As the US Senate debates its version of the $819 billion economic stimulus bill passed by the House on Wednesday, I hope they will give consideration to a smarter alternative to sweeping income tax cuts, the stimulative effect of which seems questionable. An op-ed in yesterday's Washington Post by economist Martin Feldstein offers a better idea: "a temporary refundable tax credit to households that purchase cars or other major consumer durables." In fact, I'd like to modify Professor Feldstein's idea for a car rebate to ensure that it not only boosts sales, but moves us in the direction of higher fuel economy. Let's offer consumers a one-year, $2,000 per car refundable tax credit, but only for vehicles that exceed the Corporate Average Fuel Economy of the 2008 model new car fleet: 31.4 mpg for passenger cars and 23.6 mpg for the light truck segment that includes SUVs.
Although this criterion stops short of pushing large numbers of Americans into hybrid vehicles, there are good reasons to keep the bar broad, low and technology-neutral, here. In a recession and with gas as cheap as it is, fuel economy is unlikely to be the paramount concern of potential car-buyers, even if memories of $4 gasoline are seared in their brains. Despite high gas prices for much of the year, hybrids only accounted for 2.4% of sales in 2008. Carmakers can't possibly ramp up hybrid production by enough this year for them to affect overall car sales by a meaningful percentage, relative to the crippling industry sales decline of 18% last year. Moreover, there are already tax credits in place for both hybrids and plug-in hybrids, though subsidies for the former are now phasing out. By contrast, roughly half the cars sold last year already beat last year's CAFE performance, and I'll bet Detroit and the imports would be very happy to sell more of those models, even if they didn't generate as much profit per car.
Shifting the average fuel economy of a whole year's sales up by an mpg or two doesn't nearly sound as "green" as doubling the sales of 50 mpg hybrids, but in fact it would save a lot more oil and reduce emissions by a larger proportion, as well. Recall that the biggest, juiciest target for fuel savings is not the shift from 35 mpg subcompacts to 100 mpg plug-in hybrids, but getting drivers out of 15 mpg SUVs and into 25 mpg crossovers and minivans. And if Detroit is going to get back on its feet sufficiently to repay those government loans any time soon, it must quickly resume selling large numbers of the cars it already makes, even as it infuses more energy-saving technology into future models.
We want our stimulus dollars to boost the flagging economy as effectively as possible, without making other problems worse in the future--beyond the unfortunate but unavoidable consequence of larger deficits. Targeted tax credits for efficient cars and appliances make more sense in this context than stuffing $500 into the pockets of every American, who might prudently save it or use it to pay down debt. Those are worthy outcomes in the long run, but not what an urgent fiscal stimulus is intended to accomplish.