Cash, Clunkers, and the Value of Broken Windows - Zilch!

The Cash-for-Clunkers program makes us all poorer.

The billion dollars the US House and Senate allocated for the "Cash for Clunkers" program ran out in a week; it seems that the government will chip in another 2 or 3 billon.  Big-government folks are waxing lyrical about the program's "success," forgetting the rather obvious fact that most people will take free money if it's offered them.

To oversimplify a bit, a car dealer who gets a trade-in which meets the government's definition of "clunker" can fill out a form which results in the government sending the dealer a check whose value is between $3,500 and $4,500 depending on the difference between the rated MPG of the clunker and the rated MPG of the new car.  This money goes to the dealer, but the dealer typically reduces the selling price by that amount.

Whenever a government program proves so popular that they throw more money at it, it's a good idea to take a look at some of the side effects.  For people to accept free money on offer is no surprise; a far better question is, "what's the real cost?"

Nothing in this world is free, and the much vaunted "cash for clunkers" is no exception.  Far from being free, it will turn out to be very expensive indeed in many ways.

Delayed Sales

The program has been discussed for months.  From the moment the idea hit the news, anybody who had any choice would stay away from a car dealer.  Why buy a new car if there was some possibility that the government might give you a check if you waited until the program kicked in?

Nobody knew what the rules would be, so no matter what sort of car you were after, it made sense to delay getting it until the rules settled down.

Part of the reason the program was so instantly successful was that some of the sales were sales that would have happened in earlier months if the program had not been talked about; on Day One of the program, everyone who had already done the research and planned to buy a car but was just waiting for the government money stormed the dealerships.

Would car manufacturers be in better shape had those people been buying cars all along, evenly, over the last few months?  Of course they would have.  Delaying sales was very costly to the manufacturers and to their employees.

We've explained that this happens every time the government tries to subsidize anything - the moment the possibility of a subsidy is announced, people stop buying and wait until the rules are set.

Delaying sales makes the program look as if it moved more cars than it really did - a lot of these cars would have been sold in earlier months if not for the program being talked about.

Early Sales

When it looked like the program might run out of money, people who might have waited a month or two rushed into the dealerships.  This pulled future sales into Clunker Month.  Pulling sales into an earlier month makes the program look as if it moved more cars than it really did - a lot of these cars would have been sold in later months if not for the program seeming to run out of money.

Between the delayed sales and the early sales, all the clunker program really accomplished was to create an artificial sales spike.  Few if any of the car sales were truly "new" in the sense that they wouldn't have otherwise happened; they just would have happened earlier or later.  The net sales effect pretty much canceled out, at great expense to the taxpayer.

Opportunity for Fraud

Clunkers are supposed to be destroyed so they won't be used again.  Part of the justification for the program is to accelerate the switch to more fuel-efficient cars.  If the clunkers went back on the used car market, there would be no gain in overall fuel efficiency.

The article "Abuse claim over Germany's car scrappage scheme" in the Financial Times reports:

Criminals in Germany are buying tens of thousands of cars meant for the scrapyard and exporting them as they profit from a government subsidy intended to bolster the sale of new cars, a German police trade union has warned.

Some 5 to 10 per cent of cars supposedly written off have instead been transported to Africa and east Europe, it added.

There are enough cars stolen without trace to suggest that stolen car gangs are pretty good at what they do.  If they can steal cars that people are trying to get back, how much easier must it be for them to deal with cars that nobody is looking for and nobody wants?  Sure, the dealer will file a police report to show the government inspector who's wondering where the clunker went; but neither he nor the cops are going to waste any more effort on the matter.  Meanwhile, back on the road goes the clunker, spewing pollution.

Less Money for the Highway Fund

The federal tax on gasoline is supposed to be dedicated to maintaining highways; the more gasoline is burned, the more money the highway repair fund gets.

Three billion dollars divided by the maximum rebate means that maybe 666,000 cars could be scrapped.

Early data suggest that the new cars get about 9.6 more miles per gallon than the old cars.  If each car drives 12,000 miles per year, we're talking 8 billion or so miles per year.  At 9.6 more MPG, we're use 800,000,000 fewer gallons of gas per year.  So far, so good.  We're Saving the World, and no price is too high to pay for that!

Except that each gallon not sold would have been worth 18.4 cents in tax to the highway trust fund.  The trust fund will have about $150 million per year less as a result of our government spending $3 billion to encourage scrapping operable vehicles.

Do you think our elected officials considered the "cost" of more efficient vehicles to the highway trust fund?  If lowering taxes is a "cost," why aren't higher mileage cars a "cost?"

If the goal is truly to cut down on pollution, we might have done better to spend the $3 billion on infrastructure to reduce congestion.  The Congressional Budget Office reports:

According to one widely cited study, highway congestion caused 4.2 billion hours of delay and the use of 2.9 billion gallons of additional fuel in 2005, at a cost of $78 billion to highway users.

