Trading American Clunkers For Foreign Cars

by Conor Clarke

Fox News reports that the Cash For Clunkers program, which is due to end tomorrow, has probably benefited foreign car makers more than American car makers. I think this is interesting news. But since the Fox article proceeds from the implicitly sinister premise that we are "turning the already dwindling number of American car owners into the growing ranks of foreign car drivers," it's worth making three points.

The first is typical and predictable free-trader-ism: If the number of American car owners is dwindling because Americans are buying more foreign cars, I'd say American consumers are probably better off, because the foreign cars must be better or cheaper or otherwise more desirable. But this also seems like one of those situations where the wonders of free trade extend only so far, especially as they pertain to the domestic stimulus benefits of the Cash for Clunkers program.

So here's the second point: The fact that a lot of the cars being purchased are foreign should affect how we tally up the stimulus benefit. Economic stimulus present a coordination problem for the nations of the world. If one nation hands out deficit-financed stimulus dollars to its citizens, those citizens will almost certainly use some of those dollars to buy foreign goods. The whole world shares the benefit. But only the nation handing out the stimulus dollars bears the cost -- namely, increased debt and higher future taxes. So if we are judging the success or failure of the Clunkers program based on how cost-effectively it stimulates the American economy, the fact that a lot of the cash is going to foreign companies is probably a strike against it. (Paul Krugman wrote a series of great posts about this subject back when the original stimulus bill was being debated, and I think Krugman's word on this subject -- his true expertise -- is close to gospel.)

But a third point: The fact that a lot of the dollars are going to foreign companies does not mean the program hasn't been successful. We don't live in a zero-sum world, and the simple fact that a law benefits foreign companies and foreign economies doesn't mean it's bad for America, too. It can be good for both!

Update: In response to a couple of smart emails I should make something clear. One issue I do not consider in this post is what makes a company "American." A lot of car companies that were founded in America produce cars abroad, and a lot of car companies that were founded abroad produce cars in America. Both kinds of companies have shareholders in America and shareholders abroad. There is, furthermore, a difference between GDP and GNP accounting, and those differences will become more pronounced depending on the ownership and production structure of a company.

So I'd say this: my post starts with the assumption that a greater proportion of revenue at an "American" company ends up in the pockets of both American domestics and nationals than does the revenue at a "foreign" car company. I believe that is correct. But, this being the blogosphere and all, I'm not totally sure.