Cash For Clunkers is an economically unsound program that will only make the American economic situation worse. It transfers wealth from one group of people to another while simultaneously destroying real wealth and misallocating scarce capital away from its best use.
To understand why this is, you need only understand the Broken Window Fallacy.
Frederic Bastiat originally formulated the Broken Window Fallacy in his landmark book That Which is Seen and That Which is Not Seen. Henry Hazlitt then expounded and reformulated it for a more modern audience in his classic work, Economics in One Lesson (which was one of our 31 top resources for small business owners and employees). In Chapter 2, entitled “The Broken Window,” Hazlitt wrote:
A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sun. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace the window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
The Fallacy of the Broken Window exposes the lie that, as one Austrian Economist put it, “the … destruction of wealth fuels its creation.” He then goes on to summarize the Fallacy and concludes:
You can see the absurdity of the position … when you take it to absurd extremes. If the broken window really produces wealth, why not break all windows up and down the whole city block? Indeed, why not break doors and walls? Why not tear down all houses so that they can be rebuilt? Why not bomb whole cities so construction firms can get busy rebuilding?
It is not a good thing to destroy wealth. Bastiat puts it this way: “Society loses the value of things which are uselessly destroyed.”
But Big Government frequently peppers hammers us with the message that we must create new wealth by destroying old wealth!
And that’s where Cars For Clunkers comes in. Here’s a quick summary of the program and where it goes wrong.
- The Federal Government takes tax-dollars, or borrowed dollars (to be paid back later through taxes), and offers to hand that money to people who will trade in pre-selected older cars; the money is to be used toward buying a new car; then the government takes the traded-in car off the road, and junks it, often by destroying the engine; the “subsidy” given toward buying the new car (for each trade-in) is $3,500-4,500
- If the value of the trade-in car is less than the $3,500-4,500 handed in trade value the government has overpaid for the car, despite that the government is about to junk it, thus ensuring that no value will be received in return.
- If the value of the trade-in car is more than the $3,500-4,500 handed, the government still derives no value from the trade because it’s not reselling it; it’s junking it and stripping it for salvageable parts (which are minimal)
- The net number of cars on the road remains the same; maybe net emissions drop or maybe fuel-usage drops (because of better fuel efficiency) in the aggregate, but maybe not! (more on that below)
So, in this new version of the Broken Window Fallacy, our modern-day Window Breakers are destroying drivable cars, then handing out confiscated or borrowed money to the people who are allowing their “windows cars to be broken” because other people are paying for these windows cars to be replaced with newer, better, sexier models!
They do this in the name of saving the environment from pollution, or saving on “waste” through fuel-efficiency, or preventing global-warming through reducing emissions, or whatever. It really doesn’t matter what justification they’re using, it’s wrong on several levels.
It destroys wealth by not letting these cars be used up over their useful life. It destroys wealth by routing scarce resources into activities – in this case, car building – that wouldn’t otherwise take place, denying other industries access to those resources. It destroys wealth by taking on liabilities, through borrowing, that have to be paid back later by taxpayers (reducing their purchasing power in the future) or by taxing them immediately (reducing their purchasing power today).
Also, building the new cars emits all kinds things into the atmosphere and gobbles up energy in the production process! So any gains in emission and efficiency are offset by that, too!
Guess what else proponents of this destruction are missing?
They are oblivious to how the incentives will change future behavior.
These people traded in a car they’ve been likely to drive less. We can safely assume these cars didn’t get as good gas mileage or were older, “clunkers”, because they were targeted for these reasons. These cars also may not have been driven at all, or driven rarely. However, they’ve been used to help people get a vehicle that they’re now more likely to drive more frequently!!! More driving means more emissions, even if the emission per unit of travel is less. More driving means more fuel consumption, even if the fuel consumption per unit of travel is less.
See, when you change the incentives, you change the behavior. The people who owned these traded in cars were incentivized to drive them less by having to pay more for a unit of travel, and by having to conserve the remaining life in the car, which may have been approaching the end of its life over the next 5-10 years. Now? Not so much.
In fact, the New York Times reports, “Michael Gerrard, director of Columbia Law School’s Center for Climate Change Law, said in a statement that the cash-for-clunker program is not a cost-effective way to reduce fuel use or greenhouse gas emissions. Any energy savings, he said, could take several years to realize, considering the time it takes the fuel savings from a new car to exceed the energy cost used to make it.
Who are the favored parties?
The subsidized consumers, of course. But also the favored industries, who have had their goods favored at the expense of other industries. The government isn’t handing out money to go buy [fill in the blank], yet they’re siphoning off money and resources from a finite supply and putting it into one area, at the expense of other areas.
Think the Auto-Dealers liked it?
Of course! The “government” should put more money into it. Let me fix that quote to show you what it should say if it were telling the truth.
Who were the losers?
Everyone else, especially the taxpayers. And other businesses and industries, especially ones directly impacted by trading these cars in instead of servicing them, auto-parts sellers, mechanics, etc.
The funny thing is that down the road even the dealers will suffer, because this program created false demand and just kicked the can down the road so that the dealers could put off their day-of-reckoning a little longer.
Want to feel some outrage?
Read this story and watch the video, especially watch the video at the 2 minute mark on where they discuss how the cars are junked, and how otherwise re-saleable parts are destroyed in the process. Perfectly usable cars being destroyed! And, as an added bonus, Big Government makes a complete mess in administering the program (but don’t worry, they’ll run nationalized health care flawlessly).
