Under the disguise of “going green” the federal government has introduced a new plan to help out car manufacturers. In case you haven’t already heard, “cash for clunkers” has recently come to an end.
Under the disguise of “going green” the federal government has introduced a new plan to help out car manufacturers. In case you haven’t already heard, “cash for clunkers” has recently come to an end. The program entails trading in any vehicle getting less than 18 mpg and receiving up to $4,500 in tax credit toward the purchase of a new vehicle. To prevent cheating, the program requires that participants must have owned the vehicle for at least one year. While you might think this recent stimulus package is a great idea, it is simply another example of the government believing in the “Broken Window Fallacy of Economics.” In addition to the theory, here are some additional damaging consequences of such a program.
Inflating Short Term Demand
The problem with stimulus is that you need more and more of it to keep the desired effects. Much like a drug addict needs increased amounts of drugs to achieve the same high. Eventually things come crashing down when the stimulus is taken away. Congress is doing precisely this in the automobile industry. Artificially increasing short term demand will hurt auto manufacturers even worse in the long term. Manufacturers will build up inventory to meet increased demand and suffer when stimulus is pulled away. It could also be argued that is practice “steals” automobile sales from the future.
Winners are Foreign
Everyone knows what car manufacturers are most energy conscious. We also know what car companies are based in the United States. Companies like Toyota and Honda are well known for elevated fuel efficiency. So if I told you Toyota was the leading auto manufacturer under the program would you really be that surprised. Toyota is based out of Japan, not the United States. Although Toyota employs many people here in the United States, companies like Ford Motor (NYSE: F, Free Report) and General Motors (NYSE: GM, Free Analysis) probably won’t gain market share.
Clunkers are Destroyed
Every clunker traded in through the program has to be destroyed. Removing products from the market that still possess viable economic value is wasteful. Borrowing money in order to destroy goods that still have life is counter-productive. Of course some of the vehicle’s components are salvaged, but still much waste exists. This doesn’t even account for people looking for used cars. If clunkers are destroyed many people will have trouble finding low cost transportation (cheap used cars).
Affordability
The worst aspect of the program is who is targeted. People who drive clunkers are generally low to middle class individuals. These people drive clunkers because they can’t afford a better car – or simply don’t want a luxury vehicle. By creating a program like this you entice low income individuals into taking on debt to buy a vehicle they likely cannot afford.
What people fail to realize is that having a vehicle is a luxury all together. It doesn’t matter what brand of vehicle you drive or how much it costs. In many countries people cannot afford a vehicle or don’t have roads to drive them on. The very efficiencies congress seeks to improve will actually be hurt over the long term. Congress should quit proposing stimulus programs that are based on the “broken window fallacy” of economics and simply let market forces play out.
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