Saturday, August 1, 2009

Cash for Clunkers = Horrible Economic Policy

In my 20 - plus years as an economist I have witnessed many taxpayer-financed programs that have have little or no merit - economically, morally or Constitutionally.
However, I think I may now be witnessing a program that confirms my deep belief that Americans are almost completely economically ignorant.
Recently the Obama Administration announced plans to steal $1 billion (plus interest) from future taxpayers to help current Americans buy a new car. The "Cash for Clunkers" program, as of today, has used up all $1 billion and now the socialists running our country are preparing to add upwards of $2 billion to this "successful" stimulus to our moribund automobile sector.
This program is steeped in economic stupidity for a variety of reasons. Here's why:
1. If you are a car buyer who thinks of this program as $4,500 of your money at work you are wrong. This is not a tax credit where the government tells you to deduct $4,500 from your 2009 tax bill (assuming your tax bill is at least $4,500). This is government telling you that it will take almost $4,500 from your fellow taxpayers and give it to you. If you take it, over 99% of this figure will constitute theft on your part. Legalized theft, but theft nonetheless.
To calculate how much of the $4,500 is "your money" all you have to do is look at what you typically pay in federal income taxes each year. The federal government collects about $2.5 trillion in taxes annually. You need to figure what percentage of $2.5 trillion you paid. Then, take that percentage out of $1 billion (the cost of the program so far). THAT is how much of the $4,500 that is your money, rather than your neighbors money. When you do the math you will probably see that out of $4,500, your "tax credit" is probably 7 or 8 cents and the rest is government plundering on your behalf.
2. If you think the program will stimulate the automobile sector, think again. Yes, over 220,000 new cars have been purchased so far. But that means 220,000 cars that were still running have also been taken off the market. In this program you have to trade in a car that is operable then the dealer destroys the engine and it leaves the supply part of the market for cars. 220,000 new cars driven away, 220,000 used cars, with value to someone (the poor, teenagers, parents looking for a car for a kid, etc.) leave. That is called a zero-sum event. With used cars now becoming more scarce - especially if the program continues - we will see a tighter supply for these cars and higher prices for poorer Americans who could have used an $800 car to get around in for a couple of years.
The 22,000 new ones also are a false stimulus. Many of these would have been bought anyway but the lucky people who were already in the market simply get to save money at our expense.
Of those who would not have bought a new one, now the government has encouraged them to buy. This looks like a good thing for our auto industry but what happens when this false stimulus ends? Do you think the car industry is going to add more workers for a temporary program? What happens to the people who went into debt - during a recession caused by too much debt - to buy a new car? The law of opportunity cost means they took money away from some other purpose to buy this car. That means less money for other sectors of the economy and debt incurred at a time when less debt would be a better idea.
3. The planet will not cool off as a result of this program, but more people will die from it. The Obama Administration launched this program in part to get pollution-belching cars off the road and help lower the temperature of Earth. Give me a break. Let's say I trade in my truck - that gets a polar bear harming 13 miles per gallon - for a new truck that gets 19 miles per gallon. Better yet, I trade it in for a car that gets 29 miles per gallon. So, I get an improvement of 16 miles per gallon by driving my new tin can. Will I drive more now that I get better mileage? Will I be less safe on the roads? Yes and yes.
It is a rational reaction to enjoy the better mileage by going to the beach, taking more frequent trips to the grocer and other trips - long and short - that I would not take in my current gas-guzzling truck.
One brief stop on Google will also help you uncover the hard data on the number of people who get killed by driving smaller cars.
These accidents have to be paid for by insurance, health care professionals and by consumers who have to spend more to fix small cars than bigger, safer ones. This is a real cost that few in government are talking about.
Finally, and perhaps most sadly, is the cost of raising our kids to think of government as Santa or the tooth fairy. For every adult who buys a new car under this program they are unwittingly sending a message to their kids that there is "free money" out there for the taking and that we should just go get it.
That, my friends, simply adds to the ranks of future voters who line up to steal other people's money on election day.
Enjoy your new car.


  1. I heard we were "helping" the global environment by selling the engines to china. Is that true?

    Thanks for the blog, i love hearing your thoughts on things.

