Economics:
Economics in Many Lessons 3: Cash for Clunkers = Bust
-An article by your hero, Nero
Cash for Clunkers (or if you actually prefer it’s real name the Car Allowance Rebate System) ushers in a new age for our weak and struggling economy. No, no, not a golden age. Rather imagine a more weak, inefficient, and depressing one. Because despite the raves that the mainstream media is giving to the program it is indeed not a godsend but in fact another “sounds good on paper” scheme to “stimulate” our grieving economy back into action. It does no such thing and in this lesson I would like to debunk this mythic idea that Cash for Clunkers (or CFC) is doing anything to help our economy and to show how it is in fact going to hurt it.
Now CFC in a nutshell is this: if you have a car that gets poor gas mileage (around 16 mpg or less) you can trade in your “clunker” for a better car that gets a better average (around 24 mpg) because the government will kick in an extra incentive of 3500-4500 dollars to the dealer for the trade. The government believes this is a win-win situation: you get a new car that doesn’t guzzle as much gas and the hard-pressed dealers sell more cars keeping their businesses afloat. The media believes this to be the case because demand for the program was so high: a program that was funded to run for a few months ran out of cash in 4 days forcing the government to quickly fund it an additional 2 billion dollars. Apparently everybody wins and nobody loses. Ridiculous.
This premise of CFC being beneficial is false for many reasons the first of which being who is in fact paying for this program: we are. The media and every apparent leftist in America have praised CFC because car dealers apparently sold more cars in 4 days than they had in collective months this year. This raises the question: Why the hell wouldn’t they? If the government is handing free money to people in the form on another bogus “stimulus measure” would we not expect people to rush out and buy cars. If I walked into a Best Buy with only enough money to buy one PC game but someone came up to me and said, “Here’s some free cash, buy more stuff” wouldn’t I go out and buy more stuff? Of course I would. But it wouldn’t actually create demand just as CFC isn’t either. Why? Because the money used to fund the CFC program is paid by OUR TAX DOLLARS, tax dollars the government will eventually get back by levying a HIGHER TAX in the future. A higher tax will do what every tax does: encourage inefficiency, decrease our GDP and lower growth, and encourage businesses to flee overseas. In other words we will have to pay this money back later and the bite that this future tax will cause will outweigh the benefit of CFC on the grounds that the tax will affect everyone, where as car dealers are the only ones benefitting now.
I also encourage you to keep in mind that the spike in car sales only lasted for the few days that the program was funded. The second the money ran out, what happened? Car sales went plummeting back down. This is also bad because this short burst of unrealistic growth helped bad businesses stay afloat a little while longer while it would actually be in the economy’s best interest that they fail in order that their resources (i.e. the people working there) could in fact find more productive jobs that would help the economy grow. But of course the government keeps the idea alive that we must prevent bad businesses from failing because bad businesses are apparently really good businesses. Apparently.
Another problem with a program like CFC is that people back it on the grounds that there is a long term benefit to our economy: more people will be buying fuel efficient cars and thus lower our demand on foreign oil causing the price of gasoline to drop. While this idea is actually true it’s been misconstrued, I in fact believe this will be the SHORT TERM effect of CFC and the LONG TERM will be entirely different. I believe in the long term the price of oil won’t change period. Why? Because every time the government has upped the MPG requirements for cars people who buy these cars end up driving more, not less. Again think about this situation: when gasoline reached over four dollars a gallon last year you probably cut down on the amount of driving you did because you didn’t have the cash to keep up the habit. What did this do to the price of oil? There was a minimal drop. Where I lived I watched it drop from about 4.09 to 3.87 a gallon, a meager 22 cents. But what happened when the recession caused gasoline prices to drop back down below two dollars? I assume you (and pretty much every other American) started to drive MORE because you could now afford to do so. But what did this do? It caused you to consume MORE gasoline, not less, and even though our economy has not completely recovered from the recession we have already seen gas prices go back up close to 3 dollars mainly based on the increased demand of more people driving and consuming gas.
What point am I trying to make here? I’m saying that while the short term effect of these cars could lower demand on oil in the long term they could possibly increase our demand on oil because people will be willing to drive more with better mileage and will consume more gas. I simply think it misleading to assume these cars will magically help drop the price of gas in America and think that they could even increase it.
One more problem I foresee of this program that not many people realize is what I feel to be a pretty obvious one: we are destroying cars that, while inefficient, are still usable and can still serve a purpose. That fact that we are destroying these cars is a waste of resources for two reasons: 1. Because it forces us allocate resources for cars (like steel) that wouldn’t have had to have been used if we hadn’t destroyed them and 2. There are still people in this country that would love to have the ability to buy a cheap clunker. Many poor people is the USA could probably benefit from purchasing a clunker for only a few thousand dollars, people who can’t afford the new fuel efficient cars even with the free government trade in offer. We’re destroying cars that don’t actually need to be destroyed yet and are wasting resources building new ones. Seems rather illogical when you think about it.
Ialso have a problem with the production of these new cars. Keep in mind the processes that go into constructing cars cause pollution and the burning of fossil fuels themselves: by constructing a ton of these new cars we may not even be decreasing our carbon footprints at all. Again, this would make the program pointless. (SEE EDITOR NOTE BELOW -1)
I think Cash for Clunkers represents another scheme of the government to intervene in the free markets of this country, intervention which will cause more harm than good. This program is a waste of money that we will need to make up later and the American tax payers that aren’t going to benefit from buying a new car should feel rightly pissed if they have to reimburse the government for a program they didn’t want or didn’t take advantage of in the first place. This program succeeds in keeping bad businesses alive and preventing our economy from naturally recovering and any American who understands the basic ideas of what money does would do right to tell their elected officials to stop voting more funds to this idiotic and wasteful program.
TU NE CEDE MALIS
1) I looked into the energy costs for rebuilding a vehicle and there were several estimates. I found general estimates to be at 2% of the cost of manufacture. A rule that seems popular is to say that the energy cost in manufacture is approximately equal to an entire years worth of fuel. However, we are looking at the difference in gas efficiencies and the fuel you save in changing over to a new vehicle. If we consider the example above, adding about 8 miles per gallon by moving into a car with 24 mpg, it stands to reason that you would need about three years to reclaim the "energy cost" necessary for manufacture. Admittedly this is a crude estimate, however its probably within the ballpark. Just thought everyone might like an idea. - ED