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  • Cash for Clunkers: Victims of Their Own Success?

    Cash for clunkers is working. Too well, in fact. The $1 billion program that offers $3,500 to $4,500 rebates to turn in your old vehicle to purchase a new, fuel-efficient one. The billion dollars is projected to run out much more quickly than previously thought, and while it’s a great deal for a new car, the program isn’t running too smoothly:

    Through late Wednesday, 22,782 vehicles had been purchased through the program and nearly $96 million had been spent. But dealers raised concerns about large backlogs in the processing of the deals in the government system, prompting the suspension.

    A survey of 2,000 dealers by the National Automobile Dealers Association found about 25,000 deals had not yet been approved by NHTSA, or nearly 13 trades per store. It raised concerns that with about 23,000 dealers taking part in the program, auto dealers may already have surpassed the 250,000 vehicle sales funded by the $1 billion program.”

    One car salesman, Andy Beloff, said, “People are loving it. It’s wonderful. It’s a great stimulus package.” But when asked if the government was running the program well, Beloff said, “No. No.”

    There’s a distinct difference between a successful government program and a good government program. In effect, cash for clunkers is a classic lesson in Economics 101: What Not to Do. It’s sadly reminiscent of Frederic Bastiat’s broken window fallacy, except that instead of breaking windows to “stimulate the economy,” we’re destroying perfectly good cars. Meanwhile, we’re asking consumers to purchase cars they might not be able to afford and incur more debt. While the program is ‘working’ in the sense that people are buying new cars, not only has the government had trouble dispersing the money, the program is full of unintended consequences, including dubious environmental benefits.

    Because the clunkers have to be destroyed, the program would distort the used car market by reducing the supply of used cars. Cash for Clunkers would aversely affect veteran charity programs like the Purple Heart Car Donations and many others.

    We shouldn’t be too surprised this happened; Germany experienced similar circumstances where a €1.5bn ($2.1 billion) program blossomed into something that could cost three times as much. And while it looks to have the effect of stimulating the economy, it may not have as big an impact on stimulating Germany’s economy as expected. It may have instead simply shifted spending: “Retailers, for instance, say the bonus is shifting spending patterns rather than creating demand. Higher February car sales coincided with falling turnover at consumer electronics stores. Stefan Genth, managing director of the HDE retailers’ federation, slammed the bonus last week, saying it was ‘sucking out spending’ from the retail sector.”

    It’s not the first time a government program has become a victim of its own success or that politicians haven’t clearly thought through the unintended consequences.

    “Free” health care is just one pertinent example. Look at Hawaii’s recent run in with free health care, where the program has been shut down after just seven months:

    Gov. Linda Lingle’s administration cited budget shortfalls and other available health care options for eliminating funding for the program. A state official said families were dropping private coverage so their children would be eligible for the subsidized plan.

    “People who were already able to afford health care began to stop paying for it so they could get it for free,” said Dr. Kenny Fink, the administrator for Med-QUEST at the Department of Human Services. “I don’t believe that was the intent of the program.”

    In fact, another car sales Rob Bojaryn said, “If they can’t administer a program like this, I’d be a little concerned about my health insurance.”

    Tax credits for new refrigerators is another relevant example. In an attempt to lure people into buying more energy-efficient fridges, the government offered consumers a lavish tax credit. But the plan backfired. Instead of getting rid of the old fridges, people would simply move them into their basements. Ah, but this time they’ve learned their lesson, right? They’re destroying the used cars. But is it really a good thing to destroy a resource that is still perfectly usable. Again, see Bastiat.

    Do we really need a program to show that the government can go through one billion dollars in a week? Tax credits intended to promote one thing (often energy efficiency) often lead to quite the opposite. They cause dependency on government (think Social Security, Medicare, Medicaid) and raise expectations that a program like this will be offered at another time, resulting in less consumer spending in the future. They distort the market, allowing people to think they can incur a cost or take on something they may not be able to (think housing market). Although unintended consequences of government policy have arisen many times in the past, our politicians’ act shocked every time.

