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What’s Really Wrong With “Cash For Clunkers”

by @ 11:04 am on July 31, 2009. Filed under Auto Industry, Business, Economics, Politics

This morning, we learned that the Car Allowance Rebate System, known more popularly as the “Cash for Clunkers” program was running out of money after only a few days in operation:

The government’s “cash for clunkers” program, aimed at boosting stagnant auto sales, is almost out of money, putting its future in question, according to sources familiar with the effort.

Passed by Congress in late June to help the flagging U.S. auto industry and launched just a week ago, the $1 billion program gives vouchers worth up to $4,500 to consumers who trade in gas-guzzling cars for more fuel-efficient models. The highly publicized effort was scheduled to run until Nov. 1, or until money ran out. It was not expected to run out of cash so quickly.

The effort, formally known as the Car Allowance Rebate System, or CARS, appeared headed for a temporary shutdown at midnight Thursday. Federal transportation officials became increasingly concerned that the program’s popularity with consumers could drain its budget by week’s end, according to sources familiar with the discussions who spoke on the condition of anonymity.

It’s pretty to figure out why this happened once you take a look at how the program worked:

Under the program, consumers get a voucher for up to $4,500 — depending on the model and average fuel economy of their car or truck — if they buy a new car or truck that gets better gas mileage than the one that was scrapped. The payoff grows depending on the difference in the fuel efficiencies of the old and new cars.

Basically, if you had an older car (and it’s typically older cars that get lower gas mileage) the Federal Government was subsidizing your trade-in if you purchased a new vehicle. For someone who’s been driving, say, a late 90s care into the ground, it was a pretty good deal — instead of waiting another year or two, you could have a new car now, and the government would pay for a good party of it. Frankly, only a government bureaucrat or a politician would be surprised that it would garner a lot interest.

The fact that the government apparently completely misjudged how popular the program is should be a warning to those who would continue to put more and more power into the hands of the state. If they can’t accurately estimate how many people would respond to a program like this, and can’t even tell us whether there’s any money left in the program as of today, then how are they going to be able to run one of the largest sectors of the economy ?

Now that’s it’s running out of money, of course, people are already calling for more:

One Michigan Republican, Congresswoman Candice Miller, has alreayd come out in favor of extending the program, saying in a statement that “There can be no doubt that the Cash for Clunkers program is a complete success given the fact that the entire $1 billion allocated to the program was expended in less than a week.”

She called the program “simply the most stimulative $1 billion the federal government has spent during the entire economic downturn.”

It’s worth asking, though, whether this program is really accomplishing anything, and whether it’s doing more harm than good.

Sure, the program has stimulated car sales, but it’s pretty clear that all that it’s really done is give drivers the incentive to purchase a new car now, rather than purchasing it in the future. That’s not economic stimulation, it’s a time-shifted purchase, and, to the extent that the program has given people the incentive to purchase cars that they otherwise could not afford, it’s helping to create an auto sales/credit bubble not all that different from the real estate bubble that got us into our current mess. However long the CARS program lasts, it will, in the end, be merely a brief up-tick in an otherwise dismal auto-market.

What’s wrong with “Cash for Clunkers” isn’t that they ran out of money — although that certainly should cause people to doubt the government’s ability to make economic forecasts of any kind — but that it’s more of the same nonsense we’ve been doing for years.

One Response to “What’s Really Wrong With “Cash For Clunkers””

  1. Kevin says:

    Cash for clunkers -the destruction of cars in order to stimulate buying new ones, at a subsidy- is based on an old economic error called “The Broken Window Fallacy”.

    The great Henry Hazlitt explained it here.

    Hazlitt says we should recognize “the basic truth that the wanton destruction of anything of real value is always a net loss, a misfortune, or a disaster, and whatever the offsetting considerations in a particular instance, can never be, on net balance, a boon or a blessing.”

    The idea was first explained by Bastiat more than 150 years ago. (“What Is Seen and What Is Not Seen“.)
    Didn’t Krugman once teach economics?

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