Official Retraction

Initially, I was in favor of cash for clunkers. My reasoning - it would work by getting people to buy cars and save gas. And it did work - people bought cars.

But after reading two nobel prize level economists experts dismiss the program as a joke, I officially change my position. Two main reasons:

1. Hundreds of thousands new cars will be purchased under the program, but many of these purchases would have occurred later in 2009 or in 2010 instead of during the five week window of the clunkers program. There is little value to the economy in subsidizing consumers to buy cars a few months earlier than they would have bought them anyway.

2. Even if the older cars were in reasonably good shape but got poor gas mileage, new cars would be driven more miles because, being much more fuel efficient, they would use much less gasoline per mile of driving. On balance, the clunker exchange might result in only a small net reduction, if any, in the amount of gasoline used. According to Sunday's New York Times, the average trade-in got 15.8 miles to the gallon compared to about 25 miles per gallon for the cars that were purchased. If the cars will be driven about 50% more miles per year than the clunkers that were exchanged-not an extreme assumption- there would be essentially no effect on the gasoline consumed.

The main problem I have with the cash-for-clunkers program from the viewpoint of reducing pollution is that the program is such an inefficient way to cut down on gasoline consumption. The obvious best approach, not politically easy to accomplish, would be to raise the federal tax on gasoline.

I hope this isn't an early warning signal of the stupidity of the stimulus spending. More from Beckner:

Other parts of the increase in spending in most countries are far more dubious and may even have harmed their economies. I include in that most of the $800 billion Obama stimulus package, much of which is still not spent even though the brunt of the recession is over This package was promoted as a way to fight the recession, but mainly it is an attempt to reengineer the economy in the directions of larger government favored by many liberal Democrats. I believe much of this reengineering will hurt the functioning of the economy, and of course at the same time will add to the debt burden.

A very small example was the cash for clunkers program in the US that ended a short time ago. The 19th century French essayist Frederic Bastiat discussed facetiously the gain to an economy when a boy breaks the windows of a shopkeeper since that creates work for the glazier to repair them, and the glazier then spends his additional income on food and other consumer goods. The moral of that story is to hire boys to go around breaking windows! The clunkers program was hardly any better than that (see our discussion of the clunkers program on August 24th).

Posner on how much we should care about government deficits. Now, this will put most readers to sleep, but it is of interest to me. The beginning of the article outlines how deficit spending works and importantly, it's function in the world economy. Useful. The end is a warning about what will happen with excessive debt.

As real interest rates rise as a consequence of the growing public debt and decline in demand for the U.S. dollar as an international reserve currency, U.S. savings rates will rise, and by reducing consumption expenditures this will slow economic activity. Economic growth may also fall as more and more resources are poured into keeping elderly people, most of whom are not highly productive members of society from an economic standpoint, alive. The United States may find itself in the kind of downward economic spiral in which "developing" countries often find themselves. As an economic power we may go the way of the British Empire, which occupied approximately the same position in the world economy in the early twentieth century as the United States does today.