Please torch my car

Am I the only one to think that tax incentives for new car purchases – cash for clunkers, in the words of Alan Blinder - are a daft idea? Even Obama has succumbed to this rot, despite an encouraging toughening of his general stance on government financial support for the US car industry (workers, shareholders and even unsecured creditors of GM and Chrysler have to take a larger haircut if more federal aid is to be forthcoming.  Now let’s apply the unsecured creditors part of this logic to the banking sector also!)

Fiscal incentives to induce automobile owners to trade in their jalopies and buy new cars have been introduced in many car producing countries, including Germany, France, Italy and Spain.  A number of US states and Canadian provinces also have introduced such schemes.  The rationale is partly a general Keynesian demand stimulus, partly a sector-specific subsidy to workers, managers, share holders and creditors in the automobile industry and other industries that depend on them.  If the programme is temporary and the cash incentive substantial, such programmes are bound to work.

This artificial shortening of the economic life of a car seems nuts.  It’s worse than getting paid to dig holes and fill them again.  It’s like being paid to burn down your house to encourage the residential construction industry.  In Iceland, where economic calamity has befallen a population that was until the autumn of 2008 among the richest in the world, people torch their SUVs for the insurance money.  Iceland doesn’t produce any cars, let alone SUVs, so this does not do their GDP any good, but think of the global externalities!  Perhaps the G20 could propose the world-wide legalisation and subsidisation of the willful destruction of consumer durables, residential property and infrastructure (schools, hospitals, prisons etc.) as a global stabilisation policy measure.

The most disingenuous argument for subsidising the early scrapping of cars and their replacement with new cars is the environmental one: new cars are likely to be less environmentally damaging than old cars.  Save the environment – buy a shiny new energy-efficient car.

Even if the new cars that are subsidised were just the most environment-friendly ones (hybrids, 80 miles per gallon marvels etc.) – which is not always the case – the production of these new vehicles is, when you put it through the appropriate global input-output matrix, an environmentally damaging affair, requiring lots of metals, plastics and energy.  You have to weigh the environmental benefits from running a new car (a lower flow production of greenhouse gases, say) against the one-off environmental cost of a higher volume of car production. 

If the replacement incentive is sufficiently short-lived, there need not be any long run effect on the level of car production, and even little if any effect on the (undiscounted) cumumulative volume of car production.  A given cumulative volume of current and future car production would simply have its time-profile shifted from the future to the present.  But if the scrapping subsidy were longer-lasting, cumulative car production would increase, resulting in greater environmental damage.  The net balance of environmental benefits and costs is by no means obvious.  Clearly, if car owners were incentivised to buy a new car every week, the environmental costs of producing the new cars with their very short economic lives would swamp the lower environmental running costs of these new cars.

I’m not convinced of the environmental benefits of the cash-for-clunkers scheme.  I would be a major beneficiary of the scheme should the UK decide to introduce one.  I drive an 18-year old hooptie that has bits falling off all the time (it’s easy to stick them back on, however, with superglue, miracle putty and duct tape).  These policies to promote accelerated obsolescence of consumer durables also leave a more generic bad taste.  I’ll keep my old banger on the road as long as the laws of physics allow it.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website