The Godzilla Solution

The sci-fi economics of "cash for clunkers"

It seems almost petty to join in the loud kvetching that has erupted in the blogosphere—at least in its more economically literate portions—since Congress reauthorized the so-called Cash for Clunkers program last week. After all, the program's $3 billion total cost barely constitutes chump change in that august body's stimulus/bailout spending spree, which, by some reckoning, is touching $13 trillion.

But the program's lunacy-to-spending quotient, especially when it comes to its alleged environmental benefits, is so high that it is hard to stay quiet.

So here goes.

The program's basic idea involves paying owners of fuel-inefficient clunkers worth less than $4,500 a voucher up to the value of their vehicle toward a new, more fuel-efficient car on the hope that this will stimulate the moribund auto sector and slash carbon dioxide emissions. If you disregard the poor taxpayers financing it, everyone is a winner under this scheme.

But that's only in the fantasy land on Capitol Hill.

Edmunds.com, the nation's premier car-buyers' guide, debunked the stimulus claim even before the program was launched. It pointed out that even if the program succeeded in financing 250,000 cars in three months as originally planned, it would boost the economy as much as inducting Paris Hilton would boost the aggregate IQ of MENSA. That's because in any given quarter, about 200,000 such clunkers are traded in anyway. "In effect, we are paying customers to do something most would do anyway," noted Jeremy Anwyl, CEO of Edmunds.com. At best then, the program would drive about 50,000 additional trade-ins, which works out to a whopping $20,000 per clunker.

Of course, the $2 billion more that Congress just authorized will bump net new sales by another 100,000. But this too is peanuts given that the industry needs 5 million additional sales to come out of the doldrums. Even though car companies are lavishing praise on the bonanza they are reaping, they are not exactly rushing to increase production.

Nor is the program delivering on its eco-goals. It aims to nudge participants toward more fuel-efficient cars by handing the full $4,500 voucher only to those whose new cars get at least 10 miles per gallon more than their trade-ins—with a smaller rebate of $3,500 going to drivers who get between four and nine mpg more.
But buyers ain't buying it.

Department of Transportation Secretary Ray LaHood is going around touting the program as a roaring success because the government's list of the top 10 new purchases allegedly shows that drivers are trading in their gas guzzlers for fuel-sipping compacts in order to qualify for the full voucher. LaHood claims that the new vehicles are giving a combined average of 9.6 miles per gallon more than the trade-ins, delivering close to the maximum possible environmental bang for the buck.

This convinced even critics of the original legislation, such as Sens. Diane Fienstein (D-Calif.) and Susan Collins (R-Maine), to vote for its reauthorization. But there are two problems with this claim: One, even if one accepts LaHood's numbers, the fuel savings add up to only 72 million fewer gallons of gasoline every year—about what Americans consume in four and a half hours. This translates into 700,000 tons fewer carbon dioxide emissions annually—about what Americans emit every 57 minutes.

Two, LaHood's numbers should not be accepted. Why? Because they are based on a false list of top 10 new purchases, an independent Edmunds.com analysis found. Indeed, the list that LaHood has been waving around, with the exception of a Ford Escape, contains mainly gas-sippers such as Toyota Corolla and Honda Civic with the holy Prius hybrid occupying the fourth place. But the list compiled by Edmunds.com contains two full-size, gas-guzzling SUVs and a crossover—with the Prius nowhere in sight. In other words, the program is effectively paying drivers to trade in their clunkers for—hang on to your recycled hats!—other clunkers. This undercuts LaHood's fuel economy claims by about 37%.

But there's more.

One of the crazier aspects of the Cash for Clunkers program is that it requires the engines of the traded-in clunkers to be euthanized by a sodium silicate injection. The point is to ensure that these clunkers never see the light of day again. This will no doubt force some folks who would have otherwise used the engine to refurbish their old cars to buy newer, less polluting ones. But this won't reduce emissions, it'll actually enhance them.

For starters, manufacturing a new car has the same cost in terms of emissions as driving it for a year. Thus, the more the program causes new cars to roll off the assembly line, the more it will contribute to pollution, at least initially. What's more, when drivers switch to more fuel-efficient cars, they don't pocket the fuel savings, they actually drive more, producing no net reduction in emissions.

Above all, however, the program might severely disrupt the ability of the used-car market to recycle parts, producing all kinds of negative unintended consequences for the environment. (Where is the green obsession with recycling when you need it?) The engine, combined with the drive train, accounts for about 35 percent of the value of the used car. But with this destroyed, it will make far less sense for recyclers to incur the cost of cleaning up mercury and other toxins to mine the remaining parts from the discarded vehicle. The upshot is that the car is more likely to land in scrappage with many valuable parts—engine, pistons, brakes—still intact. This will take a huge chunk out of the 80 million barrels of oil that the recycling industry saves the country every year, maintains Michael Wilson, executive vice president of the Automotive Recyclers Association.

So, to recap, the Cash for Clunkers plan involves restoring the economy by destroying wealth and healing the environment by destroying resources. By this logic, we should use the stimulus money to fund a new Godzilla brigade to mow down the country and rebuild it in a more environmentally friendly way. Imagine how much richer and cleaner the planet would be.

Shikha Dalmia is a senior analyst at Reason Foundation and a bi-weekly Forbes columnist. This article originally appeared at Forbes.