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Thursday, August 6, 2009

The Shaky Economics Of 'Cash For Clunkers'

NPR has a nice story of the negative economic consequences of the federal government's Cash for Clunkers program.
DAVID KESTENBAUM
August 6, 2009

Congress seems poised to extend the wildly popular "cash for clunkers" program, tripling the size of its initial $1 billion budget. But ask some economists about the program, and they shake their heads.

Allen Sanderson, an economist at the University of Chicago, says it's important to remember what's behind many auto dealers' crowded showrooms. Out back, he says, you'll likely find a parking lot filled with the cars that have been traded in. Many of those vehicles run fine. And they all are scheduled for execution.

The government trade-in program requires that the engines of the clunkers be killed. More accustomed to fixing cars, mechanics will pour in a solvent called "liquid glass," then run the engine until it seizes.

From an economic perspective, that's a waste, says Sanderson, who calls the program "silly." The autos required labor and resources to build. Consider a similar program to replace old light bulbs with more efficient ones, he says. Would you smash the old bulbs?

Sanderson admits that there is some environmental benefit to the clunkers program. "The question is at what cost," he says. "For $3 billion, could we do something better for the environment than what we're doing? I think absolutely. It's a very inefficient expenditure." (more)

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