The Utter Failure of Cash For Clunkers

The cash for clunkers program has been touted as a success, and it may be, but the question is "a success for whom?"

If you think that the answer is the American people your are dead wrong! Oh sure politicians can authorize handing out $4500 of our money, be astonished that people want it and then declare the program a success.

The rest of us can think a little clearer and come out with an answer based in reality.

Government programs that only benefit a segment of society always fail and are always accompanied by unintended consequences.

Anyone who has ever read a book on Macroeconomics has learned that any governmental action designed to benefit a targeted group of people is,in a free markets environment, doomed to have dire consequences on the vast majority of the people who were not given the same benefits. ( Of course if all the participants of a free market are beneficiaries of said government action then we no longer have a free market and instead end up with the "blessings" of a centralized economy)

Rent Control is a prime example

One such example is "rent control." In NYC and many towns in NJ rent control is alive and well and a matter of much debate. Without getting into the details I will just give you quick sketch of the situation.

Rent controlled apartments benefit those who live in them. The tenants tend to stay in them for very extended periods and in fact their "right" to "rent control" can be inherited by the tenants children. What this does is that those apartments ,two thousand, three, four whatever the number, are effectively taken of the market and no longer available to be rented. The law of supply and demand tells us that when supply is lowered but demand stays the same or goes up prices increase. NYC residents pay higher rent prices than they would in a free market because the City Government took action to benefit a certain segment of the city's population.

If you doubt that prices would decrease if rent control was abolished just check out rent prices in Boston. That city has ended the practice of rent control and rent prices have lagged behind NYC. Further, and more important, the distribution curve of available apartments is much more leveled indicating more apartments available at lower prices as opposed to NYC. The NYC graph has a spike indicating that most of the apartments are the very high end of the market. The graphs show that while rent control benefits a certain segment those that it hurts the most are those unable to pay the sky high rents on luxury apartments thus hurting precisely the economic class that it aimed to help.

Black Markets and crime

As William Baumol told so many millions of us in our freshman year this kind of government action also results in black markets and the criminal element also tends to benefit. In the apartment rent control racket there is an entire black market who caters to providing such apartments to would be renters. For a price you get whatever apartment that just became available. Why would anyone believe that dismantling yards, used parts dealers and God only knows who else will find a way to benefit form the cars that are supposedly "crushed". How much will we spend to combat that?

Same thing is happening with used cars

The same scenario is now being played in the used car markets. here is USA Today, quoting Kelly Blue Book analyst, Alec Gutierrez, "prices for used cars will go up as much as 10%!"

No surprise there, its just the law of supply and demand coming in on the heels of the "Cash for Clunkers" program.

The United States used car market generated total revenues of $173.2 billion in 2008, representing a compound annual rate of change (CARC) of -0.4% for the period spanning 2004-2008.

Using these figures, the Cash for Clunkers program cost the US taxpayer $3 billion dollars in initial outlay and then an additional sum of up to $17.3 billion dollars in price increases.

More to the point the price increases are most evident in the lower end of the used car market the same cars that those who cannot afford a newer car will purchase. Once again the poorest among us gets shafted. Isn't that just like all the other successful government programs?