House Democrats have settled on a deal on the Cash for Clunkers subsidy, which would pay car buyers $3,500 to $4,500 when they trade in inefficient, older cars for new, fuel-efficient vehicles.
Under the deal, buyers could trade in cars or SUVs that get worse than 18 mpg. Car buyers would qualify for a $3,500 subsidy if the new car that got 4 mpg better than their old vehicle and at least 22 mpg overal. SUV buyers would qualify for the same credit if the new SUV got 2 mpg more than their previous vehicle and at least 18 mpg overall. Larger subsidies would go to buyers of even more fuel efficient vehicles. There are also subsidies for heavier trucks and work trucks.
The legislation is far from complete. House Democrats are hoping to include it in a larger climate bill to be voted on by Memorial Day and enacted this year. The legislation would also have to be reconciled with a narrower Senate bill that requires greater fuel efficiency to get the subsidies (under the proposed House legislation, new cars wouldn't even have to meet the CAFE averages to qualify for a subsidy).
The legislation is intended to provide a shot in the arm for struggling automobile companies. A similar provision in Germany is credited with boosting auto sales there.
In the near term, however, it is likely to have exactly the opposite effect. While the legislation is pending, rational, forward-looking buyers who might qualify for the subsidy have a $3,500-$4,500 incentive to put off buying a car. Why buy a car today that might cost $3,500-$4,500 less in a few months?
It's not clear that the subsidy is good policy (it's expensive; it rewards people who made the worst decisions regarding vehicle purchases; it continues to subsidize gas-guzzling SUVs, etc.). Regardless of the merits, debating the policy and delaying its enactment are likely to cannibalize current car sales and prolong the recession in the automobile industry--truly a worst of all worlds outcome.