My Thoughts on "Cash For Clunkers"

Alan S. Blinder wrote a piece for the NY Times, in which he suggests the government buy up old vehicles ("clunkers") and scrap them in order to stimulate the economy, help the environment, and improve income inequality.

I'd like to comment on some of his main points. He writes that this plan will produce:

A CLEANER ENVIRONMENT The oldest cars, especially those in poor condition, pollute far more per mile driven than newer cars with better emission controls. A California study estimated that cars 13 years old and older accounted for 25 percent of the miles driven but 75 percent of all pollution from cars. So we can reduce pollution by pulling some of these wrecks off the road. Several pilot programs have found that doing so is a cost-effective way to reduce emissions.

The first thing I'd like to point out is that since government receives its funds from taxation (or inflation), there is no way to know if this would be cost-effective.

There are, however, groups of individuals in our society that do risk their own funds and can calculate profits/losses: Private Enterprises.

This country is teeming with private entrepreneurs searching for profitable opportunities. Why aren't they getting in the business of buying "clunkers" and then destroying them? If we saw such activity, and then examined the balance sheets, we'd know if this is a cost-effective venture. If the profits were large enough, we'd also know that there is a large demand for such a business. We'd know that this is what people actually desire.

The next benefit according to Mr. Blinder is:

MORE EQUAL INCOME DISTRIBUTION It won’t surprise you to learn that the well-to-do own relatively few clunkers. Most are owned, instead, by low-income people. So if the government bought some of these vehicles at above-market prices, it would transfer a little purchasing power to the poor.

Right away we can see another strike against cost-effectiveness. Already the government would be paying above-market prices...for something that is going to be destroyed!

Another error that I see is the suggestion that this would "transfer a little purchasing power to the poor." Unfortunately, the poor are the hardest hit by inflation. The best way to help them would be to stop inflating.

The final benefit that Mr. Blinder sees with this plan is that it would be:

AN EFFECTIVE ECONOMIC STIMULUS With almost all the income tax rebates paid out, and the economy weakening, Cash for Clunkers would be a timely stimulus in 2009. As was made clear during the Congressional debate last winter, prompt spending is critical to an effective stimulus program. And the quickest, surest way to get more consumer spending is to put more cash into the hands of people who live hand-to-mouth.

This is precisely the opposite of what needs to happen in order to return the economy to health. During a recession, the malinvestments created by the previous inflation need to be liquidated. Capital must be transferred to more profitable hands (that is, to those who are succeeding at filling consumer demands). Prices need to come down, and individuals need to save....not keep spending. Right now, the people of Zimbabwe are proof that putting cash in the hands of people who live hand-to-mouth is not the answer.