For Pure Dumbness, Cash for Clunkers is #1
As the Cash for Clunkers program begins to wind down, Cato's Chris Edwards nominates it as the dumbest government program ever.
Originally posted at Carpe Diem.
CARPE DIEM
Professor Mark J. Perry's Blog for Economics and Finance
Saturday, August 22, 2009
Originally posted at Carpe Diem.
About Me
- Name: Mark J. Perry
- Location: Washington, D.C., United States
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
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18 Comments:
Guest posting on a left-ish blog, I have a commenter who argues the "sugar high" makes it all worthwhile for stimulus.
I think that's wrong, but articulating why is out of my league. Could someone help clue me in?
This is a dumb posting...example:
His first point is totally wrong:
"A few billion dollars worth of wealth was destroyed. About 750,000 cars, many of which could have provided consumer value for many years, were thrown in the trash. Suppose each clunker was worth $3,000 at a guess, that would mean that the government destroyed $2.25 billion of value."
Dealers don't have to junk cars! If they have value, they will be resold.
They can be resold for parts, everything but the engine. But the engine is the most valuable part. And cars have less value when junked for parts than they did when assembled.
So no, not totally wrong.
please correct me if i'm wrong on this.
i see that you think cash for clunkers is a bad idea. ok, might be. i think the idea was to get high mileage cars off the road and stimulate auto sales. i have no opinion on this program.
but i don't think i've seen any postings on the $8,000 first-time home buyers tax credit. all i see are posts hyping the turnaround in residential real estate sales (most likely helped along by said tax credit). i have no opinion on this program.
do you like the real estate industry more than the automotive industry? is it because the automotive industry is unionized?
just curious
Social Security may be a close second. I'm sure, many have been brainwashed into believing Social Security is a godsend. If you invested your Social Security money in an individual account instead, over 30 or 40 years (e.g. in mutual funds or ETFs), you'd retire with a monthly check several times larger than what you'll get from the government (which could be taxed to help the poor). Hedge fund manager Bernie Madoff went to prison for performing like Social Security.
From article:
Social Security does not make any real investments -- it just takes money from later "investors," or taxpayers, to pay benefits to earlier, now retired, taxpayers. Like Ponzi, Social Security will not be able to recruit new "investors" fast enough to continue paying promised benefits to previous investors. Because each year there are fewer young workers relative to the number of retirees, Social Security will eventually collapse, just like Ponzi's scheme.
"but i don't think i've seen any postings on the $8,000 first-time home buyers tax credit"...
Nice try bobble...
I've made several of them with links in response to something you commented on...
Cash for Clunkers used extorted tax dollars to bribe foolish people into buying boxes on roller skates...
Maybe there will be a hidden payoff in 15yrs? ...the era when all the clunkers in 2024 will get 25-30mpg on average. ha.
Can anyone point out the original rationale for cash for clunkers? Where did that $4500 figure even come from?
The $8,000 homebuyer credit is also a bad idea, though obviously not as stupid as the cash for clunkers since it doesn't require you to, say, destroy an old house to get the credit.
SS is not an investment scheme. It's an insurance scheme. Thus you will obviously get less than you paid in, unless you are one of the very poor who "cash in" on the insurance. Similarly if you get life insurance but don't die during the term, it's not all that great.
Dealers don't have to junk cars! If they have value, they will be resold.
Actually, they can't be resold. The most valuable parts, the engine and transmission, cannot be resold. The program uses borrowed money and tax receipts to pay people to destroy vehicles that have value.
If I may, I think that you might benefit from reading up on basic economics. The excerpt below is a chapter from Henry Hazlitt's excellent book, Economics in One Lesson:
_______________
The Broken Window
A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sun. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace the window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
_______________
People who are ignorant of economic knowledge love programs like the cash for clunkers fiasco because they do not account for what is not seen. While they see a benefit as the Ontario Toyota plants sell more vehicles to American consumers they do not see the fact that the local garage has less work because cars that would have been repaired have been taken off the road. While they see Avis get a better price for its used cars they do not see that consumers that could only afford a clunker see their prices increase because of the destruction of supply. While they see dealers see their receipts increase they don't see charities, which sold donated cars see their receipts go down. And so on, and so on, and so on,...
I am sorry my friend but destroying value is never a good idea, particularly when the nation that is choosing to destroy value is bankrupt.
VangeIV,
Excellent post. Unfortunately, most people in this country, especially those who voted for Obama, are absolutely ignorant of economics. All they want to do is be told by their political elites in their party to blame everything on capitalism.
Gherald, I would take on either the Great Depression comparison, such as pointing out that GDP went up last year vs. 2007. Or even easier, go after this statement of Terra's:
"The post written here is what makes bubbles, this is what causes depressions, not what keeps them from us. We are a people full of greed, which creates these fake amounts of money in our market place. This makes the market crash, and thus causes these problems."
Let's see, not programs like these leads to fake amounts of money and this program using borrowed money leads to ...
And the biggest bubble of them all - housing. There was no artificial government support and interference there? Interest deduction, government coerced lending, government guarantees for Fannie Mae and Freddie Mac, extremely low interest rates for an extended period.
Luckily she later tells us which form of greed is the good greed. Apparently other people's greed - bad, her greed - good.
"I don't care what is changed... as long as my personal problems are fixed."
Unfortunately, most people in this country, especially those who voted for Obama, are absolutely ignorant of economics.
Sadly, most voters fall into the partisanship trap. For some reason they see the other party as ignorant of something or another without realizing that their own view cannot be supported by facts or logic. In the US (as in most countries) the major parties are run by a corrupt elite with no interest in helping the consumer and taxpayer but in enriching the special interests that keep them in power.
The Republican Party and the Democratic Party are both corrupt and incompetent. Sadly, things will not improve until their monopoly on power is taken away and other parties are able to compete on an even playing field. Ron Paul did a lot of good by getting his ideas out but a lot more is needed if the currency and the country are to be saved.
Andy says:
"SS is not an investment scheme. It's an insurance scheme."
It's a Ponzi scheme. Income producing immigrants are needed to keep it going.
Seconding Peak Trader, Andy. Insurance provides protection against unforeseeable events. Retirement is very foreseeable, especially from an actuarial point of view. SS is an inter-generational income/wealth re-distribution scheme.
Gherald, I would take on either the Great Depression comparison, such as pointing out that GDP went up last year vs. 2007.
I would be really careful here. The official statistics are so dependent on methodological tricks that it is easy to be confused about what is really happening. It might help you to take a look at John Williams' plot of the alternate data series, which uses the old methodology and shows that the real US economy has been in recession for most of the past nine years.
Although cash for clunkers did stimulate some new car sales, it did at the expense of used car dealers, car repair shops, car parts stores, car donation charities and the poor. These negatives could have been eliminated if the c4c cars were given to charity as requested. Cars that were in poor shape would have junked by the charity. However, those in good shape would have sold or given to the poor.
Cars that were in poor shape would have junked by the charity. However, those in good shape would have sold or given to the poor.
Or we could have sent them to Cuba where Cuban citizens would have been able to uprgrade the vehicles that they currently use. The goodwill generated would make it easier to establish commercial relations once again and push the Cubans to ditch their failed system.
"Can anyone point out the original rationale for cash for clunkers? Where did that $4500 figure even come from?"
Exactly They think that any car worth less than $4500 is junk? sure it is a was a way for some to get a lot more money for their car than it was woth but i dont agree with it!! I work at GM and I dont like seeing cars I helped build getting destroyed, it seams like a waste to me!! It did not help the workers in the auto industry, because in a few months we will be back where we were a few months ago! Thats just how it is!
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