The Broken Windshield Fallacy | Swaminathan S. Anklesaria Aiyar | Cato Institute: Commentary

The Broken Windshield Fallacy | Swaminathan S. Anklesaria Aiyar | Cato Institute: Commentary: "The economic argument says that scrapping cars creates artificial scarcity, thus boosting demand for new auto sales in a recession. Leave aside that scrapping clunkers also raises the prices of used cars, thus penalizing poorer consumers. More importantly, there is evidence that the scheme triggered far fewer additional car sales than assumed. Consulting firm Macroeconomic Advisers estimates that in the U.S. 'roughly half of the 250,000 in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway.' So all the scheme did was to transfer, rather than create, wealth by unnecessarily bribing people to make long-planned acquisitions.

But even where the subsidies may have caused genuine new sales, more money spent on cars simply means less money is available for other items. The German Retail Federation, for example, complains that the cash-for-clunkers program is 'sucking out spending' as retail sales fell 1.3% in May and 1.8% in June. For the overall economy, therefore, the net result is probably zero. The idea that destroying items of value will boost the economy might be called in this context, the broken windshield fallacy."

"The energy required to manufacture a car accounts for as much as 45% of its lifetime energy consumption. So replacing old cars with new ones requires a big up-front energy investment. And crushing old cars and converting them to steel consumes more energy than exporting them.