Cash for Clunkers
A friend of mine remarked over the weekend that when she first heard the phrase, "Cash for Clunkers," she thought it was the outlandish bonuses being paid at Goldman Sachs. It is, in fact, something only slightly different, which could go by two other names, one of them from classical economic pedagogy and another from several prior posts on this blog.
Suppose that 250,000 households were informed by the government that their old automobiles could no longer be driven and would have to be mothballed. Those households would not feel richer -- they would feel poorer. They would have to go out and buy another automobile. That in the process of making that transaction they enrich the makers of automobiles is immaterial -- the purchasers were previously content to drive their old car and use their money for something else. That some of the financing comes from the taxpayer via this program, and that the availability of that financing made the final transaction voluntary, are also immaterial -- those funds had some alternative use as well (infrastructure? health care?). On net, the whole community is poorer. To assert otherwise is nothing but the "Broken Window Fallacy." In a recession, as at other points in the business cycle, we are richer when we use our money wisely, not foolishly.
In my prior posts, I have described the different ways that a government can use its finances to deal with distressed institutions; in this case, the automakers. It can give money to their customers. It can give money to them directly. It can give money to other entities that would be compromised by their failing. Cash for Clunkers is just an example of the first option. As I have noted before, in providing this bailout in lieu of bankruptcy, the government wastes its (our!) money by intervening too early. Some of the gains in a program like this accrue to well off households who simply chose years ago to drive a gas guzzler. At the very least, the Cash for Clunkers rebates ought to be subject to the income tax.
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One thing I disagree with in
One thing I disagree with in your analysis is that since the cash for clunkers program is voluntary there was a welfare gain (ex ante) for those participated in the program. However, because taxpayer money is used to finance it, I agree that the community is poorer.
One item I have not heard discussed is that these clunkers cannot be resold. This would reduce the supply of used cars, causing a redistribution of wealth from used car buyers to new car buyers. The clunkers parts cannot be sold and the clunkers must be sold for scrap. This mandate that the clunkers must be sold for scrap is a welfare loss, because the clunkers cannot be used for higher valued uses as used cars or parts.
Windows broken at taxpayers expense
A renewed-as-proposed cash for clunkers program will boil down to taxpayers paying $3 billion to destroy about $2 billion worth of productive assets.
That's a $5 billion loss to society (those taxes can hardly be said to have been spent productively!)
It's the Broken Window Fallacy and worse -- Bastiat didn't have taxpayers pay to break the windows.
And members of Congress and the Administration are praising this as the "most effective stimulus ever"...
It is a broken window fallacy.
I agree with much of the above. The breaking of the wondow in Bastiat's lesson was not broken by government, So if a welfare gain was to occur it has to be a second best solution. My take on this written last Saturday:
http://learnecon.blogspot.com/2009/08/what-is-seen-and-what-is-not-seen....
cash for clunkers
Cash for clunkers is hurting charities that accept car donations in 2 ways. First, the cars that are now being tunrned in for a voucher are the very same ones that previously were donated to charity for a tax deduction. Secondly, the flood of c4c cars at the scrap yards has driven the price of scrap metal down. As a result, charities are getting less money for the non-running cars that are donated to them.
Not Broken Windows
It is not correct to assert that Cash for Clunkers is a broken window fallacy.
It is clear that requiring consumers to turn in their clunker means that there is a welfare loss relative to a program in which there was a simple subsidy. However, the simple subsidy may not be within the possibility space.
That is, if government could do anything should it do Cash for Clunkers? No. But, this fact alone does not make the program welfare loosing. No more than any other program which is not optimally designed.
For example, if we have a police force that is sometimes abusive to suspects would you say "The police force is welfare loosing" No, its not as good as the best police force but it is better than no police force.
The question is whether the Cash for Clunkers program is welfare loosing relative to no program. This is not immediately clear.
Externalities & irrational actors
As with many of these macro topics, the final result gets muddled. However, Andrews succint argument corralling the program into a broken windows fallacy, does not address the impact of externalities or irrational actors.
The clunkers in question are likely to have higher negative externalities [breaking down in heavy traffic, pollution, & gas consumption (natl sec & climate)] than the newer cars. Further, many people may not pay sufficient attention to their fuel & repair bills. Some may actually do better with a new vehicle, especially if fuel prices rise in the near future.
Other positive externalities may exist. Perhaps the automotive industry in the current environment creates/saves more jobs per marginal dollar of revenue than other uses of the money would? An improved automotive industry improves the government investment return in the automotive industry as well as increasing the taxes collected from higher income tax.
If you believe fiscal stimulus is important to mitigate the recession, this is a good one in the sense of being timely, targeted, and temporary.
I'm not sure that this program is a net benefit to the country, but your quicky analysis should have covered some of these external issues that were obviously the heart of why the program was created.
Andrew, While at the CEA, did
Andrew,
While at the CEA, did you ever do an analysis of crowding out by the deficit spending that resulted from the Iraq Stimulus Plan of 2004-2006? I thought not.
All the best,
ISLM
immaterial in the face of the real problem
The real problem is that people who drive very old, very high polluting vehicles get breaks such as 'grandfather' clauses, 'classic' or 'historic' car status, while these 60s and 70s cars and pickup trucks continue to spew unburned fuel into the air. In fact, you can't even turn in these 'clunkers' because they are 'too old' ??? WTF??
If they really cared about the environment, the government would simply BUY the vehicles that are pre 1978 8 cylinder behemoths, or simply ban them, to get these horrible polluters off of our streets and highways. 3 dozen modern cars can pass me without a whiff of smell from them, all it takes is one 60s era land sled to go by and it stinks for thousands of feet. I say we get these nasty, old, REAL clunkers out and forget about trading in cars for newer ones.