CRASH for Clunkers
Kurt Brouwer October 1st, 2009
Though we did correctly call Cash for Clunkers a bad program, I still hate to see the entirely predictable end result. The government handout just induced buyers to move up car and truck purchases a bit so we saw a temporary blip in sales. This chart tells the tale:
Source: Clusterstock
CRASH: Was Cash for Clunkers a success?
I suspect Congress would say yes, however I would say no.
Let’s review the scoring here. First, Joe Consumer turns in a decent car, which gets destroyed. Not sold to a family that needs a decent used car. Not even given to needy families. Not even broken up for parts. Destroyed!
Joe Consumer then buys a new car for, let’s say $25,000. Government borrows $4,500 from investors, both at home and abroad, and pays car dealer the dough, which offsets that portion of the cost of Joe’s car. However, Joe Consumer has to come up with the balance of $20,500 which has to come from his savings or from a loan. Of course, when Joe drives the car off the lot, the value drops by 20% or so.
Joe Consumer: Loses older car that was paid off. Now, he’s making payments on a loan of $20,500 on a car worth $20,500.
U.S. Government: Now owes another $4,500 to bondholders.
New car company: One new car sale
Other consumer product retailer: One less sale
Environment: One more scrapped car plus environmental costs of making new car
Environment: Slightly higher average mileage for gasoline
Charities: Fewer folks donate old cars to needy charities
Used Car Buyers: With used car costs soaring, those who need a decent car end up paying more
U.S. Taxpayer: Grab your wallet
Update: ABC News’ John Stossel does a very good job of pointing out the economic fallacy in government programs at his blog:
…Now it appears that Congress will ask not just for another billion, but another TWO billion. Look how generous Congress is with your money!
The idea is that by destroying used cars, people will buy new cars, which creates jobs. But this commits the “broken window fallacy”. That $3 billion taken from taxpayers to, essentially, destroy used cars now cannot be put towards college, or a new home, or new clothes, or anything else. Some used cars are no longer available for poor consumers to buy. If the “new car” market is helped by “Cash for Clunkers”, every other market is hurt because that $3 billion cannot be spent on anything else…
The government cannot just make up the billions needed for Cash for Clunkers out of thin air. That money has to come, ultimately, from us as taxpayers. Government spends more; we spend less. Result: no net benefit. If you are interested in more on this topic, go to Stossel’s link above on the ‘broken window’ fallacy as put forth originally by a 19th century French economist, Frederic Bastiat.
If you want to see how much actual environmental benefit we have accrued under Cash for Clunkers, go to the Political Calculations blog right here. They have a handy online tool that helps you do the calculations. Here is a summary of the findings:
…Using the default numbers, we find that it takes a very long time for taxpayers to get their money’s worth for what they were required to spend to support the “Cash for Clunkers” program. At 26.5 years, the time needed to obtain the perceived benefits of reduced CO2 emissions will very likely outstrip the useful life of the new “green” vehicle, suggesting that taxpayers will never realize a positive environmental return on the $4,500 they provided to subsidize the new car sale…
The cost for the unintended consequences and the collateral damage from Cash for Clunkers is rising. As is quite common, Congress never really did its homework on this issue and they have wasted money on a program that did very little, if any, economic good and clearly has had a net, negative environmental impact.
You’ve seen us drive, now watch us heal…
What’s next from those brilliant minds in Congress?
Source: Economists Do It With Models
Our government cannot properly manage a pretty simple $1 billion car rebate program, but the fearless folks in Congress are willing to give it a go with healthcare and health insurance, which together comprise about 17% of our economic activity. What could go wrong?
- Business , Economy , Geopolitics , debt , deficit , income taxes
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Very good article. The sad part of cash for clunkers is that many of its negatives would have been avoided if the politician had listened to the car donation charities. We asked that the c4c cars go to us instead of being destroyed. Cars in poor shape would be scrapped as is our custom anyway. However, those car in good shape (and there were many) would be repaired if needed and either sold or given to the needy. This would have prevent the rise in used car prices we are currently experiencing. In addition, car donation charities, auto repair shops and needy families would have benefited by cash for clunkers instead of taking a huge hit!
Karen — Thanks for your kind words. If you have any specifics on how C4C has affected your group, I would be happy to post them as an update to this post or another one.
Kurt,
As you know I had a strong negative opinion of C4C. I think this experience poses a lesson for any future discretionary fiscal stimlulus (hopefully it will not be needed in my lifetime). Stimulus should avoid excessive reliance on temporary investment or consumption incentives. This includes the first time homebuyers credit (we will soon see the fallout from that), and the various other business and individual tax incentives that were included in ARRA. They merely shift such consumption or investment forward in time.
In the short run the best stimuli seem to be state transfers (despite the moral hazard problem), extended unemployment benefits, food stamps and payroll/unemployment benefits tax cuts. And if the zero interest rate policy lasts a sufficiently long period (as it appears it will be in our case) infrastructure is always the way to go as it does not substitute for private consumption or investment.