What Lies Beneath

The psychological basis of economic, financial, and social behavior

David Hirshleifer is the Merage Chair in Business Growth and a professor of finance and economics at UC Irvine. See full bio

September 21, 2009, Behavioral Economics

Further news on "Cash for Clunkers: What Is Seen and What Is Not Seen"

What a wreck-- how much did "cash for clunkers" really cost?

The appeal of "Cash for Clunkers" as an economic stimulus came from psychological bias--so what did it really cost? What is seen (greater demand helping car dealers) is more salient than what is not seen (the loss of resources that could be put to other uses-- some of which might stimulate economic activity in other industries). Burton Abrams and George Parsons of University of Delaware have written this article, which has some remarkable news about the cost of this program. Like my previous entry, they refer to Frédéric Bastiat and his 1848 essay "What is seen and what is not seen." According to Abrams and Parsons, "With per vehicle environmental benefits at $596 and the costs at $2,600 per vehicle, the clunker program is a net drain on society of roughly $2,000 per vehicle. Given the approximately 700,000 vehicles in the program, we estimate the total welfare loss to be about $1.4 billion."

There is, of course, nothing unique about the Cash for Clunkers program. Many government programs are superficially appealing, because the gains are salient and the costs less so. And of course, in principle the error could go the other way-- a good program could be rejected because the costs are more salient than the benefits. My question for readers: Is there any way to structure political debate to make what is not seen more salient, so that wealth-destroying programs are not adopted, and good programs are not rejected?