Posted by Joseph Y. Calhoun, III

The cash for clunkers program is being hailed by politicians as a great success after being sucked dry of money in the first month. It is in fact a stunning display of economic ignorance. As the WSJ points out in an editorial today:

Americans are streaming back into auto showrooms, and one reason is the “cash for clunkers” subsidy. Democrats are naturally claiming this is a great success, while Republicans are claiming that because the program has run out of clunker cash so quickly, this proves government can’t run the health-care system. How do we elect these people? What the clunker policy really proves is that Americans aren’t stupid and will let some other taxpayer buy them a free lunch if given the chance.

The buying spree is good for the car companies, if only for the short term and for certain car models. It’s good, too, for folks who’ve been sitting on an older car or truck but weren’t sure they had the cash to trade it in for something new. Now they get a taxpayer subsidy of up to $4,500, which on some models can be 25% of the purchase price. It’s hardly surprising that Peter is willing to use a donation from his neighbor Paul, midwifed by Uncle Sugar, to class up his driveway.

On the other hand, this is crackpot economics. The subsidy won’t add to net national wealth, since it merely transfers money to one taxpayer’s pocket from someone else’s, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years.

It’s not as if this is some new idea. Bastiat included the parable of the broken window in his 1850 book, Ce qu’on voit et ce qu’on ne voit pas (That Which is Seen and That Which is Unseen). At best, all the clunkers program does in pull sales forward from future months and years. It also seems obvious, based on how quickly the program ran out of money, that car buyers delayed their purchases to take advantage of the program. The unseen effect is for all the products that won’t be bought or investments that won’t be made because the money has been wasted buying new cars. And if it’s such a great idea, why not expand it to other products?

Clearly, we spoilsports need an attitude adjustment to Washington’s new economics. And since money is no object, let’s give everyone a $4,500 voucher for other consumer goods. Let’s have taxpayers subsidize the purchase of kitchen appliances, women’s clothing, the latest Big Bertha driver—our Taylor-made is certainly a clunker—and new fishing boats. These are hardly less deserving of subsidies than cars, and as long as everyone thinks we can conjure wealth out of $4,500 giveaways, let’s go all the way.

One last thing to consider is the effect on the poor. While politicians like to pose as defenders of the poor, this is just another program that does the opposite. At least some fraction of those clunkers being destroyed were potential cheap transportation for the working poor. Now the market for low priced older cars will face a lack of supply and the prices of the remaining “clunkers” will rise. If the goal was to eliminate cheap transportation for the poor and force them onto public transportation, well, then the clunkers program is a rousing success. If the goal was to create economic growth, then not so much.