I have heard so many repetitions of the Broken Window Fallacy in various forms over the last few months that I’m about ready to scream. Can any example be clearer than that of the “success” of the “Cash for Clunkers” program, the program by which people who have enough money to buy new cars at $20,000 or more a pop get a subsidy to do it with?
Disabuse yourself of the notion that the program is good for the environment:
Building a new car, washing machine or refrigerator takes energy and resources: The manufacture of steel, aluminum and plastics are energy-intensive processes, and some of the materials used in durable goods, especially plastics, use non-renewable fossil fuels as feedstocks as well as energy sources. Disposing of old products, a step required by most incentive and rebate programs, also has environmental costs: It takes additional energy to shred and recycle metals; plastic components often cannot be recycled and end up as landfill cover; and the engine fluids, refrigerants and other chemicals essential to operating products end up as hazardous wastes.
And then there’s the Jevons Paradox:
In economics, the Jevons Paradox (sometimes called the Jevons effect) is the proposition that technological progress that increases the efficiency with which a resource is used, tends to increase (rather than decrease) the rate of consumption of that resource.
More efficient refrigerators incentivize the construction of larger refrigerators; more efficient vehicle performance incentivizes larger vehicles and driving farther.
Not only will it take years to realize any net environmental benefits, possibly longer than the productive life of the vehicle, but the program is bad for the economy on any number of grounds.
There’s very little evidence that the program is actually producing any increased automobile sales rather than concentrating the sales that would have taken place earlier or later into just a few weeks.
The world’s productive capacity for automobiles is a multiple of the market for automobiles. We need to invest less in auto production, not more. This program forestalls the time when we start doing that. Additionally, the specific mix of autos produced by U. S. automakers and the specific terms of the legislation will grant benefits disproportionately to foreign automakers.
But isn’t spending more borrowed money just more fiscal stimulus with a Keynesian multiplier? Not necessarily. This particular program is targeted at the middle or upper middle class, people with spare cash, and consequently will produce a smaller multiplier effect than other programs might.
Further, the money that’s being spent might have been used to promote industries that are more likely to produce growth than the automobile industry is. It’s the equivalent of eating the seed corn, something that should only be done when you’re starving. We’re not starving yet.
I have little doubt that the program is popular. Free money always is. But this money isn’t free, the program doesn’t help the environment, it doesn’t necessarily help U. S. automakers, it isn’t targeted at people in need, and it doesn’t help the economy.
Don’t renew it.
Just so you know, because this is such a rare thing given the state of discourse, you have changed my mind on this program….
I would have supported some form of the program if it had these features:
1. It had occurred 4-6 months ago and was financed by money that has been given to the automakers. It would have been a stimulus that limited the impact of the auto industry’s decline on the larger economy.
2. No restrictions on recent transfers. People in the market for a new car should have been able to buy a clunker from somebody who couldn’t afford a new car. It would have extended the reach of the program to the lower class and better achieve the goal of removing “clunkers.”
3. A more restrictive definition of clunker. A 2004 vehicle is not a clunker. They should be at least ten years old, if not thirteen.
4. Remove the singular focus on fuel efficiency. Removing clunkers also gets safer vehicles on the road, with better air pollutant emission controls. Spending $3,500 to get a 1 mpg improvement is ludicrous.
Just to be clear, I’m not opposed to any such program. I’m opposed to this program. PD has listed some worthy modifications. There should have been others. If you’re going to micromanage, go whole hog. List the acceptable exchanges. I realize that sounds a lot more like work than Congressman find acceptable. That’s why God made staffers.
Yeah, it strikes me as an unnecessary giveaway… but I’d say a couple of things:
(1) I don’t know how many new cars will be produced as a consequence, given high inventories going into this year. My understanding is that this program finally helped the auto companies get to their targets. Further renewals, though, will indeed increase production which is bad for the environment (maybe, more later), but good for the economy.
(2) Fuel efficiency is a gift that keeps on giving. People need to replace cars, and this program is probably just moving demand temporally. Your argument about fuel efficiency vs. energy and resources in production only makes a long-term difference if you change the number of cars bought/produced over the long-term. I doubt it does that. They are just cannibalizing next year’s sales — as you point out. Unless it alters long-term consumption patterns, better efficiency is a net plus. Better for the environment, reduces upward pressure on energy costs, etc…. well, as long as people don’t decide to drive more now that their gas costs are less… oh well, no free lunches in this world.
(3) I think you’re right about the overall investment in the auto industry. But then again, we’ve seen a lot of cuts. Would be worthwhile to see the industry stabilize for a bit before making too many judgments about whether automobile production capacity is too high or too low.
(4) I do wonder, also, about how this cuts for taxpayers. Does using tax money to promote demand for cars help us in the aggregate or hurt? So many cross-cutting factors — employment, sales taxes, potential returns from investments in GM and Chrysler… I couldn’t even begin to quantify it.
(5) PD’s suggestions sound reasonable.
On your point #2: For scrapping any given car to make environmental sense
Fuel cost of old car – fuel cost of new car must be greater than
Cost of production of the new car + Cost of scrapping the old
That’s actually a pretty high hurdle.
On your point #1: the U. S. automakers aren’t still selling off inventories. They’re actually producing automobiles and Ford has announced that they’re boosting production by 16%, presumably in response to the jump in sales.
GM’s boosting production 35%. This isn’t selling off inventory, folks. It’s very clearly incentivizing additional production.
Fuel cost of old car – fuel cost of new car must be greater than
Cost of production of the new car + Cost of scrapping the old
How so? People are going to get a new car anyway, if not now, then next year. Unless you are, through this program, increasing the aggregate car produced over a given time period, moving the transition to the left provides a small, but net benefit. I don’t think we can know the numbers on this… but over a 10 year period I suspect the same number of cars will be produced regardless of this, and in that case, a year of slightly better fuel efficiency would be beneficial. Or do you expect that a car bought now instead of next year will also be replaced a year earlier down the road? If so, then yes, you’re right. If not, then I am right. There is probably some data/modeling on this… but I don’t know where to find it.
On the inventories issue. They cut production dramatically in the fall. Inventory hit their new targets in July. So yes, we are seeing an increase in production right now, but if I understand correctly from news reports, the production is only meant to keep inventories at their new lower targets. It is complicated, and I admit, I don’t fully understand how inventories are sized, etc. But either way, we were going to see some increase in production regardless simply because the cuts were so dramatic earlier.
I dusted off all my old econ books. After review and careful consideration I have concluded, yes, people like to get $4500 for free…..er, uh, well, at the expense of their neighbor.
I’ve got my eye on another hot rod.