Malo periculosam, libertatem quam quietam servitutem.



August 2009

Cash For Clunkers "Success" Provides No Benefit To Economy

Written by , Posted in Economics & the Economy, Legislation

The cash for clunkers program, which created an incentive (via handouts) for people to destroy perfectly usable cars, is being hailed as a giant success after blowing through its initial allocation of $1 billion.  Of course it’s a success if the measure of success is no more sophisticated than the government’s ability to get people to take money in exchange for doing something they were likely going to do in the near future anyway.  Congratulations, you’ve proved people like money.

Nothing about this “success” provides support for the claim made by the program’s proponents that it helps the economy.  That is, and always has been, pure nonsense.

This is an example of the classic broken window fallacy.  The economically illiterate would see a broken window as doing some good by providing business for window makers, glass suppliers, etc.  What these people ignore are the opportunity costs.  Money spent replacing a broken window can’t be spent on anything else, such as new clothes.  All that’s happened economically is that the business that would have gone to a clothing store instead went to a window maker. Meanwhile, total wealth has been reduced by one window.

Cash for clunkers is just like the broken window. Government has shifted business away from some sectors and toward new car dealers.  Meanwhile, every working car destroyed is a net loss for the economy.  To those who continue to insist that there are economic benefits to destroying perfectly useful (and thus valuable) goods, I offer to come over and burn your house down tonight so we can help the economy a little bit more. Think of the new construction work we’ll be creating!

The reality is that every dollar spent destroying and replacing working cars is a dollar that can’t be spent buying other new products.  People are more than welcome to argue that there are environmental gains that make it worth the cost (personally I don’t buy that), but when politicians claim that it benefits the economy they are either ignorant or lying.