But since we’re living in the age of Big Government, so let’s go all the way with this!
Why stop at cars? In fact, the Wall Street Journal today asked, Why not a “Cash for Everything” program?
Let’s blow up buildings and rebuild them with subsidies to stimulate commercial building. Let’s burn down homes and rebuild them with taxpayer funds to stimulate the homebuilding industry! Let’s break up all our fine-china and buy everyone a new set!
Or maybe not.
Let’s just point out one last thing about the way Cash For Clunkers was run, and how it exposes Big Government hypocrisy.
Very poor people, the car-less among us, who don’t have any private transportation of their own, and who Big Government always profess to help, could have really used those cars. They could’ve been given to people in need.
This summer I donated my “clunker” to the Kars 4 Kids charity, which then sold it and used the money to help poor children. I’ll bet you my shiniest nickle that this government program has caused material hurt to charities like Kars 4 Kids. And not just this year, but also in future years since many cars that may have been later donated to charity had their end-life pushed up to the present day and therefore won’t be available for donation in the future.
Just another sad instance of the Bastiat’s “unseens” or, in words we like to use, “what-might-have-beens.”
The program should probably be called “Cash From Clunkers” since this bunch of Big Government phonies are possessed of such little brain-power that they can only themselves be referred to as Clunkers. Then again, referring to it as “Cash From Clunkers” also obscures the fact that though they are delivering the money, it’s not their money. It’s our money. Or China’s money that they’ve borrowed and we will have to pay back someday.
Whatever. It’s corrupt. Another example – in a long and growing list – of corruption and Big Government going together.
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UPDATES – Below by Date – how did our predictions go relative to what really happened? Read the results and decide for yourself. (N0, we’re not prophets, we just have common sense and an understanding of basic human behavior, mysterious commodities that appear to be absent in politicians.)
UPDATE: October 4, 2009 – Cash for Clunkers Fails to Help Economy and Environment
Last week U.S. automakers reported that new car sales for September, the first month since the clunker program expired, sank by 25% from a year earlier. Sales at GM and Chrysler fell by 45% and 42%, respectively. Ford was down about 5%. Some 700,000 cars were sold in the summer under the program as buyers received up to $4,500 to buy a new car they would probably have purchased anyway, so all the program seems to have done is steal those sales from the future. Exactly as critics predicted.
Cash for clunkers had two objectives: help the environment by increasing fuel efficiency, and boost car sales to help Detroit and the economy. It achieved neither. According to Hudson Institute economist Irwin Stelzer, at best “the reduction in gasoline consumption will cut our oil consumption by 0.2 percent per year, or less than a single day’s gasoline use.” Burton Abrams and George Parsons of the University of Delaware added up the total benefits from reduced gas consumption, environmental improvements and the benefit to car buyers and companies, minus the overall cost of cash for clunkers, and found a net cost of roughly $2,000 per vehicle. Rather than stimulating the economy, the program made the nation as a whole $1.4 billion poorer.
UPDATE: October 23, 2009 – Dealers say Cash for Clunkers has made cheap, used vehicles harder to find
In his 20 years in the business, salesman Mark Sauer has never had a tougher time finding inexpensive used cars.
“It’s never been this bad,” said Sauer, buyer and sales manager of Vaccaro’s Auto Buyers of Reading, 805 Hiesters Lane.
“Customers used to be able to find a good car for their son or daughter to take to college for $2,000 or $3,000, but now that same car may cost $5,000,” Tabakelis said. “It’s sad.”
He, too, blames cash for clunkers, which has led to fewer vehicles being available at used-car auctions, and the recession.
“You used to be able to find a decent car for $2,500, and you can’t anymore, especially in the past two months,” said Arie Garcia, the association’s office manager.
Another problem is that used-vehicle prices have quickly risen above their book values, making it tougher for customers to secure financing, Garcia said.
“Cash for clunkers really hurt the used-car industry,” she said. “I think it hurt more people than it helped.”
UPDATE: October 29, 2009 – Taxpayers paid $24,000 per car
The Cash for Clunkers program gave car buyers rebates of up to $4,500 if they traded in less fuel-efficient vehicles for new vehicles that met certain fuel economy requirements. A total of $3 billion was allotted for those rebates.
The average rebate was $4,000. But the overwhelming majority of sales would have taken place anyway at some time in the last half of 2009, according to Edmunds.com. That means the government ended up spending about $24,000 each for those 125,000 additional vehicle sales.
UPDATE: October 29, 2009 – Cash for Clunkers Massively Distorted GDP
If anyone mentions the just-released 3.5% U.S. third quarter GDP growth, just throw this chart in their face. Cash for Clunkers clearly distorted the U.S. economic figures in an unsustainable fashion.
Next quarter, we won’t just be returning to business as usual for auto output. Don’t forget that Cash for Clunkers pulled future auto demand, ie. some of Q4 demand, into Q3. Thus Q4 is likely to be very weak since many people who planned to buy a car in Q4 probably took advantage of Clunkers and bought in Q3.
Next quarter, not only are we unlikely to get Q3’s boost, but motor vehicle output data could subtract from GDP as well. So watch out for the cliff…
UPDATE: March 23, 2010 – Car Sales ($millions) Reported by Dealers