Saturday, February 7, 2009

Cash for Clunkers 4

[Update June 20 2009

If you are considering a trade in,
please use the tools linked here to see the cash value of your gas savings. The gas savings can be more valuable than the voucher.

The final bill is linked to this post. The details below refer to an older bill.]

A Stabenow and Harkin Cash for Clunkers bill, which replaced the original Feinstein et al proposal, has been dropped from the economic stimulus package. It is effectively moribund. See the Detroit Free Press summary here.

The latest Cash for Clunkers bill had a stronger focus on helping US auto manufacturers. Here is a brief description from the Free Press article:

"The proposal would have required that any new vehicles bought with the money be built in the United States, which foreign automakers said today would violate international trade agreements.

Under the plan crafted by Michigan Sen. Debbie Stabenow, D-Mich., and Sen. Tom Harkin, D-Iowa, any vehicle 10 years old or younger could be traded in for $10,000. Owners would have to have family income of less than $75,000 a year, own fewer than three vehicles and have owned the vehicle they’re trading in before Jan. 16.

Buyers would have to choose from new cars that get at least 25 miles per gallon and trucks that get 20 m.p.g., and the new model would have to get at least 5 m.p.g. better than the old vehicle. The trade-in would have to be crushed. "

There are some attractive features to the latest Stabenow and Harkin proposal. Requiring that the cars are 10 years or younger helps reduce the junker moral hazard problem. (But sources are confusing on this point: This Free Press article states that the cars need to be at least 10 years old.) And offering up to $10,000 would help pull in highly inefficient cars that still have a high trade in value (e.g., a 2004 Yukon or Tahoe).

Of course, limiting the offer to households with an income of $75,000 or less cuts out many owners of expensive inefficient cars. I'm always amazed at these stark threshhold effects in the law--going from an income of $74,999 to $75,001 drops the credit from $10,000 to $0. Why can't it be more finely graduated than that?