Sunday, August 30, 2009

Cash for Clunkers: dumbest government program ever

Chris Edwards of the Cato Institute has a good summary of the reasons the Cash for Clunkers program was the dumbest government program ever: it destroyed almost as much wealth as it cost.

A few billion dollars worth of wealth was destroyed. About 750,000 cars, many of which could have provided consumer value for many years, were thrown in the trash. Suppose each clunker was worth $3,000 at a guess, that would mean that the government destroyed $2.25 billion of value.

Low-income families, who tend to buy used cars, were harmed because the clunkers program will push up used car prices.

Taxpayers were ripped off $3 billion. The government took my money to give to people who will buy new cars that are much nicer than mine!

The federal bureaucracy has added 1,100 people to handle all the clunker administration. Again, taxpayers are the losers.

The environment was not helped. See here and here.

The auto industry received a short-term “sugar high” at the expense of lower future sales when the program is over. The program apparently boosted sales by about 750,000 cars this year, but that probably means that sales over the next few years will be about 750,000 lower. The program probably further damaged the longer-term prospects of auto dealers and automakers by diverting their attention from market fundamentals in the scramble for federal cash.


Bill said...


There is a lot of debate about whether we are going to have a V, U or W shaped recovery. Do you think the cash for clunkers and other Govt. programs will turn this into a U or W recovery?

Scott Grannis said...

I think that government stimulus programs of the type favored by Obama, Pelosi, and Reid & Co. are mostly very counterproductive. They focus on transferring money from one person to another. Instead, they should focus on increasing the incentives for people to work, save, and invest. To change the economy you need to change behavior on the margin.

So the Cash for Clunkers program is just redistribution of the worst sort, since it not only robs from Peter to pay Paul, it also destroys assets in the process.

This amounts to a "headwind" for the economy, resulting in slower growth. But fortunately it's only a couple of billion dollars, and that is just a drop in the GDP bucket. So I don't think this will make a big difference to the shape of the recovery.

The other programs however are much bigger. I've argued in numerous posts that I think we're in a recovery already, and it is likely to be 3-4% growth for the foreseeable future. That probably qualifies as a V-shaped recovery for most people. The problem though is that this is pretty tepid growth considering how far the economy has fallen.

I don't see any reason to have a double dip or W-shaped recovery, however. Unless, of course, something unforseen happens.

dr. j said...

The only thing green about the Obama reign is the color of other people's money that they use to pay for simply stupid ideas. Hey, let;s say we are environmentally aware by millions of tires, 100's of thousands of batteries and other hard to recycle items into landfills while exporting the "jobs" because most of the new cars were manufactured overseas. Then let's not spend anytime evaluating the ridculous outcome and run headlong into the next stupid idea that we will justify with the word "reform." We will not define, only repeat it and thoughtlessly say, "Yeah, reform!" This just sounds too much like SouthPark.

Dead Cat Bounce said...

Truly an abysmal program.

I hear a form of this for home appliances is next in the pipeline.

Spending, higher tax rates and makework gov't projects are going to continue to wreck employment and price stability.

I'm not sure the "recovery" when it is all said and done won't be L shaped in real terms if this keeps up. In nominal terms it's hard not to be bullish in the market since prices should follow inflation better than most other asset classes, but these programs are robbing future expenditures and demand while burdening the consumer with even more debt. Plus what if we nationalize health-care and pass cap-and-trade?

Recovery without sustainable growth is not going to allow investment to take place or hardworking people like my parents to retire. We already have a crisis on our hands and if the ideology doesn't turn around soon I'm not sure it will be reversible.

Public Library said...

I am with dead cat bounce. We may get a recovery but depth and breath will be weak and eventually it will need to be paid for big time.

The financial bailouts were even worse and on a greater scale. They transferred wealth directly into the hands of very few people.

Neither taught us a lesson which means we will repeat them in due time.

The technocrats really have a handle on things! Not.

Public Library said...

And China might be rolling over. Even if the government comes in with another massive prop-up, not even the Chinese can stop a global market route.

This story is getting interesting...