2009 August 15 Saturday
New York Times Misses Real Cash For Clunkers Effects

Writing in the New York Times David Sanger reports on the sorts of objections to the Cash For Clunkers program that the New York Times notices.

The first is that the program is simply not ambitious enough — in an effort to make sure American carmakers are among the biggest winners, it set the mileage requirements for newly purchased cars too low. The second is that Congress and the White House are essentially rewarding car owners who in years past chose to buy gas-guzzlers — violating Mr. Obama’s own first rule of environmentalism, which is that polluters should pay.

And the third question is the one that haunts any big government subsidy: Does it make more sense to pay Americans to buy a new, slightly more efficient car than it does to insulate their homes? Or to go to the health club, in hopes of lowering future health care costs?

That's the best they can do? How about a few other objections?

  • The Cash For Clunkers Program steals sales from future quarters. Some of these cars would have been purchased this fall or winter. So sales will dip this fall and winter.
  • People who are spending more on cars are cutting back on other expenditures. In fact, in July non-auto retail sales dropped 0.6% while auto sales rose 2.4%.
  • It is redistributionist in a lottery sort of way. Just happen to have an old car with very little resale value? Just happen to want a new car that fits the program's criteria. You get a deal at the expense of everyone else.

I have an even more fundamental objection: American taxpayers are paying other citizens to get cars that stimulate the economies of Japan and South Korea. What about the American economy?

The top five models purchased in the week ending Aug. 5 included three Toyotas — the Corolla, the Prius and the Camry — along with the Honda Civic and the Hyundai Elantra.

Um, I want more American jobs, not more Japanese jobs. Japan not my country (though its an interesting place to visit). I do not pay taxes to the Japanese government. I do not have a Japanese passport.

George Pipas at Ford admits Cash For Clunkers shifts sales from future quarters.

The sales last month from the federal incentives may result in fewer buyers later this year after the program ends, George Pipas, Ford‘s sales analyst, told CNBC today.

The demand effect of the incentive is already waning.

“A lot of demand got sopped up in the first mad rush, now the pressure is off to be first in line,” said Edmunds.com senior analyst Michelle Krebs, adding that sales may drop after the program ends. “We‘re nervous about what September and October will look like after this plays out.”

Okay, we taxpayers are funding the shifting of sales from future quarters and we are also funding displacement of the purchase of other goods and services so that people buy cars instead. This isn't hard to figure out.

If the US government is going to spend money to stimulate the economy I'd prefer the money get spent on something with lasting value. Nuclear power plants come to mind. They are made here. They produce energy for decades and avoid the pollution of dwindling fossil fuels.

But the Cash For Clunkers program is small potatoes compared to what is being lavished on GM, Chrysler, and the UAW retirees and workers.

The bailout of America's auto industry--General Motors, Chrysler, their finance units, their parts suppliers, Cash for Clunkers, etc.--is costing American taxpayers more than $100 billion.

Share |      By Randall Parker at 2009 August 15 10:29 AM  Economics Government Intervention


Comments
Matt@Occidentalism.org said at August 15, 2009 11:32 PM:

Randall, imagine that 12 trillion dollars was used to create the infrastructure of the future. Nuclear power plants, mag-lev trains that are almost as fast as planes, etc. Instead the USA got mugged by the super-rich.

GreySwan said at August 16, 2009 8:42 AM:

You've missed the single most important impact: Cash for Clunkers falls into the broken window fallacy (http://en.wikipedia.org/wiki/Parable_of_the_broken_window).

The program literally DESTROYS wealth in the attempt to stimulate gdp growth (which it probably also fails at). Paul Krugman famously fell into this fallacy when he claimed that the 9/11 attacks probably helped stimulate the economy by increasing demand for new construction, etc. Of course, the truth is that destroying buildings is BAD because it destroys wealth. If the economy does grow quickly thereafter (think of Germany after WWII), it is only growing to replace wealth, so you still end up worse off for a long time, and you never end up better off.

The key paradigm that needs to be understood is the relationship between wealth and GDP. GDP flows into wealth. Depreciation causes wealth to flow into nothingness. Wealth is what makes people happy, not GDP. If Depreciation is slowed (things last longer), we get richer (higher carrying capacity of wealth). Destroying cars is an example of SPEEDING UP depreciation. Imagine that everyone buys a certain type of car, expecting it to last 5 years. Turns out, by some miracle, all the cars last 50 years. Well, for a brief period of time the GDP will go down as people stop buying cars, and all the labor for building cars is laid off. But in the long term they can find another job building something else, say widgets. So now we all have cars just like we wanted, but we have more widgets! This is how we get richer.

GreySwan

Randall Parker said at August 16, 2009 11:58 AM:

GreySwan,

Great point. Yes, I did miss it. Speeded up depreciation does cost us wealth loss. Part of the rebate dollars goes toward wealth destruction.

Matt,

I agree.

But I gotta quibble: I would electrify freight rail before building high speed trains though. We need to transition our freight infrastructure off of oil. Also, just getting trains to run 90 mph on average for long haul passenger transport would be far cheaper than mag lev and deliver most of the benefit. Part of what we would need to do to get 90 mph passenger trains would also speed up freight trains and therefore pull cargo away from trucks toward trains. By relieving congestion with more parallel sets of rail tracks we could speed up freight trains and make train freight as fast as truck freight but at much lower energy cost and by electric power rather than diesel.


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