Saturday, September 18, 2010

The Law of Unintended Consequences

The other day, one of my padawan learners and I were looking at the company classified ads and noting that the prices being asked for used cars seemed really high.

Not being in the market for a used car, I haven't kept up with prices.  I know the dealer I bought my '05 Toyota from sends me a letter every couple of weeks trying to get me to trade it in on a new one, and they say they want good clean used cars, but I figured they were just hot to sell me a new car.  Nothing new there.

That evening, Bayou Renaissance Man led me to an article in the Boston Globe telling the background story.  It's the effect of the "Cash for Clunkers" program. 

It turns out the price of used cars is up quite a bit, with the average price being up 10-15%, depending on who tells you.  Some models go for over 35% more than a year ago.  How could I have missed that?  I've commented on how the incentive merely brought forward the demand for new cars creating a bubble in car sales, but I missed the other problem.  Some quotes from the Globe article are in order.
The traded-in cars — which had to be in drivable condition to qualify for the rebate — were then demolished: Dealers were required to chemically wreck each car’s engine, and send the car to be crushed or shredded.
No great insight was needed to realize that Cash for Clunkers would work a hardship on people unable to afford a new car. “All this program did for them,’’ I wrote last August, “was guarantee that used cars will become more expensive. Poorer drivers will be penalized to subsidize new cars for wealthier drivers.’’
Of the 700,000 cars purchased during the clunkers frenzy, the estimated net increase in sales was only 125,000. Each incremental sale thus ended up costing the taxpayers a profligate $24,000.
But they increased the national average gas mileage, didn't they?  There's an interesting side of this that doesn't get talked about much.  Have you ever noticed how people will avoid regular desserts, but eat a box of the "low fat/healthy" products?  Or someone will eat what they think was a healthful meal, but then get a dessert?  The rationalization is "I've been good, I deserve it".  It's a pretty well-known aspect of psychology.  A similar effect shows up when people get higher mileage cars: they tend to drive more.  It turns out that if the purpose for the Clunkers program was to save pollution, it probably didn't because of this paradoxical action, and even if people didn't change their driving, the program wasn't cost effective.  Assuming that the owners of the newer, more fuel-efficient cars didn't follow this pattern, and kept to their original driving patterns, it was calculated that the cost per ton of CO2 saved was $237.  If you go buy carbon offsets, that's around 12 times the going price.

The irony here is that this is an administration that keeps saying they're trying to help "Main street, not Wall Street", and they're for "The Little Guy".  In this case, they've really hurt any low income people who need to buy a car.  The need for transportation is non-negotiable; fleets of buses and trains that run on Magical Unicorn Farts haven't suddenly appeared and people have to get to work.  Now the cost of their cars has gone up 10%, and I know pay rates aren't up 10%.  

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