Friday, August 14, 2009


Apparently, not even the gourmets among us are immune to the economic downturn. The San Francisco Chronicle reported recently that celebrity chef Gordon Ramsay- owner of over 20 gourmet restaurants worldwide, and star of the reality show "Hell's Kitchen"- has suffered from financial problems in today's economic climate, and even faced bankruptcy before pouring $8 million of his own money into his business.

Given this news, my ever dry-witted father proposed the following government plan, intended to stimulate the economy by funneling money to cash-strapped restaurateurs. Entitled "Rebates for Recipes," the plan works as follows:

  • An individual goes to a restaurant, bringing with him a fully prepared, perfectly good meal, which meets pre-determined government standards.
  • The government then gives this individual a certain amount of money, which is used to help him purchase another meal off of the restaurant's menu- one which the government deems to be "healthier" than the one he originally brought in.
  • The restaurant, awaiting reimbursement from the government, takes the perfectly good meal the individual brought in, and destroys it.

The absurdity of such a plan is, I hope, almost painfully obvious. Certainly, one does not have to be a Nobel economist to see that the idea of stimulating the economy by trading in a perfectly good asset to be destroyed is laughable. However, this is exactly what the government, in its infinite wisdom, is already doing- except the name of the program is "Cash for Clunkers," and it's being done with cars instead of meals.

Under this program, individuals who possess cars meeting certain government standards can take those cars to participating dealerships and trade them in for new vehicles. The individuals receive a credit of up to $4500 off the price of the new car, which must be more fuel efficient than the one they are trading in. They then purchase the car at this lower price, and the dealership is reimbursed by the government. The old cars, which have been traded in, are subsequently destroyed by the dealership. Supposedly, this stimulates the economy while at the same time benefiting the environment by putting "fuel efficient" vehicles on the road, and getting rid of "gas guzzlers." Laudable goals in and of themselves, but is it really working? In fact, it's not, and the evidence would suggest that, as with most government programs, the unintended negative consequences are canceling out whatever benefits there might be.

So let's start with the main goal of the program- stimulating the economy. Is "Cash for Clunkers" actually doing this? Not really. It's not clear at all that the program is, indeed, increasing demand or boosting overall sales. Yes, the program has proved popular, and there has been a sudden rush of people to car dealerships to trade in their old vehicles. However, an analysis by Macroeconomic Advisers concluded that roughly half of the sales taking place would have occurred during the time period of the program anyway, with the other half occurring in the months following. At most, "Clunkers" has merely shifted demand, not created it, and sales are receiving nothing more than an artificial boost.

Not only is "Cash for Clunkers" failing to stimulate the economy, it may actually be hurting it. The program has caused overall retail sales to drop, by encouraging consumers to trade in their old vehicles at the expense of other retail spending- according to a journalist for MarketWatch, retail sales in July, rather than achieving the expected gain of 0.1 percent, instead fell 0.6 percent, with data pointing to "Clunkers" as the reason. Moreover, it's not even clear that car dealerships are benefiting either. The law requires that participating dealers deliver the new car to the buyer, even if the government payment hasn't yet arrived. Given the lowered price of the cars, most dealers face a loss on each sale, until they are reimbursed by the government- which, surprise, surprise, is not happening in a timely fashion, meaning that dealers are seeing a boost in sales but a drop in the bank.

In addition, the government seems to have failed to grasp the concept that destroying assets is never good for the economy. Because this is precisely what happens when the traded-in vehicles are destroyed- perfectly good assets are removed from the market. Under ordinary circumstances, most of these vehicles would wind up donated to charity, for sale in used car lots, or sold for parts (according to some estimates, as many as three out of five of the vehicles being destroyed would have ended up on used-car lots, or resold for parts). However, under the "Clunkers" program, this isn't happening- those cars are simply being destroyed, and this ultimately hurts consumers. Take, for example, a low-income family who needs to replace their vehicle. Many of these families find that their current vehicle does not qualify for "Clunkers," and even if it does, the program is still too expensive for them to participate, as they cannot afford to purchase a brand new vehicle even with the government subsidy. For such families the best option is, as it long has been, the purchase of an inexpensive used car. Yet even as the demand for cheap transportation in the form of used cars rises, the supply of such cars dwindles, and the prices of the ones that are available rise dramatically, leaving many people in the lurch, unable to either participate in the government program or find an affordable used vehicle. Not only do used cars become harder to find and more expensive- so do used car parts, making it harder for drivers of modest means to maintain their vehicles. Charitable organizations are also suffering- many organizations, such as Volunteers of America, rely on the money they make auctioning off donated cars to fund their charitable activities (in the case of VofA, such activities include housing, job training, and substance abuse counseling). Yet with cars being destroyed instead of donated, such charities take a hit. Rather than stimulating the economy, "Cash for Clunkers" puts car dealerships in perilous financial situations, and hurts low-income drivers, charities, used car sellers, and salvage/scrap yards that sell used car parts.

Okay, but after all, "Cash for Clunkers" isn't just an economic program- it's also an environmental one, meant to help reduce carbon emissions by putting fuel-efficient cars on the road and getting rid of "gas guzzlers." Is it having any better success in this area?

Once again, the evidence would suggest that it is not. The new cars on the road may have been deemed more "fuel efficient;" however, new cars are driven much more than old ones. As reported in this article, CNW finds that the traded-in vehicles were driven approximately 6000 miles per year. In contrast, new cars are driven, on average, 12000 miles per year- roughly double the amount of driving. In addition, "Clunkers" fails to take into account the environmental costs of manufacturing all the new cars and destroying all the old ones. According to William Chaimedes, dean of the Nicholas School of the Environment at Duke University, anywhere from 3 to 12 pounds of carbon dioxide are produced for every car that is manufactured. According to his estimates, if an individual traded in an 18 mpg car for a 22 mpg car (the minimum mileage allowed on new cars under the "Clunkers" program), it would take approximately five and a half years of typical driving to offset the new car's carbon footprint. With trucks, it could take as long as eight or nine years. Taking these factors into account, it would appear that, in fact, the more environmentally friendly thing to do would be to simply purchase a good used car- something that, as established above, is becoming harder and harder for people to do. When all of this is factored into the equation, it rapidly becomes apparent that any "benefit" to the environment under "Cash for Clunkers" is negligible at best, and negative at worst.

All in all, given the fact that "Cash for Clunkers" is not only not accomplishing its goals, but may, in fact, be actively retarding them, the best thing for the economy, the environment, and the taxpayers, would be to stop scrapping cars and scrap this program instead.

1 comment:

  1. Instead of looking at retail numbers for July, look at industry numbers for July. Ford turned a profit for the first time in years, and GM and Chrylser lost less money than in previous months (including last July, the best comparison). Overall retail numbers, of course, include teddy bears and picture frams, and there's no point looking at those numbers.

    The restaurant analogy is funny but pointless. I wouldn't design a college-style elective curriculum for kindergartners, and I wouldn't use the same teaching standards in a remedial school as I would a Sunday School. There's no comparison between how a restaurant operates and how to get old cars off the road and consumers spending again...