So, “Cash for Clunkers”. As I understand this program, the gov’t will pay $4500 for certain trade-ins, if:
- The old car gets under a certain mileage
- The new car gets over a certain mileage
- The old car is destroyed
As economic policy, this is a sick joke.
Dumber and Dumber
To understand the impact of “Cash for Clunkers”, let’s begin with a simpler, hypothetical program, in which the gov’t paid market prices for used cars – say $2000 for a car that was worth $2000. Such a program would be pointless, but not destructive of wealth (besides the usual inefficiencies).
Now, let’s change our hypothetical program s.t. it pays $4500 for cars, irrespective of their market value. Obviously, only consumers with cars worth less that $4500 will take advantage of the plan, so this program is essentially a transfer payment from the taxpayer to dudes who want to trade in their old cars. For instance, a guy who trades in a $2000 car comes out $2500 ahead, and the taxpayer $2500 behind.
Such a program would still be pretty dumb (although not as pointless as the first version) but, again, wouldn’t be explicitly destructive of wealth aside from inefficiencies. We can argue the merits of transfer payments, but make no mistake that this is what such a program would be: The gov’t taking money from some, and giving it to others.
Now, let’s consider “Cash for Clunkers” as sketched out above. Such a program buys a guy’s $2000 car for $4500 … and destroys it. The seller comes out $2500 ahead, and the taxpayer $4500 behind. This is, and I’m going to be technical here, “f#$@%$g retarded”.
Krauthammer
As Chuck Krauthammer puts it (via NRO):
But at bottom, it’s bizarre economics. We’re paying people — what we’re forgetting is that all of these cars, tens of thousands of clunkers, are going to be turned into scrap. And the question is why? America is going to be destroying tens of thousands of perfectly usable cars, destroying essentially American assets.
A parody of Keynesian economics is to say that you pay half the population to dig holes and the other half to fill them in. This is worse, because we’re paying people with the bribe of cash to destroy huge numbers of assets. Why not put them on tankers, ship them into the third world, and get the cash for cars and parts?
So what you are doing is destroying a whole set of assets and replacing them. That’s going to be stimulative for a week or two or three, but in the end, it’s lunatic economics.
Friend of the Working Man
Naturally, the program ends up screwing the little guy. Let’s say you have little money, and need to buy a vehicle. Well, the gov’t is doing all it can to dry up the supply of sub-$4500 vehicles (not to mention second-hand parts). Want to buy a car for $2500? “Screw you”, says D.C. “If you can’t drop $20K on a hybrid, you don’t matter to us”.
Waste
A lot of people go looking for waste in government, and, to be fair, there’s a lot to be found. But the whole point of “Cash for Clunkers” is waste – the point is to buy goods for more than they’re worth, and then destroy them.
At least you can estimate the scale of the waste easily. You can assume that the values of the purchased cars are distributed evenly between $0 and $4500, so the average car purchased by this program is worth $2250. In other words, half the money spent on “Cash for Clunkers” comprises simple transfer payments, and half represents the purchase of assets to be destroyed.
Take all the money spent on “Cash for Clunkers”, and divide it by 2. That’s how much poorer this program has made the United States.
