Cash for Clunkers Fallacy

I came upon an interesting little fallacy that fits the cash for clunkers stimulus. It's also known as the broken window fallacy.

1. Say a shopkeeper's son breaks the shop windows.
2. The shopkeeper who originally saved the money to purchase wares pays the brazier $100 instead to fix it.
3. The brazier thanks the shopkeeper's son and repairs the window for $100.
4. The brazier's business benefits in capital while the shopkeeper's loses capital.
   

Is destruction good for business? Some would say yes! Of course, the brazier just made a hundy!

However, this doesn't sit right with us though. If this were true, then we should be thanking an assailant for putting me in the hospital. I mean, if I go to the ER, tons of people in the hospital get paid! This is good for the economy, no? Heck, let's thank the serial rapist because psychologists get at least a year's worth of visits to help the victim work through the psychosis.

I used rather dramatic examples but they all share the same common denominator. It's the destruction of something or somebody for the benefit of others.

Let's consider cash for clunkers.

The government gives us a cash credit so that they can 'recycle' the clunkers. Recycle is misleading since the engine and drive train for the clunkers must be destroyed (source: CNN's Time). Essentially, the government gives us $3,500-4,500, to destroy a working (albiet inefficient) asset. This stimulates the automobile sector of the economy, just like how window breakers stimulate the brazier's business, the rapist stimulates the psychology business.

The difference is that the government is giving us money to help pay for the new car, the new glass window, and the shrink sessions. Let's break it out simpler:

1. Government gives you $3,500-$4,500 to have 60% of your car's value destroyed.
2. You 'trade in' your car and have it 'recycled'.
   
3. You buy a new gas efficient car with the credit.
   
4. Car companies thank you for the patronage. Their business flourishes.

But I got a new car out of it! Where do you think the government got the $3,500-4,500? They either got it from taxes, or they sold bonds to other countries -- most likely the latter. Basically, the government took a car loan out for you to destroy your own car so you could buy a better one.

Could you have put that $3,500-4,500 plus whatever else you paid on the new car to a better use? Perhaps invested in a business/education/certifications?

Basically, the government wanted to pour funds into the automobile industry. It's a zero-sum game. Wealth just got redistributed to the automobile industry. Same as the shopkeeper with the broken window. The money went back to Americans.

Lastly, I introduce opportunity cost and the creation of wealth.

The shopkeeper, the rape victim, and the American who 'recycled' his car all could've spent that money somewhere else. Education is probably the best since this leads to innovation, which creates new wealth (ie: RCA, Bell labs, other R&D). Those three people could've invested it into a business which could generate new wealth and taken market share from other countries (Ie: Apple, Google, etc). Essentially, the government wanted to funnel money into the American car industry which demands more pay than the Japanese and produces an inferior product. Thank you Obama.