  2. No, they are destroying the engines. The rest of the car can be sold off as scrap though.

  3. So true. This is Luke Kelly, by the way... I read a quote in the WSJ from a car dealer talking about the Cash for Clunkers program. Paraphrased he said "This is a great program, but it's also one of the most poorly run programs I've ever seen" Of course, it's a great program....FOR HIM...
    QUESTION: Is there any argument to be made for government action (such as the Cash for Clunkers program) on the grounds that it prevents people from making an irrational decision NOT to buy a car because of economic fears?

  4. This article, like many others has helped to illustrate just how out of touch people really are with the workings of the economy. I personally know three people who went out and bought new cars when there was nothing wrong with the ones they had, and they were paid for. One of them bought a new #### truck for 20,000 dollars. The dealer gave him 2500 for his old car and then the 4,500 for the "automotive assistance program" So he paid 14,000 plus change for the truck. He was all happy till I showed him last week’s paper that had an insert that showed the same truck for 12,500 from the same dealer. So, after I educated him on his apparent stupidity about how the dealer just raised the cost of the truck to insure that they made the same money off of him as they would have before, he became bitter and decided to leave. And he did in his polar bear saving 325 dollar a month truck payment. Now he just has to figure out how to pay his rent and child support. This is just one example of how our Government is using ignorance to make people think they are doing something advantages. Yet, like all the other times most people fall into it without even thinking about the long term problems that arise from those rash actions. After seeing how trickle up economics was not acted upon, the people having less and less and depending on the government more and more, a Supreme Court with "empathy for the people", and now talk about fixing the health care problem in this country; I have grown quite wise to the concept of miss-direction by the government. Everything our Government touches turns to tragedy, and we will have to pay the price one day. I ask “Continental Congress anyone”, or should we all just bury our heads in the sand and say thank you Government Daddy and Corporate Mother??? I kind of feel like I am watching the two old guys that sat in the balcony on the original Muppet show.

  5. By the way, doesn’t the Government owe us a new GM car already?? I mean haven’t we already paid for it? Only in America can we the People pay billions of dollars for a nothing. And applaud the Government for doing it. Personally, I say we start a country wide petition that says we the people feel that the now owned by our socialist Government GM should and better start paying us back for our future tax burden in the form of new cars. I mean if we walk onto a dealership lot with no money then they throw us off the property, but it is fine for them to demand money from us in the form of extortion of high layoffs and give us nothing in return. I am not an award winning economist, nor am I even a novice, but something smells pretty rank with the whole Automotive and Government conglomeration that has been going on lately. And like every other time that something like this has happened we have had to take the ridicule from every other country because we allow this to happen. Hell, we pay them to screw us over. Does anyone want to start a third political party? We can have an austrage as our political symbol, that way we can show the world what we are really all about.

    David Huff
    Angry American

  6. As you mentioned professor, the unintended consequence of the “Cash for Clunkers” program will be that inexpensive used cars that could have been bought by people who couldn’t afford a new car—or who could afford one but just weren’t interested in buying a new car (i.e., just wanted to save money by buying a cheaper used car)—are now being destroyed.

    Well, forceably reducing the supply of used cars while the demand for used cars has actually grown (because of the recession) will probably also have the unintended consequence of driving up the cost of used cars.

    Here’s a quote from a USA TODAY article:

    Now, the clunker program could cause prices to rise 5% to 10% more, especially for vehicles worth $4,500 or less, says Alec Gutierrez, senior market analyst for Kelley Blue Book. "It’s going to drive prices up of some of the most affordable vehicles we have on the road.”

    Higher prices—that should really “help” people who are struggling to make ends meet. Here’s something to pass on to our “caring, compassionate” members of Congress who voted for this clunker of a program.

  7. Keep taking the bait America and soon enough you'll get caught.

    Professor Chambless,
    I know that we are going to pay for all of this in the form of taxes, but do you think the Obama administration is going to try and hold out to see if they can get him elected for another term before they make an income tax increase?

  8. Cara,

    With the massive movement of government to take or manage large parts of the economy, an income tax increase on those who make less than the $250,000 mark would ruin whatever credibility Mr. Obama has left. Don't rule out other tax increases (payroll, social security, value-added, energy, etc.) to try to pay for all of this.