“Cash-for-Clunkers”: Made in Germany

One element in a new spending bill now agreed to by both the US House and Senate is a provision which would provide a US Government voucher of up to $4,500 to Americans to trade in their old automobile for a new one – preferably one more fuel-efficient. It does seem that, as things have proceeded through the legislative process, the motivation of stoking domestic demand for new automobiles has plainly won out over the initial environmental reasoning behind the measure, but at least it does seem pretty guaranteed that the former aim will be accomplished. That much we know from the experience in the country that implemented this idea in the first place, and Birgit Marschall and Martin Kaelble of the Financial Times Deutschland point out that this Abwrackprämie, or “scrapping premium,” is namely a German fiscal innovation.

Well, OK, strictly-speaking a couple other European countries tried the same thing or something similar even before Germany, as the authors admit later on in their piece. In fact, it was the French auto-buying bonus program of last Fall that inspired the German effort. But now the idea has spread around the world – to the UK, Australia, Japan, to China (somewhat), even to the halls of the American Congress – and there is no question that what has prompted all this imitation is the tremendous success of the German (federal) government’s program. We’re all supposed to be stuck in a big economic crisis, right?, with that big export-led economy in Germany suffering a particularly horrible decline in economic output. All that is true – indeed, Marschall and Kaelble mention that Quarter I of 2009 was the worst for Germany, economically speaking, since World War II – but nonetheless new car registrations in Germany so far this year through the month of May are already 94% of the amount for the entire year of 2008! Sure, auto production in Germany shrank by 9.1% in the month of April alone, but there is no question that that German “cash-for-clunkers” premium helped to offset this, and the authors also cite calculations from the Institut für Automobilwirtschaft (Institute for Automobile Economics) that it further preserved 15,000 jobs in that auto sector.

So it seems to be a pretty successful program. Then again, one sub-specialty of economists seems to be finding the fly in the ointment of every seeming government success. It’s pretty easy to grasp the fact that quite a large proportion of those German who traded in their old cars for new in order to take advantage of this premium were intending to do so at some point in the near future anyway; one clear effect that it must have had was simply to shift to now the new auto-purchases that were originally planned to happen somewhat later and so which will not happen later. The result is what’s called in the article a “negative rebound-effect” (Wanna know the German for that? I thought you did – it’s negativer Rückpralleffekt), whereby higher auto-sales now will inevitably be followed by lower auto-sales later.

Still, it was probably better to keep those 15,000 auto-workers employed now and take the risk they might have to lose their jobs later, rather than the other way around. And there is another pleasing characteristic of “cash-for-clunkers”: the buyer’s premium is not made conditional on purchasing domestic-made cars (it was not in Germany at least; and I don’t see any indication that it will be that way in the US version, although the approval process for that is still on-going), so that the respective government’s premium-money can go to support either domestic or foreign auto-makers. Let the best autos win! Again, this certainly was the case in Germany, where especially employees of auto-manufacturing plants in neighboring Slovakia and the Czech Republic had reason to be grateful for that particular use of German government money.

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