    Posted in Economics [slideshow_deploy]

    24 Responses to Cash for Clunkers: Victims of Their Own Success?

    1. capecodgabby says:

      The future of "Healthcare of us breathing American type Clunkers" will look like this: All the good doctors will close their practices when the Healthcare Pay Czar force them to charge $20 per hour for patient vists. No fear though, the Human Resource Czar will hire 3rd world educated doctors who will perform liver transplants for a pack of cigarettes.

    2. Barney, The Dalles, says:

      My 1979 Ford F-350, with a 460 motor gets 8 to 10 mpg. It smokes a little. However, it did not quailify for CARS. Now I can drive it with a clean conscious. I would have traded it in. So America, get used to it.

    3. looking closely says:

      This "cash for clunkers" program is intriniscally stupid because because we have the gov't paying $4500 for cars worth less than that.

      Elementary economics (and common sense) dictate that nobody is going to destroy a car worth MORE than $4500 in exchange for only $4500.

      By necessity, therefore, any cars involved in this program HAVE to be worth less than $4500. By definition, the gov't is overpaying for them. . .probably by a considerable amount in certain cases.

      Everyone gets outraged over stories of the gov't paying $200 for hammers or toilet lids, and rightfully so.

      So why is it that when the Federal gov't takes $4500 out of YOUR back pocket (ie the treasury. . .your tax dollars) to purchase and then destroy a $1500 car, this is supposed to be a good program?

    4. YuckYuck says:

      This program applies to purchases of foreign made cars, too. Doesn't necessarily stimulate the U.S. auto industry.

    5. Nicolas Loris Nick Loris says:

      Well said, looking closely.

      If the car is greater than $4,500 any normal person would sell it (assuming of course, they place little value on the time and effort that goes with selling a car) and use the cash to buy a new car.

      If the car is worth $3,500 and they can get a $4,500 tax credit, you're exactly right in that its our tax dollars that pay for that credit and $3,500 of value is destroyed.

    6. Albert,Campbellsvill says:

      Did the founding fathers intend for gov to take MY MONEY and buy other people cars or health care or food or rent or cigarettes or booze or drugs or pass it out to anyone who washes up on shore or wades acorss the rio grande.

    7. matthew, queens, ny says:

      wouldn't it make more sense to reduce and reform taxes. than to have a government program, that might have some benefit, but is more of the same dictation on how to spend or not spend your own money.

    8. DAve says:

      Certainly it would have made a MILLION times more sense to only allow this program to be applied to the purchase of AMERICAN-MADE vehicles


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    10. Danny,Idaho Falls, I says:

      What Happens when in two or three months, when people who have traded in their old cars, which worked perfectly fine, cannot find the $300.00 or $400.00 to meet their new car Payments ?

    11. Mon says:

      More scary, in original Stimulus Bill, the Commies in Congress & Senate wanted "Cash for Clunkers" to be mandatory.

      As written, government would have confiscated vehichles getting 18 to 20 MPG, ie… Chevy Tahoes, Ford Explorers, family passenger vans…ect… and give owners of confiscated vehichles about $1,600 to purchase a lower milage veichle.

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    13. Jeff Brodhead, WA (s says:

      We drive a 1986 Toyota pickup (23 to 26 MPG) paid $8200 new in '86.

      We also drive a 1979 Volvo station wagon (21 MPG) paid $800 in 2000.

      They have both served us well, but we wish we could afford newer vehicles, mostly for improved safety features. Improved fuel efficiency would be good too.

      Our stupid Feral (spelling intended) Government just spent $1,000,000,000 to scrap a bunch of vehicles, which might have been a significant improvement over what many other Americans are driving now. Next they want to flush another $2,000,000,000. (equiv. to the lifetime income of 2,500 people (working at $10 and 2,000 hours per year, for 40 years), or the lifetime savings of 2,000,000 Americans.)

      Why are they destroying the engines on these "clunkers"? To save the planet (Al Goreism); another farce. This corporate welfare is just one more proof of the Feral Gov. inept handing (or skillful mishandling??) of trillions of dollars, which don't even exist yet.

