But the real benefit to business — and harm to the economy — comes after the car sale. The law requires the dealers destroy the “clunker” engine (which, to be eligible, was drivable upon trade-in), scrap the car and shred almost all its parts. This government-required waste reduces the supply of used cars on the road. Reduce the supply of drivable used cars, and you drive up the price of all cars.
This supply reduction is the real stimulus for automakers and new-car dealers, and it comes at the expense of every consumer who didn’t take advantage of Cash for Clunkers — especially those who can’t afford a new car. The program taxes used-car buyers to subsidize new-car buyers.