Proposal:
The US government should abandon the Cash for Clunkers program and adopt a variation of my earlier proposal to boost hybrid car adoption. The variation being that instead of promoting hybrid cars alone, the government could promote fuel efficient cars. This would save the government both be more cost-effective, but it would respect the free market and avoid an otherwise-unavoidable whiplash of a correction.
Brief Analysis:
The government proposal is exactly what I describe as a flat rate handout. However, instead of discounting hybrid cars, they discounted cars that are 'fuel efficient'. However, the cars are not necessarily fuel efficient, they are simply more fuel efficient than the 'clunkers' that are being turned in. At $4500 a person, this incentive is clearly not cost-effective.
Early reports are already showing that the government failed to estimate the demand that would be created for making use of the proposed program. This is because of an obvious flaw in the program - a fixed price! Where is the capitalism? Why are we abandoning the free market system? In my earlier proposal I recommended that the government avoid trying to pick a magic rebate amount out of the hat for this very reason. If instead of fixing the rebate amount the government fixed the net rebate that will be paid out, the government could have relied on the free market to determine the most cost-effective rebate.
Ignoring the fact this program fails to pay for itself, this program has another subtle flaw - an enforced time limit. By stating that the rebate is only available for a limited time, the government essentially forced car owners to make rash decisions. Further, the decisions making of the public may not have been priced in correctly. As a result, buyer's remorse and volatility in the stock market is an almost certain result. We will probably see the reports on this coming out in a few weeks.
The rational behind the previous proposal is fully outlined here. If you haven't read it, I suggest you do. If you find merit in the proposal pass it on, perhaps it will even make it to your congressman's table.
Related Links:
- On Hybrid Car Adoption
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