Cash for Clunkers, of course, was the popular term for the Car Allowance Rebate System, which funded down payments of up to $4,500 for new cars if older-model cars were traded in and destroyed. The program was temporarily discontinued and then officially ended after barely a month of operation. Around 700,000 vehicles were purchased as a result of the program, according to government and industry statistics. It wound up costing $3 billion.
Talk Show Guy was right, I thought, careful not to cut myself. When you offer $3 billion in free money to people, why was anyone shocked that they went for it? And if you offer free health care to a supposedly narrow segment of the population that cannot now access it, why do economic planners create budget projections that assume healthcare demand will remain static?
But that wasn’t what caused me to move the razor from my face. That had to do with all of the talk about Cash for Clunkers being such a good program. It clearly wasn’t, or at least it shouldn’t have appeared so to anyone who remembers the basics of college economics. From this perspective, there is so much wrong that it’s hard to know where to start.
Cleaning Up Inventories, Not the Environment
First, let’s dispense with the notion that this bill had anything to do with improving the environment. Getting people into cars that get better mileage often leads them to drive more, negating any benefit from the switch. What’s more, scrapping hundreds of thousands of “clunkers” en masse while encouraging production of new cars to replace them isn’t exactly an environmental blessing either.
The real purpose of the program was to help car dealers sell off the excess supply of 2009 vehicles that consumers weren’t buying at the prices dealers preferred to charge. Giving people free money to put toward a down payment was a way for Congress to pay back a powerful lobby that produced an unsustainable level of output during the Fed-fueled boom. It’s reminiscent of those New Deal programs—like the Agricultural Adjustment Act—that also tried to thwart falling prices by destroying perfectly good and usable products that otherwise would have lowered prices. In the 1930s people rioted when the government forced farmers to pour perfectly good milk down sewer drains. No one’s rioting today because now the government is more richly compensating those who own the property being destroyed. (For a fascinating, contemporary account of the Agricultural Adjustment Act and other New Deal programs, see journalist John T. Flynn’s The Roosevelt Myth. For a more recent account, see Amity Shlaes’s The Forgotten Man: A New History of the Great Depression.)
Bootleggers and Baptists, Dealers and Greens
What we have is a situation described by Clemson University economist Bruce Yandle’s “Bootleggers and Baptists” theory for the growth of government. According to Yandle, government often grows because two otherwise opposite groups are able to join forces to pass legislation that neither would have been able to get passed individually. His example applied to groups that supported alcohol prohibition: The bootleggers benefited from the outlawing of their “legitimate” competition, and religious groups opposed liquor sales as a matter of morals. When both groups joined forces, legislation became far more likely to pass.
Applying Yandle’s theory to the clunker program, the bootleggers were car dealers who faced low consumer demand and sales revenues at current prices, while the Baptists were environmentalists who believed that older-model cars insult mother earth. The prospect of an old-car trade-in program unites both groups.
Cash for Clunkers certainly had its share of winners and losers. Car dealers who experienced summer profits surely won, as did those individuals who otherwise would have gone without cars. And let’s not forget the banks and finance companies that now have loan assets on their books. You can be sure the members of Congress who voted for this bill will remind dealers of their generosity in directing other people’s money their way in this old-fashioned shell game.
And it is a shell game, because the losers here are the poor and the lower middle class—the very groups in the most precarious economic shape 18-plus months into the Great Recession. They suffer in two ways. First, as primary consumers in the used-car market, they will see supply shrivel. Many cars that qualified for Cash for Clunkers still had long lives ahead of them.
The poor will also pay in the form of higher prices resulting from the inflation that will be required to finance the program. The government is broke, with tax revenues falling while spending soars at levels even higher than those associated with the profligate Bush administration. In terms of cost, Cash for Clunkers is at least twice as expensive as its New Deal inspiration, the Agriculture Adjustment Act. This program will be paid for, at some time, with monetary inflation furnished by our not-so-independent central bank, and we will pay for it in the form of higher prices. This is why inflation is a tax, and a regressive one at that.
Indeed, when I first read about Cash for Clunkers, I thought it should have been named the “I Hate the Poor” Act of 2009 because—you can be sure—this program sticks it to those members of society least able to manage in hard times. In the end they will find maintaining economic autonomy all the harder, making it more likely they will become dependent on government in the future. The cynic in me wonders if this might be the actual intent.
Nonetheless, Talk Show Guy thought this was a good program. He liked it! I bet he got a good deal on a new car, too. Hope he enjoys his ride.
This article first appeared at www.fee.org.