Cash for Clunkers

Tue, 04 Aug 2009 12:57:17 +0000

A friend of mine remarked over the weekend that when she first heard the phrase, "Cash for Clunkers," she thought it was the outlandish bonuses being paid at Goldman Sachs. It is, in fact, something only slightly different, which could go by two other names, one of them from classical economic pedagogy and another from several prior posts on this blog.

Suppose that 250,000 households were informed by the government that their old automobiles could no longer be driven and would have to be mothballed. Those households would not feel richer -- they would feel poorer. They would have to go out and buy another automobile. That in the process of making that transaction they enrich the makers of automobiles is immaterial -- the purchasers were previously content to drive their old car and use their money for something else. That some of the financing comes from the taxpayer via this program, and that the availability of that financing made the final transaction voluntary, are also immaterial -- those funds had some alternative use as well (infrastructure? health care?). On net, the whole community is poorer. To assert otherwise is nothing but the "Broken Window Fallacy." In a recession, as at other points in the business cycle, we are richer when we use our money wisely, not foolishly.

In my prior posts, I have described the different ways that a government can use its finances to deal with distressed institutions; in this case, the automakers. It can give money to their customers. It can give money to them directly. It can give money to other entities that would be compromised by their failing. Cash for Clunkers is just an example of the first option. As I have noted before, in providing this bailout in lieu of bankruptcy, the government wastes its (our!) money by intervening too early. Some of the gains in a program like this accrue to well off households who simply chose years ago to drive a gas guzzler. At the very least, the Cash for Clunkers rebates ought to be subject to the income tax.

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