      All who participated in the "clunker" deal, you have just willingly stepped into the wallow and bellied up to the trough with the DC donkeys.

      I believe every American should turn our back toward Washington DC, in a vote of no confidence.

    14. Tim AZ says:

      This is no different than the banking queens home loan scam. Who will they blame for this one? I guess they will have to blame those greedy car dealers for ridiculuosly high interest rates. How's that hope and change working out for you?

    15. Dave Chelsea, MI says:

      Just like so many other examples of unintended consequences…..with the rallying cry to ensure that the middle class and poor are properly taken care of, this program will INSURE that there are no good used cars available for purchased by those in our society that cannot buy new cars, nor will parts be available to repair the cars the middle class and poor drive now ……. because each clunker is to be destroyed within 48-hrs of turn-in…..Hmmmm – I'm sure our landfills and scrap yards can accommodate this infusion of scrapped automobiles.

    16. Reynaldo/Phoenix, AZ says:

      cash for cars. has any one seen an increase at the mvd for new registrations? is any one keeping an eye on the motor registrations? where did the money go? i haven’t heard of any dealerships selling new cars.

    17. Lloyd Scallan - New says:

      I wonder if Obama's "Cash for Clunkers" will include the "new" jobs created for "the repo man".

      By the end of the year, after the majorty cannot make the payments on that new car, do you think news media will give us the repo numbers? Does "the housing crises" ring any bells.

    18. Rosenlundkv says:

      When will this administration see the fact, that why are they spending our money to pump up sales in Auto of the Government Moters. Why are we spilling more of our money at programs that are a detriment to lowering our national dept?

      It is clear the Obama train has left the station and they are not hearing what the people. It is time to replace every Congresman and Senator who voted for Cap & Trade and is in favor of this Porker.

    19. Ed Fresquez says:

      This Cash for Clunkers is just another way the government wants you to depend on them. You folks who bought and turned in what you thought was your clunker, just signed yourselves on to more debt. Thats what the government wants. Just think, in two to five years these Auto Dealers will be in the same boat. People won't be buying new car's because they can't afford them. And the Dealers will asking the govenment to help save them from financial ruin. The government isn't going to continue this cash for clunkers business. Obama has to many carrots he can put out there knowing that the majority will leap on them like monkeys. He has put this country in one hell of a mess!

    20. Jerry from Chicago says:

      No one in government asked me if I thought this was a good idea. Has anyone out there been asked their opinion of "Cash for Clunkers"? Who do you suppose is providing the CASH?

      Lost your job? Lost your health insurance? Can't pay your mortgage? Can't pay your credit card debt? Can't afford a new car? Can't afford to feed your family? Don't want to go through all the red tape of becoming a citizen? Racist cops giving you a bad time because of your skin color?

      Don't worry, I'm from the government and I'm here to help. We will extend your unemployment benefits. We'll give everybody free insurance. We'll get those nasty banks to re-fi your mortgage, or just let you walk away from loan. We've got lawyers who can help you stiff your creditors out of 85% of what you owe them. We've got Cash for Clunkers. We've got food stamps. We've got Amnesty. And we've got a president who knows how stupid the cops can be when it comes to hassling folks in the community, and he can fix things up over a couple of beers. Just remember, keep voting Democrat.

      There's plenty of rich people out there that we can get to pay for this. Why should these people get to keep all that money? It ain't fair.

    21. Bill, Dallas says:

      Those leftists who grew up in the 60' & 70' were violently opposed to Government. Now that they have taken control of the Democratic Party and have captured the levers of power, they can't get enough Government. "Cash for Clunkers" has replace "Hope & Change". We sure got the change. Now our only "Hope" is a new Congress in 2010. Will the new Newt Gingrich please step up.

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    23. Marc, New Hampshire says:

      This is just a tax cut for people who use it, I thought Democrats said TAX cuts won't help the economy, I guess they are either wrong or too stupid to realize it.

    24. Pingback: NYT Forgets Econ 101 | National Review Institute Blog

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