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Jimhenry
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http://www.cashforclunkersfacts.info
http://www.cashforclunkersfacts.info

I'm not sure what the answer is. Perhaps the problem is that consumers don't have enough savings and can't borrow the money at a low enough interest rate to make the new purchase cost-effective for them without the subsidy. (The government, by contrast, is borrowing at near-zero interest rates — actually negative in real terms — for short time horizons right now, so as long as the program pays for itself quickly enough, it's a good deal “for the nation as a whole” though maybe not for those taxpayers without clunkers to sell.) Another possibility is that consumers just need that extra push to get off their ass and buy a new car, perhaps because they wouldn't have done the calculations and realized that they come out ahead.

But even if the program didn't pay for itself, it would still be a net benefit — even ignoring any enviornmental benefit — because the cars will be produced by workers who otherwise would have been unemployed, and most of them probably don't have very good alternative uses for their time. (I would say that, whatever value there is in those alternative uses, is probably outweighed by the psychological cost of being unemployed.) In Keynesian economics, an effective stimulus pays for itself immediately because the cost is only in terms of resources that would otherwise be wasted. In fact, it more than pays for itself, because the indirect effects create additional demand for resources that would have been wasted.

So I'm wondering: if this program is such an effective stimulus, why don't we do similar things for other durable goods? I'll tell you, if the government had a cash-for-clunker-refrigerators program, I would definitely replace the dilapidated one I have instead of putting it off repeatedly and having to continue wiping out the water that collects every few days. It's the same principle as the Investment Tax Credit, but applied to consumers instead of businesses: if the government subsidizes them, you'll buy your durable goods now, when the economy needs it, rather than waiting a few years until it may not.