While auto dealers were relishing the traffic that overwhelmed their showrooms, the fact is the program was nothing short of a government redistribution charade masked as an economic stimulus. If this type of program is the best we can do, we are in worse shape politically and economically than I thought.
While some pundits would sing the praises of the “Cash for Clunkers” program, fundamentally I have a difficult time understanding how real value is created when current value is destroyed in the process. Additionally, there was never a doubt that this program was merely pulling demand forward. How do we know this?
U.S. auto sales declined 23% for the month of September on a year over year basis. Sales for GM (-45%) and Chrysler (-42%) vehicles declined precipitously while Ford (-5%) declined only marginally. What does that indicate? Car buyers want to purchase a vehicle in which they have confidence in the manufacturer.
The Wall Street Journal sheds further light on this ‘clunker’ in writing, Clunkers In Practice:
Cash for clunkers had two objectives: help the environment by increasing fuel efficiency, and boost car sales to help Detroit and the economy. It achieved neither. According to Hudson Institute economist Irwin Stelzer, at best “the reduction in gasoline consumption will cut our oil consumption by 0.2 percent per year, or less than a single day’s gasoline use.” Burton Abrams and George Parsons of the University of Delaware added up the total benefits from reduced gas consumption, environmental improvements and the benefit to car buyers and companies, minus the overall cost of cash for clunkers, and found a net cost of roughly $2,000 per vehicle. Rather than stimulating the economy, the program made the nation as a whole $1.4 billion poorer.
The basic fallacy of cash for clunkers is that you can somehow create wealth by destroying existing assets that are still productive, in this case cars that still work. Under the program, auto dealers were required to destroy the car engines of trade-ins with a sodium silicate solution, then smash them and send them to the junk yard. As the journalist Henry Hazlitt wrote in his classic, “Economics in One Lesson,” you can’t raise living standards by breaking windows so some people can get jobs repairing them.
In the category of all-time dumb ideas, cash for clunkers rivals the New Deal brainstorm to slaughter pigs to raise pork prices. The people who really belong in the junk yard are the wizards in Washington who peddled this economic malarkey.
I concur. What do you think?