The program will provide a much needed boost to the automobile industry.
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
– Henry Hazlitt, Economics In One Lesson
Last Thursday, the Senate tacked on a $1 billion “cash for clunkers” bill to a bill for funding troops in Iraq and Afghanistan. The program will offer vouchers of up to $4,500 to car owners with 1984 models or newer that have been registered and insured to the same owner for at least a year. The size of the voucher varies depending on how much more miles per gallon the new car you buy gets compared to your trade in.
What this is is a subsidy to the auto industry. If people can trade in older cars worth $1,000 for $3,500 if they use that voucher to buy a new car, many are going to do that. It’s free money. That’s good for the auto industry but it diverts spending away from other sectors of the economy:
Those paltry results will merely represent the shifting of future demand for cars to the present; they will also come at the expense of sales of other goods that people might have chosen to buy this summer or fall. This is why Germany’s program, though it dramatically boosted new-car sales, was also met with criticism from other retail businesses, as well as used-car dealers, spare-parts suppliers and repair shops (“A Clunker of an Idea”, The Washington Post, June 23).
It also costs Washington money which has to be paid through taxes and inflation.