Cash for Clunkers and How We Can Better Solve Our Energy/Environmental "Problems"

I like that Jon brought up some counter-points to the wildly popular cash-for-clunkers program. Although the program was politically shrewd, I do not think it was good policy because it fails (will fail) to accomplish its two main goals: 1) stimulating the economy and 2) reducing oil dependency/helping the environment.

Let’s start with the first goal:

The program will fail to stimulate the economy for two main reasons. Firstly, as Jon briefly touched upon: the vast majority of people buying cars under the program either waited a few months to buy their cars under the program, or bought a vehicle a few months earlier than they otherwise would have. If you think this contention sounds fishy, think about this: If you truly did not have enough money to buy a car without the reduced price (~$4000), then you probably still won’t have enough to pay the $10,000+ to buy a car under the program. Thus, the cars that were sold in the past weeks under the program would already have been purchased over the next few months. In other words, the injection of cash (Jon puts it around $2.5 billion) would have effectively occurred regardless of the program, it just happened sooner than it otherwise would have. Secondly, we should consider the long-term effects of this program on the car industry (one of the major industries in our country). A prevailing belief seems to be that the program will somehow improve the long-run economic viability of the car industry. People assume that just because new cars are being purchased again that the car companies will be able to create more jobs, but this is fallacious. The cars being sold were already produced, and the car companies base their future production on their beliefs regarding future car sales. This program, if anything, reduces the amount of cars that the American public will need in the immediate future (because, as Jon notes, 625,000 people just bought a new car) and does essentially nothing to increase long-term demand for cars. As such, car companies will not be increasing work forces, equipment purchases, and overall production based on the program.

In essence, then, the program will fail to provide a large economic benefit to the car industry in the short-run or long-run.

Next, let’s consider the second goal:

To start, let me say that the program will indeed reduce the aggregate average miles per gallon for vehicles driving on American roads. Dan discusses this when he mentions that the long-term effect of the program “may” benefit the environment and our dependency on oil usage. This contention seems simple: we have more efficient cars, so we will use less gas and our environment will be better off. Unfortunately, this is an extremely unlikely outcome. What is far more likely is that people, now able to drive more miles per gallon gasoline, will drive more than they otherwise would with an inefficient car. In other words, people have a general amount of money that they spend on gasoline each month, and, when they suddenly have this considerably more efficient vehicle, those people will continue to use said amount of money by driving more. I do concede that there is a possibility that a reduction in overall gasoline usage will occur (and therefore a reduction in emissions), but I feel very strongly that this amount will be minimal at an absolute best. In fact, some people may even drive much more because they suddenly are getting a “bargain” for the amount of miles of usage they are obtaining for every dollar of gas. Thus, the program will not have any real effect on reducing gas usage or environmental damage relating to emissions.

This brings me to the more important point of this post: If we really want to reduce gas usage and emissions, how can we do it most efficiently? First, we should note that the use of energy related products, like any other product, is not inherently bad; it becomes bad when the effects of its use are not considered fully in the price of the product. For instance, gas, like any other product, is driven by a market; and, like any other product, the amount utilized by the public should be the equilibrium point in the market. Unfortunately, the energy markets in the United States, like most (all?) other countries, are subject to government intervention. Now, government intervention is not always bad; but, in this case, the intervention favors the producers and some consumers of energy products, which is a problem. The government does so by subsidizing companies that produce energy and some consumers that utilize it. Thus, the true cost of production to producers and cost of consumption by consumers is altered. Such an alteration is reflected in the price of the product that the market churns out. And by lowering these costs, the government (which claims an interest in doing so to increase economic output) ends up making energy cheaper to consumers than it otherwise would be. In turn, consumers use more energy products than they otherwise would.

Removing said subsidies is a start to reducing energy consumption and emissions because it will undoubtedly raise the cost of doing so. But, is this end of the answer? No. The problem of energy usage is compounded further by the government because it fails to acknowledge that there are negative externalities associated with energy usage. Most notably, the “environmental” problems associated with the use of energy products – acid rain, pollution, etc. The government should acknowledge this problem by attempting to determine the cost to society of every gallon of gasoline, minute of electricity, or hour of gas heat used by consumers. Then it should tax each product accordingly (government intervention that makes sense). Theoretically, the income from such taxes will be used to offset the negative externalities brought on by the products’ usage.

In accomplishing these two goals, the government will create a true market price for the use of energy. The market equilibrium will reflect the efficient amount of energy use and production by consumers and producers alike; and the government will be able to offset environmental changes that the public deem necessary to alter.

The sacrifice associated with these changes (aside from the political damage any politician mentioning it will take on) is the negative effects it will bring about in the economy. For this reason, the government should ease into such a proposal. But if our goal should be to reduce or negative impact on the environment, then we should at least be adopting policies that will address the issue. In the end, efforts to change consumers’ preferences through other means (CAFE Standards, Cap-and-Trade without auctions, Cash-For-Clunkers, silly environment commercials, etc.) fail to actually create an incentive for consumers to change those incentives. Therefore, if we are truly interested in reducing the negative environmental impacts, then we need to force consumers to pay the true costs of using goods that bring about such impacts.