Princeton Economist's Dumb-arse Bailout Plan: Government Buys Your Old Gas-Guzzler

With the nation in the midst of one of the worst economic crises in a generation, you’d think our best minds would be cranking away furiously to find a brilliant solution. Unfortunately, you’d only be half right.

Princeton economist Alan Blinder proposes that, in order to get cash into the hands of the needy, the government should purchase their banged-up old cars. There would be added benefits, since getting the junkers off the road would mean fewer gas guzzlers and therefore less foreign oil and greenhouse gas. Alas, Steven Levitt at Freakonomics explains why the plan is no silver bullet:

[M]y guess is that unless the price the government pays for the clunkers is very high, the majority of vehicles that are turned in will not have been driven much, if at all. Indeed, I suspect one of the most visible responses to this program will be a new market for mechanics fixing up cars that don’t run at all just enough so that they can be driven to the government’s lot to collect the cash.

The biggest problem with this policy, however, is the way it distorts long run incentives. 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. 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!

Swing and a miss. Is Mr. Blinder just trying to find a buyer for his 1970 Pinto?

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