I wrote in "Government Efficiency II" that I believe the "cash for clunkers" plan was likely a flop. Judging from stock performance at the time, I thought sales were not in any way increased by the offer, and even if they were, they were only encouraged by moving sales already planned a few months earlier, that is by stealing sales from September for June or July, basically spending a fortune to slow today's slump at the expense of a matching slump in a few months.

But let us, for the sake of argument, pretend that the logic of "cash for clunkers" was valid. let us suppose that a lot of people did take the offer, traded in cars they planned on keeping for years, and bought new cars they had no intention of buying. I doubt that is the case, but even if it is, what did it do for the economy?

Well, let us look at the most immediate effect, it cost the government a fortune, money it had to take in either taxes or in the covert taxation called inflation. If takes in outright taxes, then that was money that either would have been spent on other consumption, or saved, which would have then been loaned out by banks for future investment. In short, if it came form tax dollars, every dollar spent on this program was a dollar less of consumption or investment.

If it was funded by inflation (as it was), then the covert tax came by reducing the value of dollars, basically stealing a percentage of every dollar held by an individual. As prices would rise, this would not hit investments or investors as hard, at least not at first, but would hit those who were saving money in bank accounts, those on fixed incomes and those holding fixed return instruments, such as bonds or preferred stocks. Again, these are dollars which would be spent on consumption, for the most part, and so represent a loss of consumption equal to the money spent*.

So, the part of each sale funded by the state is, in the end, a wash, as it represents an equal loss of other spending. Which leaves us with the remaining part of the sale price.

And in that case, let us look at two cases.

First, let us look at a car which would have been  traded in anyway, which had reached the end of its useful life. Under normal circumstances, the owner would have traded it in, and paid full value for the new car. The old car would have become a used car and sold, or, at worst, scrapped at a junk yard. Under the government plan, instead, we lose $4500 of value, as that money is taken in taxes or inflation form other purchases. In addition, as the cars must be removed form commerce, we lose all future sales of the used car or junker. In short, we end up with much less economic activity, as well as a net loss of value, as a useful used car has now been declared worthless. In the end, our country is poorer.

Worse still is if the plan ends up doing what it is supposed to do, encouraging sales that would not have happened. In that case, the trade in is in even better shape, as no one was thinking of trading it. However, as the dogma is that it is a "polluter", we lose all future value from that car. It will not be sold as a used car, and part of the sale of the enw car will be subsidized by the state. In short, we will once again be even poorer than before. And the more early the sale is moved the more we lose, as the car being removed from commerce is worth more and more.

The whole fetish of "economic activity" reminds me in a way of the jobs fetish I described in "Jobs, Jobs, Jobs, and More Jobs" and "Clarfiying My Argument". Economic activity is not important in itself. After all, as I described in "War Stimulates the Economy? Let's Nuke San Francisco!", if we want activity, just nuke our cities, rebuilding them will keep us busy for years. And that, in a small way is what cash for clunkers is, at best it is pointless, just shifting around sales that would already have happened, at worst it is nuking a number of cars, taking them out of the flow of commerce to encourage "sales", at the expense of real value and wealth. It may make the GDP higher**, but it does not encourage real wealth.

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* I am ignoring here all the other ills caused by inflation. For those interested in my argument why honest taxation si always to be preferred to the chaos caused by inflation should read "Inflation and Uncertainty".

** As I said in "The Limits of Econometrics" we could increase our GDP incredibly by just charging one another for each line of conversation. We would be no wealthier, but we would have a high GDP. Or by doubling prices as I described in "The Rubber Yardstick", which would instantly double our GDP.

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POSTSCRIPT

In some ways this fascination with "activity" and numeric GDP is caused by a confusion of monetary measures with real wealth. It is a legacy of absurd Keynesian theories which I take apart in "Proof Keynes (and Krugman) Are Insane", "Technocrats",  "Some Confirmation", "Has No One Heard Of Lord Say?" and "Protectionism Right and Left" among others. I also discuss the confusion of money and reality in  "The Rubber Yardstick".

In addition, readers can see my earlier thoughts on this program in "Bad Money After Bad?", "Some Confirmation" and "Government Efficiency II".