Cash for Clunkers Clunks

Last week, government officials announced that the “Cash for Clunkers” program — which offers subsidies of up to $4,500 when trading in an old car for more environmentally friendly one — had been so successful that the funding allotted for it had run out. This seems to be a fairly typical government story: a seemingly great idea that lacks the necessary funding. The program’s proponents hail it as a way to reduce carbon footprints and to provide a boost for the economy. Both of these claims are exaggerated and, in some ways, entirely untrue.

According to a New York Times article:

Dealers estimated that they sold a quarter-million cars with the rebate money.

And the Transportation Department reported that the average gas mileage of the vehicles being bought was significantly higher than required to qualify for a rebate of $3,500 to $4,500. Of 120,000 rebate applications processed so far, the department said the average gas mileage of cars being bought was 28.3 miles per gallon, for S.U.V.’s, 21.9 miles per gallon, and for trucks, 16.3 miles per gallon.

Are these numbers worth $1 billion in taxpayer subsidy? Probably not. Are they worth the proposed additional funding of $2 billion? Definitely not. These mileage differences are pretty small. The environmental impact is negligible, especially considering that the subsidy leads to a perfectly good car being destroyed and new cars built to replace them. In a CNN article, Harvard economist Jeffrey A. Miron discussed the program’s unintended consequences, pointing out that trading in for more fuel-efficient cars might actually encourage more driving.

The other argument, that the subsidy stimulates the economy by aiding the auto industry, is an example of Frédéric Bastiat’s “broken window” fallacy, which can be explained by a short illustration: A boy broke a baker’s window, and the townspeople said, “Ah, but think of the business the glassmaker will get! It’s good for the economy.” So the baker spent $50 to buy a new pane of glass, which stimulates the glass industry. Had he not done that, though, he would have used that money to buy something else — a new suit from the tailor, perhaps — and he would still have had his window. Real economic growth doesn’t come from an artificial restriction of options, by prompting somebody to spend money on a window rather than on a suit. Similarly, when the government uses taxpayer money to stimulate one part of the economy, this comes at the expense of those other economic sectors that will no longer benefit from some measure of either consumer spending or invested savings. Tax cuts are a more effective way to drive economic growth and job creation.

At any rate, encouraging people to trade in a paid-off car to take on debt for a new car is a bad idea, as economic commentator Peter Schiff mentioned in a recent article:

The recently passed “cash for clunkers” program (currently on-hold, as it ran out of funding in one week) is a perfect example of how government policy can make the economy worse. By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy. The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Don’t they realize that is precisely the behavior that got us into this mess?

This program bears a remarkable resemblance to many ill-fated home subsidy programs, in which people were encouraged to purchase houses they could not afford. Overall, Cash for Clunkers is a wasteful and expensive program that does not need a further subsidy. Missourians would be better served with corporate tax breaks that would help create new jobs instead of artificially aiding the auto industry.