With the initial $1 billion of funding for the Federal Government’s “Cash for Clunkers” program nearly exhausted, the Senate must pass a bill to provide more money for the program prior to the start of the August recess at the end of this week.  The House has already approved an additional $2 billion for this program.  There appears to be widespread support for this program and it is certainly popular in the same way that a free lunch is usually popular among recipients.  Economists such as Alan Greenspan have indicated support for additional funding.

Who Benefits and Who Pays?

While the “Cash for Clunkers” program is widely acclaimed as the salvation for our current economic woes, the reality is that the program concentrates benefits fairly narrowly, spreads the costs to all taxpayers, and imposes economic harm on others.  Consumers may benefit from the program if they happen to have a qualifying vehicle and planned to replace it in the near future anyway.  Auto dealers are major beneficiaries because of the showroom traffic the program has generated.  In the very short run, automakers will be able to boost production, steelworkers may be called back to work, and downstream effects in local economies will occur as workers have more money to spend.

That’s the conventional case for “Cash for Clunkers”.  The reality is that the program has created many unintended consequences and has picked winners and losers.  Here are just a few consequences that have been lightly reported over the past week:

1. Consumers who drive “clunkers” are generally not in the best financial position to begin with and may not be well served by the government encouraging them to take on new debt.  Isn’t irresponsible borrowing one of the factors that led to the current recession?  What will happen when consumers start to default on auto loans they cannot afford?  Will there be a bail out for these borrowers?  After all, the government gave them an incentive to buy a new vehicle.
2. Many financially capable consumers have simply accelerated planned purchases of vehicles from 2010 and 2011 to cash in on the program.  To the extent that “Clunker Cash” is given to these individuals, there will be little in the way of long term economic stimulus since the later purchases will not take place.
3. Local mechanics who service “clunkers” will see a negative impact on their business as long time customers turn in their vehicles.  The Wall Street Journal ran an article today on this subject.  Are local dealers and the automakers more important and deserving of assistance than local mechanics?  Should the Federal Government have programs that directly benefit majority government controlled automakers at the expense of local mechanics?
4. The environmental benefits of switching people into more fuel efficient vehicles has not been proven because the data on the first $1 billion in spending has not been made available.  Furthermore, the environmental costs associated with producing a new vehicle are generally not considered when simply comparing miles per gallon ratings for the clunker versus a new vehicle.  It takes a great deal of energy to produce a new vehicle compared to nursing along an older vehicle.  Did the creators of “Cash for Clunkers” consider this?
5. There is something objectionable to programs that cause the destruction of serviceable assets that could provide utility for many more years.  Should the government be encouraging the destruction of valuable assets in a recession?  Some will say yes because we need to “boost economic activity”.  However, this logic would also support the bulldozing of homes followed by new housing starts as a means to economic recovery.  Actually, it would support the destruction and replacement of any kind of asset:  Refrigerators, tractors, furniture, etc…
6. Charitable organizations that rely on vehicle donations have reported that fewer individuals are donating their cars because the tax deduction cannot come close to the value received when turned in under the clunker program.

Rather than rushing forward with an additional $2 billion in taxpayer funding, Senators would be wise to demand data from the first billion in spending and to conduct more due diligence on the consequences of this program.  Although the program was put forward with good intentions, like most government actions, unintended consequences have been revealed which require careful examination.  However, because the beneficiaries of the program receive concentrated benefits and will be loud and vocal while those who pay will be largely silent since the costs are widely dispersed, chances are that more funding will be provided.