Failures Mount on Cash for Clunkers

October 7, 2009

It didn’t take a Ph.D. in economics to recognize that the federal “Cash for Clunkers” program would put upward pressure on used-car prices. In nominating it “the dumbest program ever” back in August, Chris Edwards noted that “low-income families, who tend to buy used cars, were harmed because the clunkers program will push up used car prices.”

From yesterday’s Wall Street Journal:

Michael Darrow, an independent used-car dealer, is still feeling pain from Cash for Clunkers. During the summer, he was shut out of the popular initiative, which allowed only new-car franchises to participate. Now, the inventory he normally buys at auction is sharply limited, a direct result of Clunkers sending close to 700,000 gas guzzlers to the junkyard. That’s driven wholesale prices to new highs at a time when cost-conscious consumers, who sometimes rely on dated information from guide books, aren’t paying more.

Chris also noted that the program amounted to colossal destruction of wealth. A recent Wall Street Journal editorial picked up on that theme:

The basic fallacy of cash for clunkers is that you can somehow create wealth by destroying existing assets that are still productive, in this case cars that still work. Under the program, auto dealers were required to destroy the car engines of trade-ins with a sodium silicate solution, then smash them and send them to the junk yard. As the journalist Henry Hazlitt wrote in his classic, Economics in One Lesson, you can’t raise living standards by breaking windows so some people can get jobs repairing them. In the category of all-time dumb ideas, cash for clunkers rivals the New Deal brainstorm to slaughter pigs to raise pork prices. The people who really belong in the junk yard are the wizards in Washington who peddled this economic malarkey.

Those are harsh words, but not unreasonable when one considers the destruction of wealth, the waste of taxpayer money, and the hit to low-income families in the market for used cars.

The Washington Post reported this week that proponents of the hare-brained scheme can’t even claim success for the beleaguered domestic automakers it was intended to help:

After the shopping binge inspired by the government’s “Cash for Clunkers” incentive program ended, U.S. auto sales plunged in September and the industry sunk back to the depths from which it started, figures released Thursday showed… The results raised doubts from some economists about the effectiveness of the $3 billion federal program as a stimulus.

Finally, Dan Ikenson says the results of Cash for Clunkers (C4C) offers a bad omen for the future of government-owned General Motors:

In just the latest example of government policies working at cross-purposes, the president buys a 60 percent stake in GM at a cost to taxpayers of $50 billion (conservatively), and simultaneously supports a mandate—in the rigid CAFE standard—that will severely handicap GM, while assisting the competition. C4C gave consumers the opportunity to express their preferences in the high mileage vehicle market, and GM failed miserably. Consumers of high mileage vehicles prefer Toyotas, Hondas, Fords, Nissans and Hyundais, whose offerings comprise the top ten best sellers list under the program. Not a single GM (or Chrysler) product made the top ten under C4C.

Metaphorically speaking, if the U.S. economy is a car, it’s well past time for the keys to be taken away from the politicians in Washington.


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