Cash for Clunkers, not just a Failure, but a Failure of Governmental Magnitude


Posted by Todd Hollenbeck on Friday, October 30th, 2009, 4:48 PM PERMALINK


We all know that when the government acts to solve a problem (that was probably created by fixing another problem the government created), it inevitably goes horribly, horribly wrong. The “solution” usually obscene amounts of money, creates new programs, entitlements, and bureaucracy, and creates even more problems than it solved. The Cash for Clunkers program, however, set a new bar for government failure.

The Cash for Clunkers program was a poorly planned scheme that was intended to help the newly socialized auto industry, the economy, and the environment. The idea was probably brainstormed something like this:
 
“Ok guys, what can we do to stimulate the economy, get evil gas-guzzlers off the road, and make sure we don’t look like idiots for bailing out GM and Chrysler?”
 
“What kind of budget are we looking at?”
 
“Haha, budget, that’s a good one; who cares, it isn’t our money.”
 
“Oh, right! Well then why don’t we just give people $3,000-$4,500 ‘Cash’ for their old car or ‘Clunker’ if you will, so they can buy a new car? We can then disable the old car so that no one else can ever use it again, and then ship it over to China to get melted down and sold back to us.”
 
“I don’t know, that sounds incredibly wasteful. Not only will that cost a lot of money, it will also waste perfectly good used cars that could be driven by people with low incomes that can’t afford new cars. Won’t it also hurt the environment more to junk the old cars and send them all the way to China than it would have if we had just let people keep driving them?”
 
“You just don’t understand economics. Trust me, it will be hugely ‘popular.’”
 
The program began on July 24th with a budget of $1 billion and by July 30th they were out of money. Giving people “free” money to buy cars is definitely popular. Congress then allocated another $2 billion that lasted almost until the end of August. That’s right, $3 billion in under a month. The program didn’t help the economy or auto industry. Despite a bump in the 3rd quarter to GDP and auto sales, consumer spending dropped 0.5% in September and the vehicle output bump was artificial and unsustainable, meaning it will drop off considerably in the next quarter as the market stabilizes to its real level. As Nick Gillespie and Veronique de Rugy pointed out today over at Reason, even the reported GDP bump is misleading, because is includes government spending. So if government spending increases it will increase the GDP, but that doesn’t mean any more was produced.
 
There are also the unseen costs of this program. By encouraging people to junk older vehicles, they lowered the supply of cheap used cars. When you lower supply and keep demand stable, the price goes up. With fewer used cars on the market, the prices for remaining used cars increases. This will make it more difficult for younger drivers or low income drivers to buy cars to get to work or school. (A video by Congressman Ron Paul further explains how it hurts the poor here.) At least the wealthy got a handout to buy their brand new cars though right?
 
Speaking of handouts, a new report from Edmonds.com found that the real subsidy for each car sold as a result of Cash for Clunkers is much higher than $4,000. During the program 690,000 new vehicles were sold, however, Edmonds found that 565,000 would have been bought even if we hadn’t done Cash for Clunkers. Only 125,000 vehicles were purchased as a result of Cash for Clunkers, meaning each car cost the taxpayers $24,000. According to the Department of Transportation, the Toyota Corolla was the top selling car under the program. The MSRP on a 2009 Toyota Corolla is $16,750. We spend $24,000 so someone else could get a discount on a $16,750 car, what a deal! Who says the government isn’t efficient?

Photo Credit: http://www.flickr.com/photos/tonythemisfit/ / CC BY 2.0

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