Both. And, you need to include the subsequent transfer of “wealth” (wages) to the computer manufacturers’ employees, and then to everyone they buy stuff from, etc., every step of which is taxable.
But in those cases the older capital either must be destroyed to make new capital or the old capital is worthless. For instance, to build a new factory on the same plot, you must destroy the old one first. Or when the military makes a new tank, if the old tank will never be used nor sold, it is worthless.
I agreed with the rest of what you said until you got to this:
The question should be, does the clunker have a larger net value than no clunker?
Did you see my earlier reply? The answer might well be “No, in fact the reverse”.
FTR, the nonpartisan Congressional Budget Office’s analysis of the package’s multiplier effect, based on decades of experience with Keynesian stimuli.
The Laffer Curve has no real-world support, btw. The analogy is pretty damn silly.
My program:
- $3000 (rebate) for anyone to buy a new car
- clunkers can be traded in, sold, kept, or destroyed, whatever the owner wishes
- the dealer gets $500 extra if he destroys a trade-in from the list
more effective, less costly, and only the valueless clunkers (I call them shitboxes too) get destroyed
Any non-refundable tax credit is more effective because it eliminates the government as a zero multiplier. In other words, tax credits are more effective because the government isn’t taking your money and then giving it back they way they are with CforC. Instead, the government is looking at your income/car/whathaveyou and saying, "Okay, we would have sent you x bill but now we’re sending you a smaller bill because you qualify for xyz tax credit. Tax Withholding (W) – Total Tax (T) = Tax Refund (R)
Of course, if you qualify for a refundable tax credit that outstrips your tax liability, you will receive a check from the government for the difference. This means you have paid negative taxes and the rest of the taxpayers have subsidized you.
Even refundable tax credits have their place. Consider the EIC, an extremely effective tax credit that yields great befit to poor families. It stands out as a tax measure that actively fights poverty. It’s based on a fair assessment of individual need and it has a huge impact on the tax liability of families.
For taxpayers, refundable is better than non-refundable but there is a threshold, at a certain point, you pay enough taxes that the difference between the two credits is non-existent.
I tend to support non-refundable tax credits over the refundable credits. I’m not certain if it’s fiscally possible but I’d like to see us move away from a tax credit system altogether. The government should offer tax deductions only, that way taxpayers retain full-time use of more of their income and the Total Tax is reduced from the principle.
I don’t understand your point about paying interest on the $4,500 - if the dude had that money, he’d be earning interest on it. Your example assumes that he has $4,500 in debt that he’s paying interest on? How is Example_Dude able to afford a car payment when he uses the CforC program if he’s $4,500 in debt? Buying the car doesn’t bring him back to zero, he just has a car payment and a lower bill at the pump. I know I’m missing something there. Might have to hit you back tomorrow though, I’m headed out for a 3pm.
You’d think with the government’s ability to magically turn every dollar into $1.70 by virtue of spending it, we’d be better off if we all just gave 100% of our income in taxes and let the government account for the entire GDP of the country. Our economy would get 50% larger instantly! Think of the riches!
You are wrong. The government isn’t magical. The economy is under performing. So there is tons of unused capacity.
Let me say it again. We are in a recession. Factories that currently exist are understaffed and under producing. Get it?
Any spending improves the economy in this environment. Not just the government’s. Get it?
Most consumers aren’t spending now, because they’re afraid of the recession and holding on to their money. Get it?
The government is the spender of last resort. It can spend money when consumers are too afraid. They fix a road, they subsidize a car. Get it?
The program not only puts the $4500 into the economy, which would be good enough, it also gets people to spend another $10,000+ of their own money into the economy. Get it?
So you are wrong, the government isn’t magic. In this economy all spending is a good thing. It’s just the government can do it when consumers won’t.
Please try to understand this stuff.
No, please talk slower and use smaller words.
No, please talk slower and use smaller words.
Any spending? Digging ditches and filling them up again?
Why doesn’t the government institute widespread incentives across the economy? Replace your old power-hungry CRT TV with a nice new LCD and the government will throw in $500!
Why not? Any spending is good spending.
No, please talk slower and use smaller words.
No, please talk slower and use smaller words.
By your philosophy, could any government spending be bad?
No, please talk slower and use smaller words.
So why not a program for TVs? Lawnmowers? Computers? All of these things could be replaced by newer, more efficient models. They would provoke people to spend their money. They would inject money from the treasury into the market (ie hand it off to some lucky corporation who lobbied successfully for it).
What makes cars special? And more generally, if this program can be wildly successful and create wealth on a small scale, then why not a massive one? Why not give everyone who wants to buy a car a $4500 credit? How about $15000?
