August 12, 2009
Cash for Clunkers: Free Morphine for Pain
Total up the costs and the benefits of the cash for clunkers program -- it is nuts. The government is borrowing $3 billion at 3.5% to buy old cars, will the government get a return of over this (4% on the 3 billion)?? No. Tax revenue is highly unlikely to increase that much just due to the program. The benefits: An illusory temporary stimulus of the car industry and an insignificant affect on CO2 emissions and on the use of gasoline. The stimulus of the car industry is illusory because -- pick one -- it is temporary (once the program goes away so do the "new jobs" at dealorships, if any), people will not buy other goods, people are buying foreign cars over American cars, people are buying cars they will not buy in the future, people are buying cars they do not prefer because inventories of wanted cars (Toyota Fit) are stretched. Economists have long noted that temporary stimulus cash grants are pointless; people take the cash and resume their pre-stimulus behavior. Scientists have calculated the CO2 reduction and gasoline reduction as peanuts because of its small size and the fact that people will use the new cars more than the old ones (due to cheaper cost per mile). The costs are understated. Not only is the government borrowing money for the program that it does not have and will not have for decades, it is destroying valuble assets (the old cars, running and usable are destroyed), it is driving up the price of older cars for low enevel users, it is driving up the price of parts for the repair of older cars, and it is encouraging a bailout out mentality among the general population. To make the point, suppose the government decided to buy and destroy all homes on which the owners had defaulted (to stop blight). The destruction of valuable assets adds to the cost of the program. The government is just giving free morphine to people in pain; it masks the symptoms for a while and when the gifts are over the pain returns, more severe perhaps.
August 12, 2009 | Permalink
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