Was cash for clunkers a good thing after all?

I had posited in the past that, apart from the odd design and old vehicle destruction, that yes, it was a good thing in terms of generating additional sales. I argued that it didn’t go on long enough. Germany has had one in force for months, and it seems to have done a great deal of good, though there was no requirement for destruction of the turned in car, it could be scrapped, or broken down for parts, or …

Ok. According to the last linked article above

The program was credited with strongly boosting sales and, in April, the government decided to expand the program’s funding to ???5 billion from ???1.5 billion. The measure received some of the credit for Germany emerging from recession, with modest 0.3% growth in the second quarter.

Of course, there will be a payback time in terms of the demand that was accelerated in the market which no longer exists, so this will likely oscillate around an equilibrium value for a while.

But was this a bad thing to do?

I read two articles this morning that suggest not only was it a bad thing, but it cost us more to do it. First:

The basic fallacy of cash for clunkers is that you can somehow create wealth by destroying existing assets that are still productive, in this case cars that still work. Under the program, auto dealers were required to destroy the car engines of trade-ins with a sodium silicate solution, then smash them and send them to the junk yard. As the journalist Henry Hazlitt wrote in his classic, “Economics in One Lesson,” you can’t raise living standards by breaking windows so some people can get jobs repairing them.

I believe this is called the fallacy of the broken window.

I hadn’t taken advantage of the C4C with a car that would have lasted much longer … entropy was getting the best of that machine. All manner of things were going wrong with it. Gas mileage was ok, but everything else was falling apart.

The second article that got me thinking was this.

In it the author takes a look at the history of the Great Depression, and talks about it in terms of our own Great Recession.

For the answers, let us turn to Murray Rothbard’s classic account of the economic mistakes made in Washington from 1929 through 1938, “America’s Great Depression.”

When economies get into trouble, Mr. Rothbard points out, businessmen are “misled by bank credit inflation to invest too much in higher-order capital goods” such as houses and cars. The “boom,” then, “is actually a period of wasteful misinvestment. … Errors are made due to bank credit’s tampering with the free market.” This is followed by a recovery period that sees a “rapid liquidation of the wasteful investments,” and, typically, a deflationary credit contraction, which helps restore confidence in the remaining sound banks.

“In short, and this is a highly important point to grasp, the depression is the recovery process. … The depression, then, far from being an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions by the boom. The boom, then requires a bust. ...

Ok. So what we are in now, a credit bust, needs a period of time for people to work out the real value of assets. I’ve heard it mentioned that the only thing you can do in a credit bust is hunker down and endure, and gradually the economy will right itself. We are seeing that in the housing market here in Michigan, where, houses are starting to sell. At prices far below what they did 3 years ago. Never mind that. 10 years ago.

The market will determine the pricing for the assets. If they are priced too high, the assets won’t be sold. If they are priced at their correct current value, the assets will sell.

Propping up pricing is bad. It won’t help assets sell. This is true in any market … housing, cars, labor, …

If anyone in Washington were to be so wacky as to seek to extend the pain of a recession, what course would they follow? On Page 26 of “America’s Great Depression,” Rothbard presents that very catalog of idiocy.

“Here are the ways the adjustment process can be hobbled:” he writes.

“3) Keep wage rates up. Artificial maintenance of wage rates in a depression ensures permanent mass unemployment. Furthermore, in a deflation, when prices are falling, keeping the same rate of money wages means that real wage rates have been pushed higher. In the face of falling business demand, this greatly aggravates the unemployment problem.”

In addition to “minimum wage laws,” don’t we now have “living wage” ordinances, “project labor agreements,” and, for our unionized government employees, “automatic step and seniority raises” in addition to cost-of-living adjustments that boost the pay of government employees as well as welfare recipients … even when the cost of living is falling?

“4) Keep prices up,” Rothbard continues, cataloguing precisely the wrong things to do if you want a recession to end. “Keeping prices above their free-market levels will create unsalable surpluses, and prevent a return to prosperity.

Uh oh… isn’t number 4 what C4C was effectively all about? I argued that C4C showed that auto prices were too high, and needed to adjust. Removing the prop here, and in Germany, has (massively) reduced the number of new car buyers. Maybe C4C wasn’t as good a stimulus as I had thought.

For us it looked like a good deal, but at the end of the day, even with the good deal in place, I felt the car we purchased cost too much, but we didn’t have much choice in the matter, as I knew the program, being poorly designed, would run out of money quickly, so we had to act on a mediocre deal rather than getting no deal at all.

Hmmm…

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