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Flawed "Cash for Clunkers" Bill Makes Way Through Congress

After passing in the House, the stage is now set for a Senate vote to pass the “Cash for Clunkers” bill that would offer up to $4,500 to trade in a used vehicle for a new one. Although the idea sounds good on paper, we’ve outlined a number of problems with the bill: Consumers typically replace clunkers with slightly newer clunkers or used cars, the program would distort the used car market by reducing the supply of used cars at a time when demand has been increasing, the voucher exceeds charity tax deductions for used cars, the environmental benefits are dubious, and its estimated cost of $4 billion is largely unfunded:

But the $1 billion set aside for the auto-purchase program is far short of the full cost of such an effort, estimated at $4 billion. The $1 billion is expected to fund the program through Sept. 30, the end of this fiscal year, according to two congressional sources close to the negotiations who asked to remain anonymous.

This week, Sen. Debbie Stabenow, D-Lansing, who sponsored the Senate version of “cash for clunkers” legislation, said she was comfortable with winning approval for money to start the program, with the idea that additional funding could be approved later.

Legislation establishing a program passed the House this week, but Senate supporters had struggled to overcome disputes over funding and mileage requirements. Those concerns are unlikely to derail the war-funding bill, which includes $51 billion for operations in Iraq and Afghanistan, $5 billion to support the governments of Iraq, Afghanistan and other allies and other spending with broad support.”

It’s somewhat ironic that policymakers are attaching cash for clunkers to a war-funding bill, when the Cash for Clunkers would aversely affect veteran charity programs like the Purple Heart Car Donations and many others.

This bill needs to be called out for what it really is: another bailout for the auto industry. This is at a time when the Treasury recently announced additional tax deductions for new car purchases. Senator Judd Gregg of New Hampshire said in a statement concerning the bill,

As the nation’s debt continues to climb to unsustainable levels, it is troubling that Congress is looking for even more fiscally reckless ways to subsidize the auto industry.”

Senators Feinstein and Collins believed their cash for clunkers program would reduce pollution and stimulate the economy through improved car sales, but in their Wall Street Journal op-ed, they blamed lobbyists for mucking up cash for clunkers:

Our “Cash for Clunkers” proposal was a win-win for the environment and the economy. Then Detroit auto industry lobbyists got involved. Soon a rival bill emerged in the House, tailored perfectly to the auto industry’s specifications.

The House bill was written so quickly that one of its main components — a provision that would have excluded any vehicle manufactured overseas — had to be removed because it violated trade laws. But the worst item on the auto industry’s wish list is still at the heart of the bill — a provision that undermines fuel-efficiency standards.

On Tuesday, the House approved this legislation, which would subsidize the purchase of a new Hummer H3T (16 mpg) or a new Dodge Ram 1500 4×4 truck (15 mpg), but not a two-year-old Ford Focus (27 mpg) or used Chevy Colorado (20 mpg). A companion bill is pending in the Senate.”

As we’ve mentioned before, this is economist Frederic Bastiat’s broken window fallacy. The story goes as follows: A little boy breaks a shopkeeper’s window. After sympathizing with the shopkeeper, everyone begins to see the silver lining. The shopkeeper hires a window repairman, who will then use that money to buy bread, and the bread maker will use that money to buy new shoes; therefore, the little boy’s actions actually stimulates the economy. But this ignores the fact that the shopkeeper could have spent the money somewhere else, such as to buy bread for himself. The reality is the broken window reduces net wealth.

Instead of breaking windows to “stimulate the economy,” we’re destroying perfectly good cars. Meanwhile, we’re handing out more taxpayer money and distorting the market by asking consumers to purchase cars they might not be able to afford without the tax incentive, and thereby incur more debt. Unintended consequences. They slip by politicians, frequently leaving the consumer to swallow the burden.

Read more at Is "Cash for Clunkers" Just Another Bailout?


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