The Shaky Economics Of 'Cash For Clunkers' A government program enticing people to trade in old cars for new ones has proved wildly popular, except with economists. They say the benefits of "cash for clunkers" may not outweigh the costs, in terms of finances or the environment.
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The Shaky Economics Of 'Cash For Clunkers'

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The Shaky Economics Of 'Cash For Clunkers'

The Shaky Economics Of 'Cash For Clunkers'

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MELISSA BLOCK, host:

The Cash For Clunkers program was intended to help both the car industry and the environment: buy a new car, get a dirty one off the road. But if you ask economists what they think of the program, some shake their heads.

David Kestenbaum of NPR's Planet Money team explains.

DAVID KESTENBAUM: The selling points for Cash For Clunkers seem pretty clear: new cars replacing old cars. But the ugly part? You don't see that. Behind that car dealership is a parking lot filled with cars that have been traded in. Some of them perfectly good, waiting to be euthanized.

Mr. DAVE WILSON (President, Preston Automotive Group): We have one complete parking lot that's filled with clunkers and then we have another one that's behind our body shop that is getting close to being filled with them.

KESTENBAUM: Dave Wilson is president of the Preston Automotive group, which runs a bunch of dealerships in Maryland. He says there's a beautiful Lincoln on his lot. It just feels wrong to kill it. But they will: pour a solvent into the engine and run the engine until it ceases. One employee has become the designated executioner.

Mr. WILSON: Doesn't seem like it bothers him as much as it bothers everybody else. He's just blowing through the ones that he needs to blow through.

KESTENBAUM: It does bother Allen Sanderson though. He's an economist at the University of Chicago. Destroy a working car, he says, you're destroying something of value that required a lot of labor and resources to make. Imagine a similar program for old light bulbs, he says. Would you smash the old ones before they were burnt out? Sanderson admits there is some environmental benefit to Cash For Clunkers.

Mr. ALLEN SANDERSON (Economist, University of Chicago): Oh, yes, there's some value but the question is at what cost. I mean could we, for $2 billion - or let's say $1 billion in the initial price tag or $2 billion it gets added to it, for $3 billion, could we do something for the environment that would better than what we're doing? And I think absolutely.

KESTENBAUM: So let's look at the other argument, that Cash For Clunkers provides and economic boost for the auto industry. Jeremy Anwyl says not so fast. He's CEO of the car research site Edmunds.com. Anwyl says that even without the program, people trade in about 60,000 clunkers every month, so Cash For Clunkers - it's just giving those people free money. That's how the program works. You trade in your car and the government gives you a voucher for, say $4,000. Anwyl says yes, other people are trading in their vehicles also, but most would've come in sooner or later anyway.

Mr. JEREMY ANWYL (CEO, Edmund.com): It encouraged anyone that had a clunker that would have traded in their vehicle over a three- or four-month period to do so over three or four days. You have to wonder how many additional sales were actually created.

KESTENBAUM: You are such a skunk at the picnic.

Mr. ANWYL: I feel bad. I know everybody really likes the program. You know, and hey, I'm as happy as anybody to see car sales going up, but I just - when you look at the data it's like, you know what, this program is one of the more over-hyped programs I've seen an era of over-hyping programs. This one sort of sets a new bar.

KESTENBAUM: The U.S. is not the only country trying out the Cash For Clunkers idea. Germany has a program, but it's much larger: $7 billion. It has a German name.

Mr. STEFAN SCHNEIDER (Economist, Deutsche Bank, Germany): Abwrackpramie, which means environmental premium. That's the official name.

KESTENBAUM: That's Stefan Schneider, chief international economist at Deutsche Bank Research in Germany. He thinks the program is a good idea. Even if you're just encouraging people to trade in cars now instead of later, that makes sense, he says, because the economy needs a boost now to get it going again. The government writing all those checks as part of the program, that's boosting spending.

Mr. SCHNEIDER: First quarter actually, private consumption picked up a little bit and if you look at other indicators, like retail sales, it's pretty evident that's it's mainly coming from the car program. And car registrations, for example, with the June numbers, they are up 40 percent on the year. And that's pretty impressive.

KESTENBAUM: Still he says there is concern that when the program ends that bump in car sales will turn into a dip in car sales. The hope is that the economy will have recovered a bit, and the dip will be less painful.

David Kestenbaum NPR News.

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