The Cash for Clunkers Program struck me as very familiar when I first heard about it. After a brief consideration I realized why it was so familiar and that reason was because I had heard a similar scenario in economics class a while back. What was this similar scenario? Well for those of you familiar with the “broken window fallacy” you may be keeping up with me by now but for those of you not familiar let me briefly hit the high points.
In essence the broken window theory states that assuming a very Keynesian type idea that it is possible to help the economy by forcing consumption of goods to artificially raise demand. The idea continues the ideology very popular in government and takes it to a logical end. The logical end is that since breaking a window creates jobs at the element level, the manufacture level and the installation level that a broken window is a benefit to the economy. We go on to say that it would be a “good” idea to break all of the windows in a town during a downturn because demand would be stimulated and jobs created and therefore the economy would be strengthened. Obviously, waste is never beneficial no matter how many jobs it might create.
So how does this remind me of the Broken Window Fallacy? Let us walk through it. The government is purchasing “clunkers” which are older but working vehicles and scrapping them. The program destroys the vehicles and ensures that they are not used. This is identical to the broken window theory. Capitol is being destroyed and the tax payer is paying to replace the existing capitol. How is it possible that the destruction of capitol can increase demand and therefore drive supply to strengthen the economy? It can’t! The Theory of Economic Growth indicates that since economic growth is invariably tied to capital accumulation in fact these programs hurt the long run economic growth in the system. I say that because due to the marginal propensity to save and the marginal propensity to consume only a portion of the “new” income created will result in savings and thus capital accumulation therefore paying to destroy and replace existing capitol leads to a weaker capitol stock position after the dust settles leading to a slower long term economic growth picture then before such a program so why would the administration do it?
I don’t know but if I had to speculate I would say that the auto industry and the support industries such as the steel industry and mining industry are union heavy industry and since the current congress and administration are democrats and are well to support union interest in exchange for union support my speculation is that this is a major encouragement to overlook the obvious bad economics.
6/10 of the top selling cars under this program are foreign made cars… that’s a huge leakage for a program of this sort not to mention the leakage from foreign components to domestic cars! This is ludicrous waste and must be stopped. This is simply unsustainable waste.
In essence the broken window theory states that assuming a very Keynesian type idea that it is possible to help the economy by forcing consumption of goods to artificially raise demand. The idea continues the ideology very popular in government and takes it to a logical end. The logical end is that since breaking a window creates jobs at the element level, the manufacture level and the installation level that a broken window is a benefit to the economy. We go on to say that it would be a “good” idea to break all of the windows in a town during a downturn because demand would be stimulated and jobs created and therefore the economy would be strengthened. Obviously, waste is never beneficial no matter how many jobs it might create.
So how does this remind me of the Broken Window Fallacy? Let us walk through it. The government is purchasing “clunkers” which are older but working vehicles and scrapping them. The program destroys the vehicles and ensures that they are not used. This is identical to the broken window theory. Capitol is being destroyed and the tax payer is paying to replace the existing capitol. How is it possible that the destruction of capitol can increase demand and therefore drive supply to strengthen the economy? It can’t! The Theory of Economic Growth indicates that since economic growth is invariably tied to capital accumulation in fact these programs hurt the long run economic growth in the system. I say that because due to the marginal propensity to save and the marginal propensity to consume only a portion of the “new” income created will result in savings and thus capital accumulation therefore paying to destroy and replace existing capitol leads to a weaker capitol stock position after the dust settles leading to a slower long term economic growth picture then before such a program so why would the administration do it?
I don’t know but if I had to speculate I would say that the auto industry and the support industries such as the steel industry and mining industry are union heavy industry and since the current congress and administration are democrats and are well to support union interest in exchange for union support my speculation is that this is a major encouragement to overlook the obvious bad economics.
6/10 of the top selling cars under this program are foreign made cars… that’s a huge leakage for a program of this sort not to mention the leakage from foreign components to domestic cars! This is ludicrous waste and must be stopped. This is simply unsustainable waste.
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