Monday, October 05, 2009

Cash For Clunkers: One Of Washington's All-Time Dumb Ideas?

How does destroying assets create value?

The basic fallacy of cash for clunkers is that you can somehow create wealth by destroying existing assets that are still productive, in this case cars that still work. Under the program, auto dealers were required to destroy the car engines of trade-ins with a sodium silicate solution, then smash them and send them to the junk yard. As the journalist Henry Hazlitt wrote in his classic, “Economics in One Lesson,” you can’t raise living standards by breaking windows so some people can get jobs repairing them.

In the category of all-time dumb ideas, cash for clunkers rivals the New Deal brainstorm to slaughter pigs to raise pork prices. The people who really belong in the junk yard are the wizards in Washington who peddled this economic malarkey.

(HT Don Boudreaux)


thinking said...

First, the report cited in the article is by the Hudson Institute, which is a very conservative think tank. It's not exactly objective.

BTW, Dan Quayle and Henry Kissinger are 2 of its supporters. Their funding ties to some big corporate interests have raised doubts as to their credibility.

I do agree that the program was a very temporary stimulus.

The article states rather amazingly that "Some 700,000 cars were sold in the summer under the program as buyers received up to $4,500 to buy a new car they would probably have purchased anyway..."

This is a totally faulty assumption, undergirded by the basic theory of supply and demand. The subsidy did lower the effective price and thus attract buyers into the market who otherwise would not have purchased vehicles. I know of at least a few people myself who made a purchase they otherwise would not have made for at least a few years, if at all.

There are stories out there of families who realized a significant upgrade in vehicle who otherwise would not have been able to.

thinking said...

BTW, where was the Hudson Institute and the Wall Street Journal when the Bush administration was spending far more money on the war in Iraq, etc?

Cash for Clunkers may have its flaws, but I'll take it over the devastating price tag of the Iraq war any day.