Cash For Clunkers is an economically unsound program that will only make the American economic situation worse. It transfers wealth from one group of people to another while simultaneously destroying real wealth and misallocating scarce capital away from its best use.
To understand why this is, you need only understand the Broken Window Fallacy.
Frederic Bastiat originally formulated the Broken Window Fallacy in his landmark book That Which is Seen and That Which is Not Seen. Henry Hazlitt then expounded and reformulated it for a more modern audience in his classic work, Economics in One Lesson (which was one of our 31 top resources for small business owners and employees). In Chapter 2, entitled "The Broken Window," Hazlitt wrote:
A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sun. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace the window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment†has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
The Fallacy of the Broken Window exposes the lie that, as one Austrian Economist put it, "the ... destruction of wealth fuels its creation." He then goes on to summarize the Fallacy and concludes:
You can see the absurdity of the position ... when you take it to absurd extremes. If the broken window really produces wealth, why not break all windows up and down the whole city block? Indeed, why not break doors and walls? Why not tear down all houses so that they can be rebuilt? Why not bomb whole cities so construction firms can get busy rebuilding?
It is not a good thing to destroy wealth. Bastiat puts it this way: "Society loses the value of things which are uselessly destroyed."
But Big Government frequently peppers hammers us with the message that we must create new wealth by destroying old wealth!
And that's where Cars For Clunkers comes in. Here's a quick summary of the program and where it goes wrong.
- The Federal Government takes tax-dollars, or borrowed dollars (to be paid back later through taxes), and offers to hand that money to people who will trade in pre-selected older cars; the money is to be used toward buying a new car; then the government takes the traded-in car off the road, and junks it, often by destroying the engine; the "subsidy" given toward buying the new car (for each trade-in) is $3,500-4,500
- If the value of the trade-in car is less than the $3,500-4,500 handed in trade value the government has overpaid for the car, despite that the government is about to junk it, thus ensuring that no value will be received in return.
- If the value of the trade-in car is more than the $3,500-4,500 handed, the government still derives no value from the trade because it's not reselling it; it's junking it and stripping it for salvageable parts (which are minimal)
- The net number of cars on the road remains the same; maybe net emissions drop or maybe fuel-usage drops (because of better fuel efficiency) in the aggregate, but maybe not! (more on that below)
So, in this new version of the Broken Window Fallacy, our modern-day Window Breakers are destroying drivable cars, then handing out confiscated or borrowed money to the people who are allowing their "windows cars to be broken" because other people are paying for these windows cars to be replaced with newer, better, sexier models!
They do this in the name of saving the environment from pollution, or saving on "waste" through fuel-efficiency, or preventing global-warming through reducing emissions, or whatever. It really doesn't matter what justification they're using, it's wrong on several levels.
It destroys wealth by not letting these cars be used up over their useful life. It destroys wealth by routing scarce resources into activities - in this case, car building - that wouldn't otherwise take place, denying other industries access to those resources. It destroys wealth by taking on liabilities, through borrowing, that have to be paid back later by taxpayers (reducing their purchasing power in the future) or by taxing them immediately (reducing their purchasing power today).
Also, building the new cars emits all kinds things into the atmosphere and gobbles up energy in the production process! So any gains in emission and efficiency are offset by that, too!
Guess what else proponents of this destruction are missing?
They are oblivious to how the incentives will change future behavior.
These people traded in a car they've been likely to drive less. We safely assume these cars didn't get as good gas mileage or was older, a "clunker", because they were targeted for these reason. These cars also may not have been driven at all. However, they've been used to helped people get a vehicle that they're more likely to drive more!!! More driving means more emissions, even if the emissions per unit of travel is less. More driving means more fuel consumption, even if the fuel consumption per unit of travel is less.
See, when you change the incentives, you change the behavior. The people who owned these traded in cars were incentivized to drive them less by having to pay more for a unit of travel, and by having to conserve the remaining life in the car, which may have been approaching the end of its life over the next 5-10 years. Now? Not so much.
In fact, the New York Times reports, "Michael Gerrard, director of Columbia Law School’s Center for Climate Change Law, said in a statement that the cash-for-clunker program is not a cost-effective way to reduce fuel use or greenhouse gas emissions. Any energy savings, he said, could take several years to realize, considering the time it takes the fuel savings from a new car to exceed the energy cost used to make it.
Who are the favored parties?
The subsidized consumers, of course. But also the favored industries, who have had their goods favored at the expense of other industries. The government isn't handing out money to go buy [fill in the blank], yet they're siphoning off money and resources from a finite supply and putting it into one area, at the expense of other areas.
Think the Auto-Dealers liked it?
Look at this:
"It was an absolute success," said Michael J. Jackson, chief executive of AutoNation Inc., the U.S.'s largest chain of auto dealerships. "There's a very compelling case the government should put more money into it. It's a great stimulus to the economy."
Of course! The "government" should put more money into it. Let me fix that quote to show you what it should say if it were telling the truth.
"It was great for us, though a miserable failure for taxpayers and other industries," said Michael J. Jackson, chief executive of AutoNation Inc., the U.S.'s largest chain of auto dealerships. "There's really no case to be made that the government should confiscate or borrow more money to put into it. But it's a great stimulus to my bank account, so I don't care what happens to the people picking up the tab!"
Who were the losers?
Everyone else, especially the taxpayers. And other businesses and industries, especially ones directly impacted by trading these cars in instead of servicing them, auto-parts sellers, mechanics, etc.
The funny thing is that down the road even the dealers will suffer, because this program created false demand and just kicked the can down the road so that the dealers could put off their day-of-reckoning a little longer.
Want to feel some outrage?
Read this story and watch the video, especially watch the video at the 2 minute mark on where they discuss how the cars are junked, and how otherwise re-saleable parts are destroyed in the process. Perfectly usable cars being destroyed! And, as an added bonus, Big Government makes a complete mess in administering the program (but don't worry, they'll run nationalized health care flawlessly).
We're not being fooled. The majority of American people understand that this program is corrupt and just 35 in 100 Americans are in favor of it.
But since we're living in the age of Big Government, so let's go all the way with this!
Why stop at cars? In fact, the Wall Street Journal today asked, Why not a "Cash for Everything" program?
Let's blow up buildings and rebuild them with subsidies to stimulate commercial building. Let's burn down homes and rebuild them with taxpayer funds to stimulate the homebuilding industry! Let's break up all our fine-china and buy everyone a new set!
Or maybe not.
Let's just point out one last thing about the way Cash For Clunkers was run, and how it exposes Big Government hypocrisy.
Very poor people, the car-less among us, who don't have any private transportation of their own, and who Big Government always profess to help, could have really used those cars. They could've been given to people in need.
This summer I donated my "clunker" to the Kars 4 Kids charity, which then sold it and used the money to help poor children. I'll bet you my shiniest nickle that this government program has caused material hurt to charities like Kars 4 Kids. And not just this year, but also in future years since many cars that may have been later donated to charity had their end-life pushed up to the present day and therefore won't be available for donation in the future.
Just another sad instance of the Bastiat's "unseens" or, in words we like to use, "what-might-have-beens."
The program should probably be called "Cash From Clunkers" since this bunch of Big Government phonies are possessed of such little brain-power that they can only themselves be referred to as Clunkers. Then again, referring to it as "Cash From Clunkers" also obscures the fact that though they are delivering the money, it's not their money. It's our money. Or China's money that they've borrowed and we will have to pay back someday.
Anyone suspect that this whole program might just be one ruse to prop up Government Run Motors or as a payback to the Automobile Unions?
Whatever. It's corrupt. Another example - in a long and growing list - of corruption and Big Government going together.
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