This morning in the UK on BBC Radio 4, we were treated to the views of Chris Edwards of the Cato Foundation on the Cash for Clunkers scheme. He said something that seemed to me to be fundamentally misguided. I would not consider myself an expert, but I studied economics at high school, so I know the basics. This guy’s comment appeared to miss a very important point.
His argument was that the programme was clearly a failure, because all it has done is to bring forward purchases that would have been made next year, therefore next year will now be a bad year for the motor industry.
The pretty basic point that this argument seems to miss is the effect of the recession. The recession meant that people were putting off until next year purchases they would otherwise have made this year. Therefore, the effect of the programme is to dampen down a fluctuation in favour of next year, not to create a fluctuation in favour of this year.
I decided to investigate a bit further, and found this blog:
Cash for Clunkers: Dumbest Program Ever?
He repeats the Radio 4 argument here.
The auto industry received a short-term "sugar high" at the expense of lower future sales when the program is over. The program apparently boosted sales by about 750,000 cars this year, but that probably means that sales over the next few years will be about 750,000 lower. The program probably further damaged the longer-term prospects of auto dealers and automakers by diverting their attention from market fundamentals in the scramble for federal cash.
Now I would accept that the programme may have led to some purchases, that would have happened next year even without the recession, being brought forward. But this self-proclaimed expert expressly claims that every single one of the sales under this scheme was a purchase brought forward. In his mind, not one single car was sold this year that would have been sold this year anyway but for the recession.
He then goes on to claim that getting the gas guzzling wrecks off the roads has not helped the environment. To support that claim, he cites a colleague at the Cato Institute and the Washington Postneither of whom I would accept as being at the forefront of environmental thinking.
I’ve vaguely heard of the Cato Institute before, but I have never really taken much notice of them. Having looked at their contribution to this debate, I have not seen the sort of rigorous thinking backed up by solid evidence that I would need to see from a source before I would be prepared to trust it.