Thursday, June 04, 2009

Cash for Clunkers Legislation Stuck in Neutral

There appears to be pretty strong opposition in the Senate to "cash for clunkers" legislation, multiple bills crashed into roadblocks. The most recent failure involved a bill tied to tobacco regulation. Cash for clunkers has given the auto industry a boost in Germany, but the German market is very different from the US market, high taxes on gas give consumers incentive to buy very efficient cars. Our fuel prices are much lower, and Americans are less likely to buy the highly efficient cars that will satisfy the environmental policy objective of the bill. The bottom line is that any cash for clunkers legislation that has a shot at passing will have a difficult time serving the two competing policy rationales for the bill. Any bill that would substantially stimulate the US auto industry would be so watered down environmentally that the environmental results would be insignificant. Any bill that would significantly help help the environment will likely not give a significant boost to the auto industry.

In the meantime, in theory, continued talk of a $3,500 to $4,500 cash for clunkers incentive on the horizon seems tailor-made to kill current auto sales. Congress needs to either pass a cash for clunkers bill or take it off the table completely. As long as it is a possibility, people will have an incentive to wait rather than buy. Failing that, all of the cash for clunkers supporters should commit now to only supporting legislation that is retroactive to the beginning of June this year.

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