If any government spending produces wealth, why don’t we have as much spending as we could possibly manage?
So why aren’t we expanding this program to all consumer goods?
Gee golly I don’t know, this economy stuff sure is complicated.
Actually that would stimulate the economy. Like I say, the reason our economy is doing shitty is there is no money moving around. Everyone (consumers and businesses) is holding on to it because they fear the recession kicking them in the nuts.
Look, you pay a dollar for a candy bar. The store owner pays some of his payroll with that dollar. The employee pays for a chicken sandwhich at Burger King. His Majesty, the Burger King pays his bun supplier. The bun supplier pays for service for one of his trucks… and so on. Every dollar is spent again and again. One dollar has a multiplicative effect. It’s magic!
I would expect that would work, but most of the stimulus plan was aimed for things we need to do anyway, like fix roads and maintain public parks. The C4C is a good idea because, 1. It makes people spend a ton of their own money. 2. It helps the auto makers who employ millions of Americans. 3. It actually does get low mileage cars off the road.
Military spending on fighter jets that sit in hangers unused would be pretty bad. They have to be maintained after all.
Because eventually we’ll reach saturation.
Because in this equation the government is acting as a proxy for the consumer. The consumer isn’t consuming because of fear of the recession. Have you cut back your spending? I have. This means that the engine of our economy isn’t getting the transactions it needs to keep revving.
The way to fix this is for the government to inject money when the consumer wont. That keeps the economy moving. And helps it fix itself as confidence rises.
It’s not magic, this spending is increasing our debt. But it’s keeping the economy moving. If the economy stalls and falls apart we enter a deflationary shitstorm. When deflation happens we’re all fucked. Companies start shedding jobs and assets, dogs and cats living together waaaagh!!!
Debt is bad. A stopped economy is worse.
It really needs to be pointed out that program is NOT part of the Broken Window Fallacy, for the simple reason that it was VOLUNTARY. In the BWF the window is destroyed against the owner’s wishes, the C4C program is not a government mandate to destroy inefficient cars.
The second point that needs to be made is that the C4C program was part of a government stimulus plan, which is based on Keynesian Economic Theory–namely that the government can have a positive impact on the economy through spending. If you don’t agree with or believe in Keynesian economics that concept won’t make sense, much like washing your hands seems weird to someone who doesn’t believe in germ theory. So if your real criticism is of government spending (wasteful or otherwise) and its impact on the economy this is a rather complicated way to have that discussion.
But to actually address the OP, it is NOT a destruction of wealth. That would imply that NONE of the clunkers would have been scrapped if the program hadn’t existed. Are you suggesting that had this program not been implemented, that all of those cars would still be on the road in 6 months or a year? Are you saying that NONE of those cars would have been traded in for scrap?
The “math” presented so far acts as if perfectly usable cars were just tossed away because the government gave free money.
The reality, based on the evidence presented, indicates that people used this as a chance to trade in a barely usable car that would have still been scrapped, AND bought a new car sooner than they would have.
And as for the used-car-supply-side of the equation: this program required people to buy a new car. But with the recent economic downturn, those people were more likely to buy a used car and thereby REDUCE supply—don’t forget that their clunker may have still been scrapped.
So without the program, the same group would have turned in the same car to be scrapped and buy a used car. Now we have a system where people are encouraged to turn in their clunker sooner and buy a new car.
In this one specific program, government money was spent to encourage people to buy new cars, which is something that people stopped doing over the past year. And to that effect, it was a success.
As to the question of why cars? Why not? There is currently an economic stimulus that provides $8,000 to new home buyers. The government has been subsidizing mortgage interest through tax deductions for years now. There are rebate programs for upgrading your windows. And there was a HUGE stimulus package that addressed other areas. This was just one part of that program, and it appears to have done exactly what it set out to do, only faster. It seems really late in the game to ask, “why not TVs?” This program was designed, written, voted on, and implemented to stimulate new car sales, and it did that!
The real criticism you should have of the program has nothing to do with emissions, destruction of wealth, free money, or website failures.
The real and simple failure was that $4500 (or $3500) was obviously too high and chances are they could have achieved the same affect using a lower number.
This question indicates that you didn’t get my point. I’m not against all tax credits, but C4C is more effective than a credit in this case. Say ED would buy a car for a later credit at $14,500. He will be financing that whole amount, but say could pay back $4500 when he gets his credit. (Which is dubious.) With the program, he only finances $10K up front. The difference is the interest on the $4500 from now until next April. If he had all the money, he could also get more than 6 months of interest in the $4500 he saved from now until April, when he’d get the money back and be able to invest it. The bill at the pump would be the same in both cases. This assumes that a tax credit would drive the same kind of consumer interest as C4C which is hardly clear. The $4500 off the sticker price might look like a much bigger bargain than it rationally is, but behavioral economics tells us this stuff counts.
