August 26, 2009
Cash for Clunkers and the Broken Window Fallacy
Our first lesson in economic growth is as follows:
The Broken Window Fallacy was well understood by Frederic Bastiat, 1801-1850. Briefly, if someone (the government, perhaps) were to go around town breaking windows, there would be an increase in expenditure on fixing windows. This would hardly be an effective way to stimulate the economy, however, because replacing destroyed assets simply diverts spending from other beneficial goals such as replacing worn-out shoes.
EconLib has an excellent piece by Frederic Bastiat. Wikipedia adds some Keynesian views. Toward the end of the latter piece, you will find references to the controversy over one well-known economist's assertion that rebuilding after 9/11 was a stimulus. More generally, one issue is whether the destruction of war is a stimulus.
The current issue is "Cash for Clunkers." The government could have simply given $4,500 to anybody who bought a car. The issue is the implications of also destroying the trade-in car. What is the additional effect of destroying the "clunkers?"
A second issue is "Who benefits from Cash for Clunkers?" Two of the possibilities are the car purchaser and the car dealer. We will discover that the answer to this question depends on the slopes of supply and demand curves. The answer could well be that the bulk of the benefit goes to the car dealer.
A third issue is "Who pays for Cash for Clunkers?" One obvious answer is people who would have purchased one of the "clunkers" in the used car market. Another possibility is young people who will have to pay off the government debt that financed the program.
Warning: The people in the video links in the following references love cars, spend their lives trying to keep cars alive, and are being told to kill cars. Their language in some cases reflects this conflict.
Some of these people understand the Broken Window Fallacy.
Posted by bparke at August 26, 2009 10:02 PM