The Freedom Minute

Cash for Clunkers: Success or Failure?

As the “cash for clunkers” program came to a close this past week, government officials fell all over themselves declaring what a huge success the program has been. “This is one of the best economic news stories we’ve seen, and I’m proud we were able to give consumers a helping hand,” gushed Transportation Secretary Ray LaHood. The positive spin is certainly not surprising considering the federal government just spent $3 billion of your tax dollars (or more correctly, added $3 billion to the national debt which will have to be paid back, with interest, from future tax revenues). And when they pony up that kind of coin, we’re certainly not going to hear anything coming from Washington other than the sound of our elected officials patting themselves on the back. True, if you’re one of the roughly 700,000 who were able to take advantage of the government’s largess, it’s likely you consider the program a success as well. And who’s to blame you. It’s not often you can get the government to reallocate $4500 of someone else’s money to you so you can buy a new car.

But those of us who understand that there is no free lunch realize that when the government engages in this kind of economic sleight of hand, there is always something on the other side of the equation, hidden from view, which balances out all the “benefits”. Plus, we’ll have to deal with all those pesky unintended consequences which always occur. So let’s take a look at the entirety of the cash for clunkers program and see whether or not it really was a good deal for America.

On the plus side, we’ve got:

1. About 700,000 new cars sold which helped boost the automakers’ bottom line, at least temporarily.

2. The new vehicles purchased through the program had an average fuel efficiency increase of 58% over the average mileage of the vehicles which were traded in. On the surface, it might seem as though this will help reduce our dependence on foreign oil and be good for the environment.

Not so fast. Let’s look at the other side of the equation.

1. The increase in auto sales was only temporary and will do nothing to help the automakers in the long run. Indeed, recent data shows that there will certainly be a huge drop off in sales now that “clunkers” has ended. Auto research firm Edmunds.com describes the coming decline in sales as “a painful hangover” likely to affect dealers in the coming weeks. According to Edmunds Senior Analyst David Tompkins, PhD., “Current purchase intent is down 50 percent from the Cash for Clunkers peak, and down 11 percent from the June average. Day by day, intent is slipping: Sunday activity was down 21% from Saturday, then Tuesday activity was down 16 percent from Monday.” So all the government ended up doing was creating a temporary artificial demand that will soon correct itself. No one really gained anything. In fact, as I explain below, we’re actually worse off now.

2. Of consumers who participated in the program, a much larger than normal percentage are experiencing “buyer’s remorse” about their purchase. As the L.A. Times reported Friday, “CNW Marketing Research Inc., which tracks consumer buying habits, said a survey of 1,000 cash-for-clunkers participants found that 17% had doubts about their purchase of a new car, primarily because of the $275-to-$350 monthly payment they’re now facing.“ So Washington may now be responsible for a large number of Americans having over extended themselves once again. Did our politicians learn nothing from their ill fated attempts to entice everyone to buy a home, even those that couldn’t afford it? Apparently not. And as we saw with the housing market, the creation of an artificial demand for new cars caused the prices of those vehicles to increase. As CNNMoney.com reports, “During the weeks the Clunkers program was in effect, buyers of the Toyota Corolla paid 29% closer to the full sticker price than before the program started. Ford Escape prices were 13% closer to full sticker, and Ford Focus prices were 12% closer.” So those participating in the program may not have gotten as good a deal as they thought, and those that didn’t qualify but purchased a new car anyway definitely did a lot worse. And this price imbalance will continue for the next few months until inventory levels readjust to where they should be based on actual consumer demand.

3. As I suggested above, the $3 billion to pay for this program has to come from somewhere. That somewhere is tax dollars. And as anyone who understands basic economics will tell you, every dollar that is taken away from consumers in taxes, is one dollar less that is available to be spent or invested in other areas of the economy. That’s a dollar less to be spend on clothes, or food, or entertainment, or any of the countless other things that individuals might choose to spend their money on and grow our economy. But, of course, we’re not talking about one dollar, we’re talking about three billion dollars. Now if you’re tempted to think that this was an even trade-off, you’d be wrong. The reason is that there is a cost to collecting those tax dollars and administering the programs. Furthermore, we don’t currently have these tax dollars, we have to borrow them and pay interest on them. Think about the interest on $3 billion. But that’s not the worst of it. The worst part is that the government decided how best to spend this $3 billion. That might not have been the most efficient use of that money. In fact, it’s almost a guarantee that it wasn’t. No government bureaucrat, no matter how smart or well intentioned, can do a better job of deciding how to spend that money than the individuals from whom the money was taken from. Those thousands or tens of thousands of individual purchasing decisions would have, in the long run, produced a better economic outcome and we would all have been better off. Simply put, if those billions of dollars were best spent on buying cars, then that’s how individuals, making their own personal choices, would have spent them.

4. While the new cars on the road might use less fuel and produce less harmful emissions, consider the environmental impact of having to dispose of all the “clunkers” that were traded in. Whatever environmental benefits we may gain from better fuel mileage, we undoubtedly will lose in additional energy usage or environmental damage in disposing of the old vehicles. As any good environmentalist will tell you, in the mantra “reduce, reuse, recycle”, the most “green” of the three is reuse. Also, since many of these vehicles had some useful life left in them, disposing of them prematurely constitutes waste, and waste translates into a reduction of wealth. So, in addition to the economic costs described above, thanks to the waste created by this government program, our society as a whole is less wealthy now.

So was “cash for clunkers” a success? I hope you now know the answer to that question. And I hope you remember it as our politicians concoct their next scheme that purports to give us something for nothing. New refrigerator anyone?

August 29th, 2009 Posted by freedomminute | Federal Government, Libertarian Philosophy | 6 comments