Cash for Clunkers Proposal Yanked from Senate Stimulus Plan

Strong endorsement from President Obama and Detroit’s Big Three was not enough to keep a $16 billion “Cash for Clunkers” program on the table last night as Senators wrangled with their version of the economic stimulus bill. Amid mounting pressure to shrink the $900 billion bill, Senator Thomas Harkin of Iowa withdrew his proposal to offer drivers up to $10,000 apiece in rebates to trade in older cars (to be scrapped, not resold) and buy more fuel-efficient models assembled in the States, Reuters reports. The rebates would have been offered only to drivers earning $75,000 or less per year (gross adjusted income).

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While classic car fans and vehicle restorers came out against the House version of the program, which did not include a mandate for U.S. assembly, international automakers came out swinging against the Buy American aspect of Harkin’s proposal earlier this week. “We should not take away the consumer’s right to free choice,” American International Automobile Dealers President Cody Lusk said in a release yesterday. “Any relief for consumers during these economic times should apply to all new vehicles for sale in the U.S. –- not just those assembled here.” The group represents import-brand automakers, which make up 80 percent more than half of U.S. auto sales.

Steven Levitt pointed out other problems with the program — with or without a Buy American clause — on the New York Times Freakonomics blog last summer, shortly after Princeton economist Alan Blinder called Cash for Clunkers as “the best stimulus idea you’ve never heard of.” According to Levitt, there’s a huge risk that this sort of program would distort incentives. From Freakonomics:

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. [Note: The proposal ended up setting the cutoff at 10 years.] 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!

Photo credit: D.B. Blas via Flickr

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