Cash for Clunkers: Free Money For Some, A Burden For Others

What would you say if I came to you with this idea?

To help the economy, let's borrow $3 billion dollars (from the Chinese if they will still lend us money) plus whatever interest we have to pay for 10 years. Then we’ll offer to pay $4,500 for 10-year old cars which is more than they are worth if they buy a new car that gets better millage than their old car.

This would provide instant stimulus to the economy and hopefully some of these buyers will purchase their new car from one of our government owned car companies. We could sure use the revenues.

Then, we'll pay someone to destroy the old, used cars which will reduce the supply of used cars and drive up used car prices for months and months which would also be good for the dealers.

Even more brilliant, we could pay some banks we own, like Citi bank, millions of dollars to administer the program. But I’m not finished yet. We could also sell this idea to the public, if free money wasn’t a strong enough incentive, by emphasizing how the better gas millage will help save the economy.

What do you think?

If you were a typical politician or economist, you would probably go for this because it focuses on several groups that need help; and it would help them immediately.

If you were anyone else, you might think I’m nuts because it spends money we don’t have, it props up failed car companies slowing down the recovery, it destroys our wealth (700,000 used cars), it’s not real demand because it pulls future sales into this year. And that’s just for starters.

You might also think it’s a nutty idea because it doesn’t look at all the other groups that are affected by this policy.

For example: the auto repair shops across the country that will lose about $70 million dollars per year in repair service. Lower income people who buy and rely one these functional, low-cost “clunkers” to get to work and get their kids to the doctor. Or Charities who depend on the donation of these “clunkers” to raise money for their important work.

And by the way, the additional CO2 saved by the extra 10 miles per gallon won’t help save the earth either. 100 gallons of gasoline produces approximately one ton of CO2 (one gallon produces about 20 pounds.) At a CO2 cost of $50 per ton, you could have driven the clunker 1,000 miles per month for the next 15 years before you reached $4,500.

And this is just the immediate effect. Long-term we will have to raise taxes to pay for this program, which will take money out of the pockets of people who could use it more effectively to build wealth rather than destroy it. Small businesses, charities and the poor will have to find other ways, around government policy, to earn a living or help other people.

The net is that this kind of policy may help some people or groups today but it will hurt other people and groups as well. long-term, it will hurt the economy and the pace of the recovery.

As President Reagan said, government isn't the solution to our problems; it's often the cause of our problems. This may not be true all of the time but it certainly is true in this case.