NCPA - National Center for Policy Analysis


August 13, 2009

If Congress suddenly required every car and truck in America (all 250 million of them) to be immediately destroyed and replaced with new cars and trucks that got better gas mileage, would the country be worse off or better off?  Those members of Congress who voted for the "Cash for Clunkers" program would probably say "better off," even though a perfectly good auto and truck stock would be destroyed, says Richard Rahn, a senior fellow at the Cato Institute.

Under "Cash for Clunkers":

  • Millions of workers would be employed to replace all of the existing cars and trucks; yes, that would be true, but everyone else would be poorer.
  • Those who had to buy a new car would have less money to spend on everything else, which would mean fewer jobs in the rest of the economy -- more autoworkers but fewer farmers, teachers and medical researchers -- not a good trade-off.
  • And Congress would likely respond by proposing a tax credit for the purchase of the new car.

The tax credit could only be paid for by higher taxes now or in the future, which means people would be worse off because of the dead weight loss of collecting taxes in addition to the amount actually collected, says Rahn.

Members of Congress would then say that we are saving gasoline by having a more efficient auto fleet -- which ignores the fact that building a new car takes far more resources, including petroleum, than could possibly be saved by the gain of additional miles per gallon.  They are living in a fantasyland, concludes Rahn.

Source: Richard W. Rahn, "Congress In Fantasyland," Cato Institute, August 5, 2009.

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