Cash For Clunkers: Victims Of Their Own Success?

Posted on Sat 08/01/2009 by

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By Nick Loris

cash_for_clunkers090731Cash 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 adversely 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.

Contributing Author Nick Loris writes at The Heritage Foundation and he is a Research Assistant at The Heritage Foundation’s Roe Institute for Economic Policy Studies.

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