Cash for car-wrecks — VOICES for REASON

A favorite cliché of coming-of-age movies is the irresponsible teenager taking the family car for a joyride without his parents’ permission. The climax is invariably a spectacular car-wreck, with the car totaled beyond repair. In such movies, the parents usually ground their children for the harm they have inflicted on the family by destroying its perfectly good car.

But if one believes the economics behind the government’s popular “Cash for Clunkers” program, these parents should be rewarding their children instead; it turns out that destroying cars “stimulates” the economy.

“Cash for Clunkers” just ended on Monday, as it finished gobbling up its $3 billion budget. But even though it is over, for now, its economics remain popular — witness the “cash for refrigerators” program discussed here — and thus those economics are important to expose.

“Cash for Clunkers” paid $3500-4500 to Americans who agreed to destroy their older, less fuel-efficient cars and buy new, more fuel-efficient cars. Though part of the justification for this program was to put more “green” cars on the road, the main justification was that it “stimulated” the economy by encouraging spending by cash-strapped consumers — who might otherwise save money or pay off their debts in these difficult economic times. That spending, in turn, would generate much-needed revenue for American automakers.

But let’s look concretely at what this program is doing to real wealth in the economy. Let’s say someone has an old-but-reliable pickup truck with 100,000 miles on it that may sell for $1000. The car could perhaps be driven for 100,000 more miles with inexpensive maintenance. “Cash for Clunkers” pays the owner an average of $4000 to destroy it. Check out this video of a perfectly-good Volvo being wrecked.

Now consider that with $3 billion in “Clunker” checks being written for an average of $4000, that means some 750,000 cars are literally being destroyed. It’s as if President Obama paid 750,000 teenagers to wreck their parents’ cars beyond all recognition. By what verbal economic manipulations can this possibly be productive?

Some economists would say there’s an upside to these 750,000 destroyed vehicles — that the $4000 in spending on replacement vehicles stimulates the economy. But that $4000 isn’t some new wealth created by the government — it is wealth forcibly taken from someone who earned it, and then used to fund destruction. No person or business in their right mind would pay $4000 of their hard-earned money for someone else to wreck his car, but this is precisely what “Cash for Clunkers” forces him to do.

To return to the movies, it is as if a teenager wrecks the family car — then makes it up to his parents by stealing $4000. Granted, that would be a pretty bad movie. But it is far worse economic policy.

(For more on the fallacious reasoning behind “Cash for Clunkers,” read Henry Hazlitt’s classic Economics in One Lesson, where he dissects those who make the claim that breaking windows rather than cars is good for the economy.)

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