Cash for Clunkers Sought to Create Wealth by Destroying Value

| by FREE

By Pete Geddes

Can one create wealth by destroying value? That is precisely what the cash for clunkers program purports to do. At least $3 billion in taxpayer dollars are being used to destroy $2 billion of productive assets, on the premise that this is somehow good for the economy. This is crackpot economics. Taken to its logical conclusion, why doesn't the Congress require all car owners to destroy their vehicle every six months? Or, that the Navy torpedo fully loaded cargo ships as they leave port? (Their hulks would at least provide environmental benefits in the form of artificial reefs, far outweighing the alleged environmental benefits of cash for clunkers.)

This economic illiteracy has roots in the New Deal. One of the more lamentable features of the 1933 Agricultural Adjustment Act (an attempt to prop up agricultural prices for farmers) was that government subsidies required farmers to slaughter livestock, plow under crops, and pour milk on the ground. This at a time when over one-third of U.S. households had someone out of work and many people experienced real hunger. Again, if destroying useful goods somehow made the nation wealthier, why not simply order the periodic wholesale destruction of entire industries?

Further, wrapping the cash for clunkers program in a green patina is a shamcars and trucks, it will have a negligible impact on our consumption of fossil fuel. Why? Because new cars are more fun to drive and greater fuel-efficiency lowers the cost of driving. Hence, we should expect to see an increase in total vehicle miles driven. Further, it is much more environmentally damaging to make a new car than to drive an older one. If reducing fossil fuel consumption is a priority, lawmakers should propose policies that actually work, such as higher gasoline taxes and congestion pricing on our highways.

Writing to The New York Times, Christoph Schmidt Essen, a professor of economics at Germany's Bochum University, offers this prospective: "The German program...is not only misguided economics but also bad for the environment.... Rather than scrapping the cars, it would make more sense to allow for their resale.... Used cars from Germany typically migrate to countries eastward, where they replace older cars that are more polluting."

In 1850, economist Frédéric Bastiat wrote perhaps his most influential essay, "That which is seen and that which is not seen." (I've posted a link to it on FREE's website.) Bastiat explains how many "obvious" solutions to economic problems turn out to have "unseen" affects that work 180 degrees opposite of proposed solutions.

Let's apply his analysis to cash for clunkers. Here's what is seen: consumers are enticed to buy new cars; auto dealers and the industry benefit. But there are also the unseen affects. In many cases, consumers trade in still productive cars, which are destroyed. (Check out YouTube for videos of perfectly serviceable engines being run to death.) This harms used car dealers, buyers, and many unseen others. Why not dismantle the car, sell the parts, and give the proceeds to the Gallatin Valley Food Bank or the battered women's shelter?

In addition, since the money consumers spend on a new car is not available for the purchase of other goods, sales fall in other industries. In Germany, retailers report the nine-year-old program for vehicle trade-in simply shifts spending patterns rather than creating new demand. Stefan Genth, managing director of the German retailers' Federation, said this program was "sucking out spending" from the retail sector.

Job creation fundamentally comes from the private sector. Every public dollar spent on cash for clunkers comes at the expense of taxpayers who would have spent the money in ways we can't imagine. As Bastiat said, sometimes the harm not seen is worse than the good that is seen.