IMAGE: Special Issue | Chicago and the EconomyEditor’s Notes

Was Cash for Clunkers penny-wise?

A Chicago economist argues against my recent transaction.

By Amy Braverman Puma

I didn’t plan to take part in Cash for Clunkers. I wanted to grow our savings for a down payment on a bigger place. But in July, while heading to a wedding, our 2000 Chevy Blazer overheated on the Dan Ryan. We had just spent more than I’d like to admit on repairs when the key got stuck in the ignition—car running. Before that we got new shocks. And the driver-side door was falling off its hinge.

IMAGE: Market Madness

The Market Madness final culprit, as decided by the voters, will be announced October 5.

So we did it. Got $4,500 toward a shiny new car (20 city miles per gallon) and sent the Blazer to the scrapyard. Put some money into the economy and helped the environment. And although we now have car payments, eventually we’ll save up for a new house. All in all a good deal, right?

Not according to Chicago economist Allen Sanderson. Driving home from work the week we purchased our non-clunker, I heard Sanderson on NPR’s All Things Considered slamming the government’s Cash Allowance Rebate System. Although the idea had some environmental benefits, “[T]he question is at what cost,” he was saying. “For $3 billion, could we do something better for the environment than what we’re doing? I think absolutely. It’s a very inefficient expenditure.”

At the time Sanderson happened to be working on a project related to this Magazine issue on the economy: our online “Market Madness” brackets, where he seeded 16 teams in a tournament for readers to choose who or what ultimately felled the economy. So I asked him to further explain why he was down on C for C.

Within minutes he e-mailed this colorful response: “There are so many things wrong with that program that it’s almost genius-like in its conception and roll-out.” For one, he wrote, the program helps middle- and upper-income families, “of which you and your hubby are poster children” (thank you, sir). Beneficiaries need cash or credit to buy a car, and the program is for new cars, so poorer families can’t upgrade to a better used model.

Second, “any time you set a price and people come running, you know you’ve set it too low; that is, we probably could have gotten the same number of vehicles turned in had the government paid $3,000 instead of $4,500.” Third, with Cash for Clunkers, the dealer already knows that the government is paying $4,500 “to euthanize” the old car “and this won’t come down as low as he normally would have on the final offer.”

Another complaint: we could have traded “Bucks for Bulbs, through which you bring in your Edison bulbs, watch them get crushed on the spot, and walk out with new LED replacements; ditto for turning in refrigerators, washers and dryers, etc.—and I think they’re all inferior to many other ways to create jobs or help the environment.”

So much for my patriotic consumerism.

Let the madness begin

I’m not totally defeated, however. Sanderson and the Magazine are pleased to bring readers “Market Madness: Who Fouled Up the Economy?” Participants can vote on—and discuss—one matchup a day. The teams include the Yo-yos at the Federal Reserve, the Moral Hazards on Wall Street, and the Invisible Hands of the Chicago School, to name a few. At the end of the tournament, in addition to seeing voters’ results, we’ll reveal Sanderson’s picks. And two random voters will receive—you guessed it—a free lunch.