Presumably, there are two rationales for this type of economic stimulus. First there is an economic rationale and secondly there is an environmental rationale. Both rationales are nonsense and just an attempt to cover up the real reasons to implement this program. Let's explore:
- The economic rationale is severely flawed. The theory relies on traditional Keynesian thought. Increasing aggregate spending will help increase employment. The problem is that you can't improve the economic conditions by destroying useful resources. Why not apply this economic principle to everything else? Let's burn down our houses and destroy everything we own, so we can rebuild everything. This is Bastiat's broken window fallacy. Resources are wasted to destroy the used cars. Resources are used to build the new cars. This is taking resources away from other uses that would be more productive. The claim is that since resources are underemployed in this economy, resources are not being taken from other sources. However, by employing these resources in an inefficient manner, cash for clunkers slows down the reallocation of resources to their most efficient use, thus prolonging the recession. This reallocation of resources is inevitable and vital to a healthy economy. Another problem with increasing aggregate spending is that it attempts to ignore the reality that Americans have had a negative savings rate for years. This is unsustainable. Economists like Paul Krugman acknowledge this reality, but then claim that we do not have to deal with it. Increasing savings is necessary even if it causes some pain in the short run. It cannot be avoided. How does one reach the long run without going through the short run first?
- Real environmentalists are not in favor of cash for clunkers. The problem is that cash for clunkers only focuses on fuel efficiency while ignoring the total amount of resources used. It takes tremendous amounts of fossil fuels to build cars and to destroy cars. Also improvements in miles per gallon become marginally less meaningful as miles per gallons increases. Consider: Going from 10 mpg to 20 mpg is more meaningful than going from 20 mpg to 100 mpg. How? Well, a 10 mpg car uses .1 gallons per mile or 10 gallons per hundred miles. A 20 mpg car uses .05 gallons per mile or 5 gallons per hundred miles. This is an improvement of 5 gallons per hundred miles. Using the same mathematics, a 100 mpg car uses 1 gallon per hundred miles. So going from 20 mpg to 100 mpg saves only 4 gallons per hundred miles. When you take into account the fuel used to build and destroy the original car, it is probably a net negative to switch from a 25 mpg car to a 50 mpg Prius. These old cars still have utility and should be recycled if conserving resources is an important goal. The reason that it is expensive to implement this program is precisely why it is bad for the environment: tremendous amounts of resources and fossil fuels are used. Also if more fuel efficient cars are being used, drivers may be able to afford to drive more offsetting any possible gains in fuel efficiency.
- Here is what one environmentalist had to say.
Do not forget that Cash for Clunkers was meant for as a stimulus for the auto industry rather than environmentally friendly. In that, the program is wildly successful.
ReplyDeleteThe politicians like to mention the environmental aspect because they feel it will help them get votes. Thats politicians for you.
Cash for Clunkers has NOT been a stimulus for the auto industry at all! While it is true that more people are going out to buy new, fuel efficient automobiles due to the new bill, the government does not have the money to back this "cash for clunkers" program. Many Americans are rushing to their auto dealerships to get cash for their clunker and buy a new car; however, the auto dealerships are the original source of funding- the refunds are coming from them first, not the government. In theory, after the car is purchased and the dealership lays out the money, the government is "supposed" to reimburst them. The major flaw in this plan--the government has no money! Car dealerships across the country are going under and will continue to fail because it is taking so long for the government to issue the cash for clunkers rebate. To date, only about 1 million of the 3 million "trades" have been backed by the government. In theory cash for clunkers may sound appealing; however, in practice it is idiotic. What the government should of done is implement a higher gas tax, as Thomas Freidman has constantly advocated, which would eventually force people to purchase more efficient cars, and the government would be making more money.
ReplyDeleteHope you're having a great time at Case Jeremy! Keep in touch