only reason to register a car is to drive it so you won't have the issue of people fixing up junk cars unless they honestly want to use them on the roads.
Posted by: Boonton at Aug 11, 2008 10:25:10 AM
How the hell can you be an actual, credentialed economist and yet be so incapable of recognizing the consequences of such a policy that you still feel comfortable advocating it? Is Blinder renting out his credibility among his colleagues to the highest bidder?
I thought economists, even those with different values from libertarians, had mostly switched by now to advocating *efficient* versions of left-wing policies, like carbon taxes instead of CAFE.
You know?
Posted by: Person at Aug 11, 2008 10:37:52 AM
The sentiment behind the proposal seems sound, and while there are clearly issues with incentives that others have pointed out, I have to ask, are there no solutions to these problems with Blinder's proposal? One of the issues that Levitt raised was people holding on to cars for a few extra years just to take advantage of the subsidy. I'll ask the same questions I asked over at the Freakonomics Blog:
Couldn’t you deal with the issue of age of the cars by establishing a minimum, or rather a maximum, MPG that cars have to have? In other words, if the guidelines say that the cars can’t get more than 25 MPG, wouldn’t that render the age of the car unimportant and thus prevent people from holding onto the cars for a few extra years? It’s not like the MPG is going to magically increase, after all.
And why would there be a constituency for the program over the long run? If the MPG guideline is instituted, over time, wouldn’t the cars under this guideline eventually fall so that nobody would qualify?
Posted by: Brian at Aug 11, 2008 11:31:18 AM
I've been looking into the existing Cash for Clunkers programs since seeing Levitt's post, and by and large his big concern (people holding onto cars longer to get the bounty) is misplaced. Most of the programs (though not all of them) have a particular cut-off year, rather than a particular car age, and the cut-off doesn't seem to move. '95 was generally the year. The reason, I gather, is that the problem with old cars is not age, but vintage.
As someone pointed out in the comments over at Levitt's, around '86, and again around '94-'96, there were changes in how cars were made (due to regulation, I believe), such that cars before those years were much more polluting than afterward. So a '97 model might be more polluting than an '07 model, but they're on the same order of magnitude. Wheras a '95 model might be 10-20 times more polluting than either one.
Also, it's worth pointing out that the question here is not miles per gallon, but pollutants per mile. Hence the crazy-sounding argument out there that Hummers are better for the environment than you think (low gas mileage, but good emmissions control technology--who knew?), and in particular better than old cars with great mpg.
Posted by: Ryan at Aug 11, 2008 12:23:24 PM
Blinder plays a bait and switch, talking about "pollution" in most of his piece and mentioning greenhouse gasses at the end. Older cars tend to have worse mpg, thus carbon emissions, but they are dramatically worse for NOx & SOx, which is the topic of the studies he repeatedly quotes. If he hadn't mentioned greenhouse gases at the end, it would be merely deceitful and not an explicit lie. Probably an editor who didn't know the code added it.
Posted by: Douglas Knight at Aug 11, 2008 12:40:47 PM
We love to give ourselves money, don't we?
Countries with a little firmer worldview would just implement inspections ($) to get badly maintained old cars off the road.
(Strange that Detroit doesn't back that one.)
Posted by: odograph at Aug 11, 2008 2:11:12 PM
The problem with many of your suggestions is that, almost by definition, someone who uses an old, poorly-maintained car is poor.
So when you mandate that those cars be off the road,
Countries with a little firmer worldview would just implement inspections ($) to get badly maintained old cars off the road.
or try to nickel-and-dime them off the road
So, across the board government policy is subsidizing 15-30 year old clunkers, while taxing and emissions-inspecting 3-4 year old cars with modern emissions controls.
Add a fee for older cars
you are really saying that poor people shouldn't own cars.
Posted by: Bob Montgomery at Aug 11, 2008 3:06:17 PM
When I was in Malaysia, this would have been 15 years ago, I was told that they had so many new-seeming cars because Japanese inspections forced them off the road. Inspection was costly enough that people just traded-in.
I'm really just observing, rather than lobbying hard, that we are very different.
To tell the truth, I probably wouldn't go to an extreme ... forcing 5 year old cars out or something ... but I wouldn't mind a genuine safety inspection of 15-20 year old cars.
And while we're at it, kick some money to mass transit. If we are going to place a bar for responsible car ownership, we can also create a fall-back for the (genuine) poor.
