‘Clunkers’ program breaks what was fixed

Richard McCord, Henderson

Sunday, Aug. 16, 2009 | 2:03 a.m.

Richard Pratt, in his Friday letter to the editor, says the “Cash for Clunkers” program is successful because it causes a multiplier effect on spending. He calls this “Economics 101.” Mr. Pratt and all who support the “Clunkers” program, including Congress and President Barack Obama, fall victim to an elementary economic error called the “Broken Window Fallacy.”

In the story of the broken window, a young hoodlum throws a brick through a shopkeeper’s window. A crowd gathers and initially condemns the act of vandalism. But then someone points out that the act has actually created work for the glazier, and that the glazier’s found income will be spent at the tailor, who will spend his new income at the baker, and so on. The young vandal is hailed as a public benefactor.

The fallacy of this thinking is that it ignores the shopkeeper’s loss from the broken window. Before the window was broken, he could have spent his money at the tailor, leaving him with his window and a new suit, but now he has only a repaired window.

The “Clunkers” program destroys the value of serviceable automobiles. The money that must be spent to replace them is not then available to increase the stock of goods and services elsewhere in the economy.

Other “benefits” of the program are also illusory. It is being funded with debt, on which interest must be paid, diverting additional capital from productive use. And no cost-benefit analysis has been done to determine whether the benefit to the environment is worth the cost to the economy.

“Clunkers” is junk economics.