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.