Thursday, August 6, 2009


There are a couple of good economics lessons out of the "cash for clunkers" fiasco of the last several weeks.

1 ) People respond to incentives. If the government decides to borrow (or print) money to pay people to trade in old cars, people will change their behavior and start trading in old cars.

2 ) This is Hayek's critique of central planning writ large. The federal government thought that it was choosing a price that would take months to burn through. They were completely wrong. The price they chose was so far above the actual market value of many of these cars that the original billion dollars or so lasted just a few days. The government guessed, and they guessed wrong. So, when the central planners tell you they know something about the "costs" to you of something five years down the road, be very, very careful


Doug said...

Additionally, the "Cash for Clunkers" program has had the unintended consequence of increasing the cost of transportation to the poor. America's poor are more likely to buy used parts to keep their car running. The program has restricted the supply since one of the requirements is to crush the car and everything in it.

On a personal note I would also like to add that my PT Pooper (Cruiser) died on May 7th this year. If it had decided to blow a head gasket only two months later I could have possibly reaped some of the clunker bucks. Oh well.

Doug said...

Also, I just heard of another unintended consequence last night on the evening news. Many charities that rely on automobile donations to finance their missions are projecting experienced a decline in donations and therefore revenue for operation. Just another case of harm to mission activities like Boys Ranches among other nonprofits.