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Debate: Cash for Clunkers program

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Does the Cash for Clunkers program help the economy?

Background and Context of Debate:

In the wake of the 2008/2009 economic crisis, the Cash for Clunkers program was introduced in many European countries and later on in the US in 2009. In this program, people can trade in their old vehicle in exchange for some extra money that they can use for buying a new one. The basic idea, as presented by its proponents, is that the program helps to "jump start" the economy. But is this really the case? Is Cash for Clunkers program really a viable way how to improve the economy?

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  • The program helps in the short term only. While the sales of new cars is spurred by the program in the short term, they will arguably drop the more once it has ended, since many of the people who buy the car because of the program were arguably planning to do so anyway, were only artificially spurred to do so immediately. In one sentence: the program is effectively just stealing sales from the future.
  • The program is aimed selectively at the automakers. The Cash for Clunkers program focus only on one specific sector of the economy - the automotive industry. Other producers, e.g. electronic appliances makers (not to mention the service sector) do not receive any subsidy of this kind. The artificially increased demand in the automotive sector shrinks the demand in other sectors; money that are spent on buying a new car will not go directly to other parts of the economy.
  • The program will increase indebtedness of many people, leading to social problems. - Many people from the lower income range are attracted by the vision of buying a new, relatively cheap car. The (rather irrational) desire "not to miss the opportunity" may shatter their sense of reality. In order to get the "extra money" from the government, they are willing to sign a leasing agreement, or to borrow the money, straining their (family) budgets to the limit. Later on, many of them may find that they are unable to fulfill their obligations or that they have not enough funds to actually use the car, so it doesn't make sense for them to have it. Such people will eventually lose in the end. Moreover, the surplus of relatively new cars from this kind of people will flood used-cars retail. That will lead to a decline in the demand for new cars (since there will be many nearly-new available on the market). These effects are already seen in some countries that have introduced the program. So, in the end, the program does not help even the car manufacturers at all; exactly the opposite.



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