The New York Times reports today on the Obama administration’s claim that “Cash for Clunkers” is improving the average gas mileage of American’s cars. I have no doubt that they are correct as statistically when the marginal gas mileage is above the average, the average has to go up (that for my students). But that this program might lower American’s gas consumption is far from assured. For as American’s trade in older more expensive cars to drive for newer cheaper cars to drive, they will undoubtedly drive more. Given that driving is relatively inelastic with respect to gas prices, it is likely that overall consumption would fall if this program were continued.
So this is good news for the atmosphere in the short-run, but in the long-run this will encourage more driving and less reliance on mass transit. It seems highly likely that this program will work against the administrations efforts to -promote transit and mass transit seems pretty key to a low energy future. Meaning that the atmosphere my suffer in the long-run. While good for consumers, this program is probably bad for transit.
Regardless, the program does seem to be having its intended first-order benefit: US automobile manufacturers are seeing huge increases in sales. But this massive transfer of American’s tax dollars is benefitting all car companies, not just American companies or cars made in the US (to do so would create some sticky trade policy problems).
I have a better idea, how about a carbon tax where the proceeds go to fund research and development of newer more efficient automobiles, transit and renewable energy?