Why Should We Cash in Our Clunkers?

August 28, 2009--A few days before the Car Allowance Rebate System (CARS), better known as the “Cash for Clunkers” program, was brought to an end on Monday, August 24, President Obama said that it had been “ successful beyond anyone’s imagination .” With rebates of either $3,500 or $4,500 up for grabs, approximately 700,000 gas guzzlers were traded in for more fuel-efficient models. While there has been some noise about the U.S. Department of Transportation being slow to reimburse car dealers, and some protectionists complaining about purchases of foreign vehicles, supporters are nonetheless hailing the program’s results as a boon for the environment and for the economy.

In reality, although CARS was certainly popular, how successful it was is open to debate. The benefits to the environment will be meager at best—and expensive, too, with a $3-billion price tag. As for the economy, the only way one can call this program beneficial is to ignore the substantial costs associated with it. Unfortunately, for many politicians and pundits, ignoring costs is as natural as driving to work in the morning.

The Broken Windshield Fallacy

Setting aside the environmental question for the moment, let me address the curious but popular notion that the Cash for Clunkers program has been good for the economy. Even Larry Kudlow , a self-described “free-market capitalist,” likes the program because, he says, it is one part of the stimulus package that is actually working. He makes the typical argument that increased demand for cars will lead to increased production and therefore more good jobs, “something we desperately need.”

This line of thinking is seductive, but misleading. First of all, any money the government spends to stimulate the economy has to be taken from taxpayers who would have spent the money some other way. Boosters of programs like CARS see the increased economic activity resulting from government spending, but ignore the decreased economic activity resulting from higher taxes. Once the transaction costs and inefficiencies of collecting taxes and distributing rebates are factored in, it is clear that less money is pumped into the economy than was taken out of it. So less, not more, economic activity takes place.

Some object that taxpayers sometimes save their money instead of spending it, resulting in less economic activity. But unless it is kept under a mattress, money saved by one person is money borrowed and spent by another, so this is no argument at all for government spending.

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With rebates of either $3,500 or $4,500 up for grabs, approximately 700,000 gas guzzlers were traded in for more fuel-efficient models.

But Cash for Clunkers is actually worse for the economy than your average stimulus program because the cars that are turned in are destroyed. The program’s official website states, “The CARS Act requires that the trade-in vehicle be crushed or shredded so that it will not be resold for use in the United States or elsewhere as an automobile. The entity crushing or shredding the vehicles in this manner will be allowed to sell some parts of the vehicle prior to crushing or shredding it, but these parts cannot include the engine or the drive train.”

Now, if it were beneficial to the economy to destroy some cars, wouldn’t it be even better to destroy all cars? That would create even more demand, stimulating the car industry to even greater heights! While we’re at it, let’s burn down all of our houses too, and give the construction industry a real boost.

Whatever the purported environmental benefits, destroying useful things is not good for the economy. Frederic Bastiat illuminated this seemingly obvious fact over 150 years ago in That Which Is Seen and That Which Is Not Seen . The Broken Window Fallacy, described in the very first chapter of that work, is the error of looking only at the benefit accruing to glaziers from the repairing of broken windows. But not only is the money spent paying the glazier not spent buying a pair of shoes—thus depriving the shoemaker of income—the person paying for the window is also less well-off, as he does not have the pair of shoes he wanted.

CARS is essentially a program for breaking windows (cars) for the benefit of glaziers (car dealers and manufacturers), complicated slightly by the fact that a third party (the taxpayer) is footing the bill. But the value of the destroyed vehicles represents a deadweight loss to the economy as a whole. This deadweight loss must be added to the transaction costs and inefficiencies of taxation mentioned above.

Half the Bang for Twice the Bucks

As there is no economic justification for the Cash for Clunkers program, supporters must fall back on its environmental benefits. An ABC News report suggests that the program will save approximately 12,000 barrels of oil a day . This might sound like a lot, but since the U.S. consumes around 9 million barrels of oil a day, this represents a reduction of just 0.13%. Is this a good way to spend $3 billion?

University of California, Davis, economist Christopher R. Knittel studied the benefits and costs in terms of carbon dioxide reductions.  He calculated that the cost of the program per ton of CO₂ reduction could be well in excess of $500. His best case scenario calculation was $237 per ton. How bad is this? Knittel writes, “The CBO [Congressional Budget Office] recently projected the allowance prices under the Waxman-Markey cap and trade program would be $28 per ton.” This means that even under the best case scenario, CARS was almost ten times more expensive than getting the same reduction in carbon emissions through the mechanism proposed in the Waxman-Markey Bill.

There are many debates to be had over environmental issues. Air pollution in particular is admittedly tricky for markets to deal with, since the harm it causes is so diffuse. It therefore invites government regulation to correct so-called “market failures”. But even assuming for the sake of argument that carbon dioxide qualifies as a dangerous pollutant, what CARS demonstrates more than anything is just how wasteful government “solutions” can be. For both the economy and the environment, the inescapable conclusion is that this program was a real clunker.

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