Wednesday, April 8, 2009

An Economic Stimulus Idea That Seems to Work

One economic stimulus idea that has been proposed a number of times is for the government to spur auto sales by offering a voucher good towards the purchase of a new car1 to owners of old cars. The first I remember reading of such a proposal was last summer, but here are a couple of more recent examples, from the Brookings Institution ("Refuel Economy with Cash for Old Cars") and from the chairman of Ford in the USA Today ("Cash in Old Cars for New Ones"). As the Brookings piece notes, Germany included this sort of voucher program as part of its stimulus package it implemented in January. The German version offers vouchers of 2,500 euros to citizens who scrap cars that are at least nine years old. According to an article in today's Financial Times ("Berlin hit by cost of car incentive scheme"), this German stimulus program is having a big effect, both in Germany and in other parts of central Europe. A few excerpts from the article make this point:

“In February and March, we made about three times the sales we had in the first quarter of last year,” says Bernd-Uwe Prochnow, sales director at a Volkswagen dealership in Frankfurt. “And the first quarter of last year wasn’t bad at all.”

Car sales nationwide rose 11.9 per cent in February, making Germany the world’s only bright spot for the car industry.


Car-scrapping incentive programmes introduced by Germany and other European Union countries2 are having a dramatic impact on central European car factories, and could help boost the region’s slumping economies, write Jan Cienski in Warsaw and Thomas Escritt in Budapest.

The turnround at factories making smaller and cheaper cars has been striking. During much of November and December, the Dacia factory in Pitesti, Romania, stood empty, its workforce at home on 80 per cent pay. However, Dacia, owned by France’s Renault, produces the €5,000 ($6,600, £4,500) Logan, Europe's cheapest production car, which has become a winner thanks to Germany’s €2,500 government rebate available for new car purchases.

Recently Fran├žois Foumont, Dacia's general manager, said surging west European demand meant exports would account for three-quarters of the company’s production this year, against two-thirds in 2008. Dacia said it sold 25,500 vehicles in Germany last year, and German orders this year already exceeded that number.

In the Czech Republic, Skoda, a subsidiary of Volkswagen, has seen its sales to Germany more than double to 11,000 in February, and the factory in Mlada Boleslav has gone back to full-time production after working only four days a week in January.

Petr Vanek, a spokesman for Hyundai, which has a factory in the Czech Republic, said the plant shipped 20 cars a month to Germany in January and February, but last month delivered more than 2,000. Hyundai is now hiring about 500 workers.

Fiat, which makes small cars in southern Poland, exported 47,417 cars in March, almost 10,000 more than in the same period a year ago.

The image above, of a welder working on a Logan sedan in the Dacia factory in Romania, comes from this site

1Some have proposed making vouchers good for the purchase of newer used cars too, which would indirectly boost new cars too.

2The article mentions that France offers a voucher program as well, but the French vouchers are worth only 1,000 euros.


Dr.Phil said...

A horrible idea.

Your tax dollars helping buy your low-life neighbor a car.

DaveinHackensack said...

As we noted in another post a couple of months ago, most economists agree that fiscal stimulus can be effective when an economy isn't at full employment. The sort of voucher program Germany has implemented seems to provide a lot of fiscal bang for the buck, because it levers additional spending (and, presumably, borrowing) from consumers. By providing only 2,500 euros, the German government gets consumers to buy cars that cost, at the absolute minimum (e.g., those Dacia Logans) twice as much.

This is similar, in a way, to offering companies a 50% tax credit for buying new equipment. In both cases, the government can get more stimulus for its money by giving those in the private sector and incentive to spend some of their money as well.