Cash for Clunkers Not Economic Stimulus

August 7th, 2009 by Lee Eldridge

Cash for ClunkersWhile my intent is to typically stay away from politics on this blog, I am a bit of an economics nerd. And there will be times that I’ll feel compelled to share some opinions about the economy or other business-related issues that might overlap into politics. This is one of those times. And to clarify, I’m a registered independent who has no love for either of the political parties.

Many in the media and in Washington have attempted to portray Cash for Clunkers as economic stimulus for our country. It’s not. It’s purely an environmental program. It’s the government telling us what kind of cars we should be driving — those of us who can afford cars. See their quotes about the benefits if you don’t believe me. It’s all about lowering fuel consumption, and improving the environment.

Example: “Cash for clunkers has been a proven success,” Obama said in a written statement issued shortly after the vote to extend the program. “The initial transactions are generating a more than 50 percent increase in fuel economy; they are generating $700 to $1,000 in annual savings for consumers in reduced gas costs alone, and they are getting the oldest, dirtiest and most air polluting trucks and SUVs off the road for good.”

Example: “The so-called cash for clunkers program has actually been far more successful than people expected, both in terms of the number of car sales it’s generated, and, I should say, in terms of the environmental benefit,” said National Economic Council President Larry Summers, appearing on CBS’ “Meet the Press.”

Those of us who cannot afford a new car are now subsidizing those who can. Plus by destroying these “clunkers”, which is required by the law, they are reducing the availability of used vehicles that people like me can afford. In the long run this will only increase the prices of used cars if we remove the availability of these “clunkers”, many of which are likely better than the old truck I currently drive.

Alan Greenspan, the former Chairman of the Federal Reserve, explained that the success of this program is not because it’s stimulative by nature, but it’s a sign that the economy is getting better:

“It’s an interesting issue. I mean, I have qualms about the concept, but there is no doubt that that very extraordinary response is a very important indicator that the state of confidence in the economy is beginning to pick up. If we had been — the clunker program had been put in place six months ago, it would have probably been a dud,” Greenspan said on ABC’s “This Week.”

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One Response to “Cash for Clunkers Not Economic Stimulus”

  1. Steevo Says:

    No, not stimulus in the classic sense though I think that the program could be stimulative in respect to the overall mindset of the consumer. It’s certainly stimulative to car dealers and the auto industry who I’m sure are appreciating the booster shot. If auto makers do better, show better earnings, add to any other good news coming from the financial markets, it will have a positive effect on consumer confidence. Also, less money spent on gas means more money can be spent stimulating other areas of economy. I saw you can get a new Kia that probably gets great gas mileage for less than 5k. I’m a pickup guy though. Problem for us pickup drivers is that they are already overpriced just because they’re pickups.