Congress is likely to pass this week a bill to extend the “Cash for Clunkers” program–doubling the initial payout of $1 billion. There have been a number of good items here, here, and here which detail how this program, though designed to get less fuel-efficient cars off the road, will not produce the desired results of less energy use.
This program is really just a transfer of wealth from the poor to the middle class. The ones who are buying new cars today are the ones who can afford a monthly payment for the next few years–not the poor or the young. The later group relies on used cars for their transportation needs. One of the provisions of the program is dealers must destroy the clunkers traded in by the new-car buyers. What this will do is lower the supply of used cars available to consumers and result in higher prices. In other words, Congress is passing a bill which will put an additional tax on low-income consumers. So much for President Obama’s pledge not to raise taxes on anyone who makes more than $250,000.
The other big problem with this program is the fallacy that it helps the economy. President Obama and Congressional Democrats defend the program by telling everyone how popular it is. Thousands of people are going to the hard-hit dealerships around the country, many of whom are buying new cars and injecting a real shot in the arm for the economy. Today it is, but what about tomorrow? Many people who are taking advantage of the rebate would have bought a new car in the next year or so, even without the program. More importantly, what is going to happen to the economy when the government needs to either raise taxes by $3 billion or borrow that amount? Consumers will have $3 billion less to spend on other goods and services.
The French economist Frederic Bastiat provided a good example of why the idea of destroying property in order to encourage economic activity is wrong. He wrote about how breaking a window supposedly creates economic growth:
Suppose that it will cost six francs to repair the damage. . . . The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen. . . . It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. . . . The window having been broken, the glass industry gets six francs’ worth of encouragement; that is what is seen. If the window had not been broken, the shoe industry (or some other) would have received six francs’ worth of encouragement; that is what is not seen.
In the above example, the homeowner derives economic benefits from the unbroken window. The problem lies in it doesn’t generate any monetary value, thus people don’t think of it as a benefit. If growth came from the destruction of goods, then every December 31 all Americans should tear down their homes. Think of the affect on the economy from the increase in demand for new homes. By not having to buy new windows or a new home every year means people have money to invest and spend on other consumer goods. Economic growth comes only when you expand from existing wealth. If you destroy wealth, you can generate a lot of economic activity rebuilding it, but all you do is get back to where you were before the destruction.
All the “Cash for Clunkers” program does is encourage people to spend their money on a new car rather than a new refrigerator or television. As well, by destroying the old cars puts an additional financial burden on those who can’t afford a new car. It is another example of how politicians create short-term programs, not to help consumers, but to assist in their reelections.