Another dark side of Cash 4 Clunkers

August 21, 2009

So, Cash for Clunkers was made to stimulate the economy.  We’ve heard an awful lot about the problems it has had so far.  In brief:

– It’s undoubtedly hurting charities.
– It’s well behind schedule in payments.
– It’s part of the “broken window” fallacy. Basically, it assumes you can create wealth by destroying wealth.
– It’s highly likely it will drive up the prices of both used cars and used car parts, thereby hurting the lower and lower-middle classes.
Etc., etc.

I’d like to mention something most don’t. Basically, one of the big problems with the “broken windows” fallacy is that it ignores opportunity costs. Fortunately, with C4C, we know exactly what that opportunity cost is. The extra $2 billion that was poured into the program came at the expense of loan guarantees for new energy projects. Think about that for a second. Think about what the opportunity cost was.

What does this mean? It means it’ll be harder for new alternate energy projects to be funded. These are the sort of projects that are the first ones cut during a credit crunch like this recession. After all, they’re unproven technology, and therefore high risk. Personally, I know over a dozen biofuel companies who have dramatically slowed down their commercialization plans after the big crunch last year. These people would love loan guarantees in order to star putting cement on the ground and get their projects running.

At worst, these loan guarantees would be no less stimulating than C4C, as any company that fails is no different than blowing up cars. In fact, in the grand scheme of things, its better, as every failed company tells everyone else what not to do, and thus increases the odds for everyone else.

At best, these loan guarantees would be a real stimulus, helping to form stable, long term companies that generate wealth and provide dozens of direct jobs without government funding. And would also reduce CO2 emissions if you’re into that sort of thing, possibly reduce energy imports, prove that such projects are possible and create a boom of new projects (thereby stimulating the economy even further), and so on.

Given the loss of 2 billion dollars of loan guarantees here, I think it’s safe to say that C4C has failed in stimulating the economy.