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To understand why Cash for Clunkers doesn't work you need to understand the Broken Window Fallacy: http://jim.com/econ/chap02p1.html http://jim.com/econ/chap02p

To understand why Cash for Clunkers doesn't work you need to understand the Broken Window Fallacy: http://jim.com/econ/chap02p1.html http://jim.com/econ/chap02p1.html In a nutshell you can't create wealth by destroying useful things.

joeyo 17y ago
In this case, however, the cars are not only being destroyed (the broken window part) but money is also being injected into the economy via the rebate. Now, I make no claims about whether or not putting money in the economy in this way is actually a good idea or not. But it's not as simple as the broken window fallacy. Anyway, the only reason why the cars are being destroyed is to meet the other (primary?) goal of the legislation: raise average fuel efficiency.
- lupin_sansei 17y ago
  The broken window fallacy covers both the destruction of the window plus the supposed benefit to society of the spending. Assuming the government didn't print the money from thin air (if they did it means more inflation), then no more money has been injected into the economy than if the programme didn't exist.
  - mncaudill 17y ago
    It's not only the net total of the amount of money in the market, but also its movement. If everyone had a million in the bank, but no one was spending, the economy would suffer.
  - joeyo 17y ago
    Again, I make no claims about whether this program actually works just that it is clearly not as trivial as the broken window example. However, if you believe that tax cuts work, then I see no reason why this sort of rebate wouldn't work, too (it's like a tax cut for people who buy new cars).
  - joe_the_user 17y ago
    Currently, the government certainly is 'printing money from the air', ie borrowing and monetizing. We shall see whether the result is consumer-level inflation or not. It's not always true that injecting money into an economy simply result in visible inflation. Such an injection is indeed essentially a wealth re-distribution but if such a re-distribution causes more productive investment when you would have otherwise have people hoarding money, then you have economic expansion. And even more, if such an injection successfully causes the economy to grow, you don't have the same degree of inflation, since a larger store of money is now chasing a larger store of goods and ... it's all good. But this is a hypothetical discussion between the Keynesian and Classical positions. In the case of Cash for Clunkers, I think both schools would agree that we have a Bad Policy. The Classicals would evoke your Broken Window Fallacy while the Keynesians would point out that this is not really increasing socially useful resources. And further, we currently don't have obvious Germany-1920's-style inflation but the real enemy that lead up to the crisis was asset inflation. And the current program is really neither monetarist nor Keynesian but rather simply a process of propping up the same asset-inflationists that organized the previous bubble.
joe_the_user 17y ago
The situation is not as clear cut as your link claims. A broken window might or might stimulate more economic activity. It depend on, among other things, whether the money spent on fixing the window would have otherwise been horded. The problem with broken window economics isn't that breaking and fixing them doesn't create jobs but that it doesn't stimulate rational decisions. If a glazier can count on business from hoods he pays to throw bricks in the night, he won't create a business that gives much to society as a whole. Remember, the Soviet Union didn't fall for lack of jobs but for lack of sane economic activity... And that's what's wrong with cash for clunkers. If a company can just sit and repeat clunker money, they are probably going to just ... create more clunkers.
deleted 17y ago
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joeyo 17y ago

In this case, however, the cars are not only being destroyed (the broken window part) but money is also being injected into the economy via the rebate. Now, I make no claims about whether or not putting money in the economy in this way is actually a good idea or not. But it's not as simple as the broken window fallacy. Anyway, the only reason why the cars are being destroyed is to meet the other (primary?) goal of the legislation: raise average fuel efficiency.

lupin_sansei 17y ago
The broken window fallacy covers both the destruction of the window plus the supposed benefit to society of the spending. Assuming the government didn't print the money from thin air (if they did it means more inflation), then no more money has been injected into the economy than if the programme didn't exist.
- mncaudill 17y ago
  It's not only the net total of the amount of money in the market, but also its movement. If everyone had a million in the bank, but no one was spending, the economy would suffer.
- joeyo 17y ago
  Again, I make no claims about whether this program actually works just that it is clearly not as trivial as the broken window example. However, if you believe that tax cuts work, then I see no reason why this sort of rebate wouldn't work, too (it's like a tax cut for people who buy new cars).
- joe_the_user 17y ago
  Currently, the government certainly is 'printing money from the air', ie borrowing and monetizing. We shall see whether the result is consumer-level inflation or not. It's not always true that injecting money into an economy simply result in visible inflation. Such an injection is indeed essentially a wealth re-distribution but if such a re-distribution causes more productive investment when you would have otherwise have people hoarding money, then you have economic expansion. And even more, if such an injection successfully causes the economy to grow, you don't have the same degree of inflation, since a larger store of money is now chasing a larger store of goods and ... it's all good. But this is a hypothetical discussion between the Keynesian and Classical positions. In the case of Cash for Clunkers, I think both schools would agree that we have a Bad Policy. The Classicals would evoke your Broken Window Fallacy while the Keynesians would point out that this is not really increasing socially useful resources. And further, we currently don't have obvious Germany-1920's-style inflation but the real enemy that lead up to the crisis was asset inflation. And the current program is really neither monetarist nor Keynesian but rather simply a process of propping up the same asset-inflationists that organized the previous bubble.

joe_the_user 17y ago

The situation is not as clear cut as your link claims. A broken window might or might stimulate more economic activity. It depend on, among other things, whether the money spent on fixing the window would have otherwise been horded. The problem with broken window economics isn't that breaking and fixing them doesn't create jobs but that it doesn't stimulate rational decisions. If a glazier can count on business from hoods he pays to throw bricks in the night, he won't create a business that gives much to society as a whole. Remember, the Soviet Union didn't fall for lack of jobs but for lack of sane economic activity... And that's what's wrong with cash for clunkers. If a company can just sit and repeat clunker money, they are probably going to just ... create more clunkers.

deleted 17y ago

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