Posted by: odograph at Aug 11, 2008 3:55:55 PM
One nice thing about this proposal is that we don't have to worry too much about some of the hypothetical problems suggested, because we have several pilot programs in place that we can examine. The California program that I am familiar with has been relatively successful, and has been held back largely because it is underfunded.
Indeed, in California's version, the model year cut-off date eliminates Levitt's second concern. Cars are bought for junking based on their model year, to eliminate older anti-pollution technologies that weren't as effective.
As to the first concern of Levitt re fixing up older cars, that has not been a problem observed here in central California. However, that may be due to the program not having enough funding to create a market beyond the existing cars already in need of junking.
This seems like a straightforward program for an economist to endorse - incentivizing the behavior you want to see. Perhaps in a larger scale of the program, you would see problems like cars being fixed up for resale, but that strikes me as suggesting that the price might be slightly too high for market clearing of the old clunkers, not that the program itself is inherently flawed.
Posted by: Sisyphus at Aug 11, 2008 4:05:12 PM
...target the buyback to vehicles actually observed to be polluters, rather than using a blind one-size-fits-all bureaucratic 'rule' a priori.
I see cars everyday on the road that prime candidates for buyback --and they all have license plates... making it easy for the government to contact the owner and make them an offer.
yeah, it takes 'observers' to work... but there's no shortage of government employees on the roads each day (..like cops).
Keep the buyback "voluntary"; just implement it a bit more sensibly.
Posted by: hatfield at Aug 11, 2008 6:03:46 PM
A version of this proposal avoids some of the problems noted above: Purchase old cars that are advertised in the classified ads. At least at first, this will largely lead to removing running cars from the market. If such a buy-back grows to large scale, it runs into the problems of raising the value of old cars.
Thus, if we care about reducing pollution then taxing pollution makes more sense. If we can bring to market the almost-ready technologies that permit sensors in the road to detect car-specific pollution, pollution taxes should be feasible at reasonable transaction costs.
Posted by: David Levine at Aug 12, 2008 2:12:15 AM
*scratches head* Um, why would anyone take an editorial with the title "A Modest Proposal" remotely seriously. It's pretty much grounds for automatic classification as satire. Moreover, after reading it I find it in complete accordance with the definition of satire. So either the author's a poorly read complete idiot, or it's satire.
Posted by: ravenshrike at Aug 12, 2008 11:53:07 AM
The best way to remove dangerous or "bad" cars from the road? Make it costly to run them....
That is, via inspections and registrations. I have a 13 year old Explorer that I love. At 55 mph it gets 23 mpg. At 70, it gets 18. It's not a huge disadvantage for me to keep it because the cost of trading in and getting a new car (low trade in value, high cost of purchase) that gets 30 mpg is MUCH more than the cost of gas and repairs on the current car (I drive it about 8,000 miles per year).
That's $700 in savings if gas is $4 and I get 18 mpg (I usually get more), per year, on getting a 30 mpg car.
Now, add in maintenance. I pay about $1,000 a year in maintenance. $1,700 in total payments or about $150 a month. A new car will run me much more per month.
So let's factor in inspection and registration. If, at inspection, I get assessed a cost for age and low mpg, say $200, and then I get assessed $200 at registration for same, my costs jump to $2,100. Suddenly, I'm getting closer to a cost valuation where a newer, better, car makes sense. Still not there, but in a year or two when my maintenance goes up to $2,000 a year or so (it will, age does those things), and the assessments also rise, then a new car would inevitably make more sense. Let's say the Explorer turns 15, my costs are $2,700 and registration and inspection take a $600 bite (rising fees on cars over 8 years old, let's say, with penalties for gas guzzlers). At almost $300 a month in costs, and I'm close to being in the market for a new car.
It's still a stupid idea...the real cost of savings and maintenance have to exceed $450 a month for the change to make sense on a $24,000 car. Yet how many $24,000 cars are there out there? I just did a search, and not many.
I found some Chevy Hybrids at under $24,000...so the gas savings could tote up a bit more (since I do mostly local driving) to about $1,200. Still, it's not enough to make a huge difference.
Net result? Ride out your car, if you own it outright as I do, until the cost of maintenance matches the cost of a new car payment. Then trade in and buy a new one.
If the gov't wants to make a little money and "help" the car manufacturers, then the way to do it is at registration and inspection. Free for cars under 8 years that get over 25mpg. Under 8 years and under 25 mpg - $100. Over 8 and under 25, up $30 or $40 a year.
It's punitive, it's unfair, but it would do the trick.
Posted by: Richardm at Aug 13, 2008 4:02:49 PM
