Don't have time right now for the full explanation but it is not good for economic growth or the lower class. I will try to fond sone time latter to give a more full explanation.

I believe in one of my diaries I addressed this so that's a good place to start.  

I've made the same argument for years.

Give money to the average American (hopefully via wages, instead of Gov't stimulus), and they will spend most of it.  Of course, they will put some away into savings.  But that's actually a good thing because it increases the liquidity (boy I love that word) of banks...as well as giving the average person the ability to save up and buy big ticket items.

Win and win.

It's not a perfect system.  People are rather gullible...and easily fooled out of their money.  But it's nice to see something different tried every now and then.

You're right! :D

I purposely didn't hit reload before posting this comment because I'm sure that there will, at some point, be some economics-student-slanted comment(s) regarding why this won't work.

Remember those 100's of Billions or so that we handed out to all those Wall Street jerks? What would have happened if we had given that money to the people, instead? Let's say it meant each American got a $200,000 check. Not that I want my nation to give me a hand out, but if they're intent to spend all of that money, it might as well do some good for the masses.

How many people would pay off debt? That would straighten out the credit crisis. Save money? Stabilize the banks. Buy cars? Fix the auto companies. Invest in the stock market? Stabilize Wall Street. Buy a house or pay off a big chunk of the mortgage? Stabilize the housing market and stop the foreclosure nightmare.

But whatever - the American people can't possibly fix a problem this big! Leave that up to the bankers and lobbyists who know better.

Trickle down economics just doesn't work, there's no evidence to support it, at least nothing definite.  But trickle up economics at least has a greater effect than anything else tried, gov't spending helps a little too.  The economy is complicated, incredibly complicated, so we can't expect one simple fix to solve the problem, its going to take a million different factors to fix it.  And in the end, its just the economy, it has ups and downs, thats what markets do, but when tax cuts are implemented for the upper class, it helps no one, oh, except for the upper class, but it seems to me that they don't need any help.  But there are also equal risks to raising the minimum wage, there is nothing that you can do to attempt to fix the economy without causing another problem in another sector, it just comes down to when the benefits outweigh the cost.  Trickle up economics is the way to go though, giving rich people more money only inspires greed, not recovery.  

I had posted yesterday that the short answer is no, "Cash for Clunkers" is not proof that trickle up economics works. I will give a little bit longer of an answer this time, time permitting.

The first thing we should do is try to determine the effects of the program. Let's take the allocated $3 Billion of which $2.8 billion was used and figure out how many new cars were purchased under the program. A report recently came out that said 690,114 cars sold under the program. When you look at that number it looks pretty good, but we have to try to figure out how many of these people would not have purchased this car without the program.

For the first part of the year annualized car sales were about 10 million or around 833,000 a month for the month that Cash for Clunkers has operated the annualized car sales rate was about 11.2 million or 933,000 a month. So these 100,000 new sales seem like a decent estimate for the number of new sales induced by the program for our little back of the envelope estimation. This number is not perfect and probably will give a higher estimation than what truly happened because some people who would have purchased cars before the program waited and some who would have purchased afterward bought now. These sales would have happened regardless but lets take this number as our estimate.  So the percentage of induced cars sales is approximately 15% we spent $2.8 billion to purchase 100,000 new cars or $28,000 for each car that would not have sold without the program.

Then there are the environmental benefits of taking clunkers off the road. The program is supposed to replace old less fuel efficient cars with new more fuel efficient cars which for the most part it did. The average mpg of a car traded in was 15.8 while the new cars averaged 24.9 mpg. Assuming the cars are driven 12,000 miles a year the program saved some 278 gallons of gas per year, which would have released almost 2.8 tons of carbon dioxide when burned.

Assuming that the previous cars would have been driven 5 more years it would save 14 tons of carbon dioxide at a cost per ton of $250 assuming a $3500 rebate. There is also the possibility that people will drive more with their new car because the cost of driving has decreased for them with the increased mileage so this number may e a little optimistic. Even with this optimistic estimate the cost of removing CO2 is very high. For the cap and trade bill it was estimated that removing a ton of CO2 would cost around $28 per ton, the cost per ton for cash for clunkers was nearly 10 times the estimated cost of reducing CO2 under cap and trade.

In addition to these effects there is also an effect on the used car market. The 690,000 cars that were traded in are being destroyed. This drives up the cost of used cars especially those that were worth less than $3,500. It has eliminated a lot of the replacement parts that normally would also go to repairing older cars. The program also mandated that the cars be less than 25 years old thanks to the antique car lobby (I didn't even know there was one) so there are still a number of real old clunkers out there that were unable to be traded in that would have been more beneficial to get off of the road.

We also have to consider where the money came from. This money was borrowed, which even with the relatively small size puts upward pressure on interest rates which is not good for economic growth and also is a future obligation that must be paid back through future tax increases or cuts in government services which is also not good for economic growth.

For the simulative effects, I am skeptical. In Keynesian terms it is very small it is not all that fast (it has been discussed since the beginning of the year) but at least it is temporary. There may be some small simulative effects. With regards to employment in the auto industry I would guess that of the people hired back most will only be temporary as after the program car buying drops back to normal levels or even below.

Overall I would categorize "Cash for Clunkers" as a gift to the upper and middle classes. They were given free money to buy cars that most of them would have anyway. The cost is spread out among all of us while the benefits are concentrated in the people who purchased the cars, and the automotive industry. The number of cars that would not have been purchased was small compared to how many were purchased under the program. The environmental effects are minor and we could have achieved much more with the money perusing a different policy like a gasoline tax and rebate system for the poor. The simulative effects could be small with offsetting negative effects in the future as the government pays for the program. It has negative effects on the used car market raising prices and decreasing the supply of parts for older cars.

Great job pointing out the flaws in the program itself, there certainly were flaws.  It was passed with its teeth removed, as most things are when the Congress is too caught up in their partisan pissing contests to worry about actually being effective.

My understanding is that the engines of the trade-ins were to be destroyed, not necessarily the whole car.  So all we have to do is distribute all the big, roomy, engine-less cars to the homeless and, voila, instant shelter!  

("I'm living in a van, down by the river!")

This was an interesting experiment, but I certainly hope it will not be turned into an institutionalized program.  Seems like I saw a news fluff piece suggesting that subsidizing the purchase of more energy-efficient major appliances should be the next "Cash for Clunkers" program.

Let's not and say we did, OK, fellas?