I’m stuck with a future tax bill to pay mostly Japanese automakers today.
I’m trying.
BTW, it’s not even clear that Cash For Clunkers increased sales very much.
According to the CEO of Edmunds.com, part of the big surge in sales was due to about 100,000 people delaying car purchases while waiting for the program to start. In other words, rather than moving car purchases up as a true stimulus would, it actually delayed car purchases. This would be why there was such an incredible surge when the program was enacted. Had it never been announced at all, 100,000 cars would have been sold earlier.
Also according to Edmunds.com, the normal state of the current market is for 60,000 to 70,000 similar deals to happen in any given month.
In addition:
So follow along here - what this program may have done is cram two or three months of sales into two or three days. As a result, there was an instant shortage of vehicles - especially of the most fuel-efficient. This may have driven buyers into cars less fuel efficient than they would have purchased had the program not existed at all! It may have made the fleet average economy of all these sales even worse. The market had expected that, without the program, about 200,000 ‘clunker’ sales would have happened in the three months of summer. This means the total stimulus of the ‘Clunker’ program may have been only 50,000 cars, which means they actually cost taxpayers $20,000 each. And of course, without the program, those 250,000 engines and transmissions would still be available to poorer people to help keep their older vehicles running. If the average economic loss was $1000 per vehicle (the residual value of the drivetrain), then that’s another $250 million in economic losses, or $5,000 per vehicle sale stimulated.
Finally, it appears that in anticipation of ‘Cash for Clunkers’, auto makers actually reduced normal purchase incentives, meaning buyers didn’t get as good a deal as they thought.
As usual, when it comes to the real world, not everything is as simple as the theory.
Sources:
100,000 car buyers waiting for ‘Cash for Clunkers’
The Inconvenient Truth - Each Clunker Sale Costs Taxpayers 20K
I have to say, I agree with Sam on this one. The primary benefit od CfC in my opinon was the better gas efficiency gained. But I have always th.ought that a gas tax is far more effective than this program would be for that end. And a gas tax is economically justifiable, as it relates (not 100% difrectly mind you) to the societal costs imposed on driving, the need for roads and the environmental costs. I could even see imposing a vehicle tax related to the fuel efficiency. I think these two combined would come closest to creating the proper incentives to consumers which in turn would send the market signals to the automakers.
We’re using that tax bill to stimulate the economy. I’ll have to pay it too, but I’d rather pay down the deficit than live in a country going through a deflationary spiral.
Do you agree that deficit spending is better than a deflationary spiral?
Can you agree that the stimulus effect of C4C is a good thing for your economy?
Except that a substantial raising of the gas tax is politically infeasible.
Following up on my comment upthread, a bit from a Time article dated today (Aug 5):
Again, though, the figures come from “initial data released by Department of Transportation”, so they’re likely to change.
The top 3 models sold under the program are the Ford Focus, built in Michigan; the Toyota Corolla, built in California, and the Honda Civic, built in Indiana.
Edmonds.com says, in Sam’s link:
but we don’t live in typical times, do we? It would have been nice if they gave some data showing this rate of trade-in during the past 3 to 6 months. In fact, if the announcement of the program made people delay buying cars, we should have seen an even bigger dip than we’ve seen during the recession when the plan was announced. I don’t recall any such dip. Some data, please?
As for incentive reduction, there is clearly an optimal amount of incentives to drive sales. The C4C program is part of that, and therefore it makes perfect sense to have Detroit reduce their contribution. People are voting with their checkbooks that this level of incentive is enough to get them to buy, so Detroit would be throwing away money by offering more. This increases their effective ASP which improves their profitability which is what we want.
It appears there hasn’t been a big shortage problem, no doubt because of the massive number of cars in inventory. Since the MPG improvement is higher than forecast, even a small reduction won’t be a big issue. And since the Senate looks clear to pass the additional funding, maybe we could stop the “oh nos, what if they run out of money and stick the dealers” stuff.
C4C and a gas tax are not mutually exclusive. C4C just gives a one-time boost to fuel economy, but it is hardly the solution. I don’t think anyone is claiming that. An increase in the gas tax to reflect the social costs is much better, and allows industry to innovate to meet increased consumer demand for efficient cars. California has high gas prices for other reasons, but this has increased efficiency for us.