‘Cash for clunkers’ was an even bigger clunker than we first realized

When I first heard about the “cash for clunkers’ program two years ago, I thought it might be satire. It sounded too much like a real-life example of Bastiat’s broken window fallacy to be real. But the politicians really were that stupid.

In case you don’t remember, the program was sold as a way to help the economy and the environment at the same time. The idea was to get people to bring in their used cars and buy new ones — with the government giving $3,500 credit on each deal. Selling new cars was supposed to stimulate the economy, and getting newer cars (getting slightly better gas mileage) was supposed to help the environment. Just don’t think about details such as cost and possible unintended consequences.

Taxpayers ended up spending about $3 billion on the program. How did it work out? A new study suggests that it was a waste of money. (Get a PDF of the study here.) The paper estimates that nearly half of the money went to people who would have bought a car even without the taxpayer subsidies. It also suggests that the program increased average fuel efficiency in the country by just 0.65 miles per gallon.

There are two issues that don’t seem to be mentioned often enough in the context of this program. One is about pure waste. The other is about the harm the program had on low-income families.

On the issue of waste, the cars that were traded in under this program couldn’t be sold by dealers. Instead, they legally had to be destroyed. The government even prescribed the specific method of destruction. You can read more about that and see a video of a perfectly good Volvo being destroyed here. So for each car that came in to dealers, the value of that car was completely and permanently destroyed — on purpose. It was an insane waste of money. It was just like breaking windows so glassmakers could have work. Did the politicians never read Bastiat?

While this program was going on, I was friends with someone who sold cars for a large car dealership. She explained to me in great detail what really went on. As soon as middle-class people started bringing in their used cars to trade up — at taxpayer expense — an unintended side effect started showing up. The people who can only afford inexpensive used cars — the sort of people who government claims to want to help — suddenly couldn’t find cars to buy. This program sucked about 360,000 cars out of the used car market. All of a sudden, there weren’t enough used cars to go around. Prices for inexpensive used cars skyrocketed and some couldn’t find anything at all to buy — simply because government mandated that those 360,000 cars be destroyed. The market for used cars was totally distorted, and it was the poorest part of society who paid the price.

Politicians distort markets whenever they try to push reality in one direction or another. They’re arrogant to believe they know what the market needs. That’s why we end up with idiocy such as “cash for clunkers” and why poor people end up hurt while the rest of the people pay the bill. That’s why we end up with policies that give people incentives to buy houses that they can’t afford, setting everybody up for failure. That’s why we have a planned and managed economy that is falling apart.

Some people are foolish enough to believe we have a real free market in this country. A serious look at the facts will show you that the economy is a puppet — and the strings are pulled by politicians and bureaucrats in Washington. That’s not a free market.