no third solution

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Cash For Clunkers Program Ran Out of Money

July 31st, 2009

After less than a week, the government has pulled the plug on the cash-for-clunkers program, a part of the Auto Industry Bailout designed to encourage people to scrap their old, fuel-inefficient vehicles in favor of a large credit (up to $4,500) towards the purchase of a new, fuel-efficient vehicle. The program has been suspended because of fears that the $1 Billion allocated to it have been exhausted.

The U.S. government plans to temporarily suspend its “cash for clunkers” incentive program because Obama administration officials believe its $1 billion budget has been exhausted after just one week, said several congressional officials.

I am not particularly sad to see it go — sure, it happens to be several orders of magnitude smaller than the bailouts given to the banking industry, but it’s no less reprehensible. I’m just as surprised as anyone that the plan “worked” as well as it did.

From the start, I was very skeptical of this program: I just didn’t understand why people would be willing to turn in a serviceable vehicle (albeit, an old one) for a brand new one. On the surface, it sounds nice, but brand new vehicles also have brand new vehicle payments — $400/month or more. A clunker has zero monthly payment, although some allowance needs to be made for maintenace.

I also took issue with the program, as a combination of some of the most heinous economic fallacies. First, most people don’t pay cash for new cars, even with a nice big government subsidy to dampen the price. Most people finance new cars, which means they take on debt. And debt is kinda-sorta the root of the current economic crisis: adding to that shitpile isn’t going to (in the long run) be in anyone’s best interest.

Furthermore, the broken window fallacy is at play here. When I first heard that the vouchered vehicles needed to be scrapped after trade-in, I was immediately reminded of the farm policies during the great depression:

The [Agricultural Adjustment Act] immediately set out to slaughter six million baby pigs and reduce breeding sows to reduce pork production and raise prices. Since cotton plantings were thought to be excessive, cotton farmers were paid to plow under one-quarter of the forty million acres of cotton to reduce marketed production to boost prices.

Raising prices, or implementing policies intended to keep prices high when people are losing jobs hand-over-fist, and when people don’t have money or are reluctant to spend it, is the completely wrong thing to do. It is the destruction of an abundance of goods (i.e., affordable) at a time when people need affordable goods. Forcing people to destroy an otherwise functional piece of equipment impoverishes society. Every “clunker” that they scrap is a “clunker” that some poor college kid or some less-than-well-to-do person can no longer buy.

Artificially propping up automobile prices by destroying old vehicles, and subsidizing the purchase of new ones (with taxes and debt) is no different than artificially propping up agricultural prices by slaughtering baby pigs and plowing under the fields. It does not benefit the average consumer today, who gets shafted with a load of debt and unreasonably expensive goods, any more than the farm policies of the AAA and NRA benefitted the average sharecropper in the 1930s.

However, I suppose it illustrates that there will always be people willing to take a free-ride on someone else’s dime.

no third solution

Blogging about liberty, anarchy, economics and politics