Cash for Clunkers Is Just a Broken Windshield: Caroline Baum
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Commentary by Caroline Baum
Aug. 5 (Bloomberg) -- Now that the U.S. government is in the auto business, with a 61 percent ownership stake in General Motors and 10 percent in Chrysler, it wants to move inventory.
So it came up with a plan, gave it a catchy name and wrapped it in a patina of environmental do-goodism.
“Cash for clunkers” was touted as a huge success, with cars tearing out of auto showrooms, the program running through its $1 billion appropriation in one week and government servers crashing in response to overwhelming demand from dealers filing for rebates. (At least it wasn’t the drivers that crashed.)
Was the program to induce drivers to turn in old gas- guzzlers for a more fuel-efficient vehicle a success? That depends on how you define success.
Consumers got a “discount,” automakers sold more cars and trucks last week than they would have, and all that “stimulus” -- spending begets income begets spending -- has to be good for the economy, right?
With success like that, why limit the rebates to $4,500? Why not give everyone a $10,000 or $20,000 rebate to turn in an old clunker? And why stop at the cars in the garage when you could get rid of a garage full of accumulated junk, with the government providing rebates to households for unloading what they’ve been meaning to get rid of for years?
A reductio ad absurdum, to be sure. Sometimes reducing a proposition to absurdity is the easiest way to expose its flaws.
The government is transferring money from -- guess who? -- we, the taxpayers, to car buyers. Those buyers would have traded in their cars anyway, albeit at a more leisurely pace, according to Jeremy Anwyl, chief executive of Edmunds.com, an auto information Web site. Knowing their cost would drop on July 24, buyers postponed sales so they could cash in on the program, he says.
Sight Unseen
Transferring money from taxpayers to car buyers is exactly that: a transfer. The money taken from taxpayers can’t be used for something else.
This is the lesson of Frederic Bastiat’s essay, “That Which is Seen, and That Which is Unseen.” Bastiat, a 19th century French political economist, tells the story of a shopkeeper who has to hire a glazier to repair a broken window, providing work and income for him in the process. That’s what is seen.
What is unseen is what the shopkeeper would have done if he didn’t have to pay the glazier. He might have bought shoes for his children, providing income for the shoemaker, who in turn could buy leather to produce more shoes. The glazier’s gain is the shoemaker’s loss. There is no net gain, no job or income creation, from this transaction.
Broken Window Fallacy
The “broken window fallacy,” as it is known, can be applied to all government spending. The $787 billion fiscal stimulus enacted in February transfers money from taxpayers to the government to allocate as it sees fit. The effect of the government’s expenditures shows up as growth in gross domestic product. Auto manufacturers produce more cars to meet the juiced demand, adding to GDP. This is what’s seen.
What is unseen is what would have been produced by the private sector had the government not confiscated future revenue via taxation.
An additional $2 billion to extend cash for clunkers -- the measure passed by the House of Representatives and is awaiting Senate action -- is a drop in the bucket compared with the trillions the government has spent, lent or pledged during the crisis.
Just think of all those broken windows, or windshields, as the case may be.
Cash ‘n Trash
Cash for clunkers requires that trade-ins be scrapped, whether they are fully depreciated or not. How is destroying something good for the nation?
James Hamilton, professor of economics at University of California, San Diego, says cash for clunkers adopts the worst of the New Deal policies and adapts it to today’s circumstances.
The Agricultural Adjustment Act of 1933 “paid farmers to slaughter livestock and plow up good crops, as if destroying useful goods could somehow make the nation wealthier,” Hamilton writes on his blog. “And yet, here we are again, with the cash for clunkers program insisting that working vehicles must be junked to qualify for the subsidy.”
What’s more, the U.S. has effectively adopted Japanese- style industrial policy, or a government-business partnership. In the case of GM, it happens to be partnering with itself.
What about other industries that are constrained by bloated inventories? Why not offer a rebate to homeowners that trade in older, oil-heated houses for new ones using gas heat or solar panels? The government could even mandate that trade-in homes be scrapped (in this case scraped), paring inventories in the process.
If President Barack Obama and the Democratic majority in Congress think these programs are putting us on a path to wealth, they better start looking beyond the 2010 mid-term election.
Then again, what better way to demonstrate the benefits of fiscal stimulus than a parade of new, fuel-efficient vehicles cruising down a newly paved road?
(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)
To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.