The amount of pollution saved by recycling the clunkers is dwarfed by the pollution caused by congested roads. If the clunkers program actually does increase sales, congestion and the resulting pollution will only get worse.

Engine Shortages

To combat fraud, the US government demands that the engines be ruined by replacing the oil with grit and running the engine until it seizes up.  Selling used engines is the most profitable part of the scrap business.  Since they can't sell these engines as engines, they sell them as scrap metal, which barely pays the cost of pulling them out of the cars.

Why would anyone want the engine from a clunker?  Like any other mechanical device, old car parts wear out at different rates.  Particularly in the colder parts of America, cars don't usually die because the engine fails; more commonly the body rusts out and the car falls apart, but the engine has a lot of life left in it.  In the hot, dry Southwest, though, there's no weather to rust out the cars, and they run until the engine dies.  Match a good New England engine with a good Arizona car body, and you have one perfectly decent car instead of two junkers.

Nobody that can afford a new car is going to do this, but there are a lot of people who can afford a few grand to buy and install a used replacement engine, but can't come up with thousands for a new car even with the help of the "cash for clunkers" program.  Mostly, these people are the "working poor" that Democrats love to say they care about.

By demanding that perfectly good used engines be destroyed, the "cash for clunkers" program is creating a shortage of used engines which will make it more expensive for lower-income people to keep their oldies running.

Hurts Independent Mechanics

To whatever extent the program is actually encouraging people to turn cars in earlier than they otherwise would, the program hurts independent automobile maintenance shops.  All new cars come with at least a three-year warranty and in some cases much more, so these brand-new cars will be serviced at dealers for a long time to come.  In "Clunkers Plan Deflates Mechanics," the Wall Street Journal reports:

Owners of automotive repair shops say the program to help invigorate sales of new cars is succeeding at their expense.

It appears that as many as 250,000 operable vehicles will be destroyed in the first round alone.  That's a lot of repair business lost:

"This package will hurt mechanical repairs without question. You are taking older vehicles that are still fine to use and removing them," said Robert Redding Jr., the Automotive Service Association's Washington representative. "If you're taking hundreds of thousands of vehicles that you normally service off the road with no consideration, it hurts people." [emphasis added]

Hurts the Poor

Throwing away operable cars is just fine with car manufacturers, of course.  We've explained that the US automobile market is saturated; the only way to sell a new car is to persuade someone to throw away a running car and buy a new one.

This supply of used cars has helped lower-income people who need cars to go to work.  Taking 250,000 cars out of the used car market will boost used car prices which hurts lower-income people who buy them.  We already see the result:

Basing their argument on the fact that about 250,000 clunkers have already been traded in for new cars and that with another $2 billion in funding expected, up to 500,000 more used cars could be taken out of the market, Kelley [Blue Book, which tracks the cost of used cars] sees the value of used cars in general rising steeply, if only for a brief time.

Clunkers and Broken Windows

The clunker program paid people to throw away operating vehicles earlier than they otherwise would have.  We've pointed out that replacing functional equipment with new, greener equipment is like breaking windows just to make work for glass makers.  Cash-for-clunkers boosts auto sales in the immediate term, of course, but wasting the months and years of use we should have gotten from the cars being scrapped early doesn't help the economy as a whole.

They might as well hire ACORN and the Black Panthers to rampage through towns and villages smashing windows.  Let's hope Nancy Pelosi doesn't read this article...

Will Offensicht is a staff writer for and an internationally published author by a different name.  Read other articles by Will Offensicht or other articles on Economics.
Reader Comments
Car czar argues that most clunkers turned in were American and that most cars bought were foreign.
August 12, 2009 7:38 AM
Yet another side effect -

that many of the clunkers would have been donated to charities. It seems that the charities will lost millions in donations.
August 16, 2009 7:52 PM
The government can't even give money away. Fox reports that car makers are guaranteeing the cash for clunkers payments.

Eight months after the federal government stepped in to bail out U.S. auto giants, the beleaguered companies are turning the tables and helping the government bail out itself.

Major auto manufacturers have stepped up to guarantee their dealers' "Cash for Clunkers" transactions, following complaints that thousands of dealer claims have been delayed or rejected by the federal government.

General Motors announced Thursday that it will immediately start providing "cash advances" to dealers equivalent to the rebates that are being processed, and will do so for the duration of the program.

I wonder where GM will get all that money? Maybe the government returns their phone calls?
August 20, 2009 1:45 PM
Now that it's over the Times doubts. Now they tell us! At least the can criticize the administration after the fact. If only they could sound off before!

Clunkers Don't Come Cheap
As environmental policy, a gas tax or a rebate program would be better and more cost effective than buying clunkers.
August 31, 2009 5:37 AM
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