Wednesday, August 25, 2010

Cash for Clunkers

Jason Kuznicki examines a 'successful' government program and discusses some unintended consequences, the bane of almost every government program, except that while these were probably unintended by the programs founders they were not unforeseen by many folks including us.

It wasn’t so long ago that everyone just loved Cash for Clunkers. People thought I was a total crank when I scoffed. Even some of my fellow ideologues wavered.

On my now-defunct blog, I wrote,

Whenever I mention that paying people to destroy vehicles does not create wealth, I am inevitably — always, always, always — presented with one of the positive (but decidedly local) effects of the program, as if it negated the simple destruction of goods:

  • American auto companies will be kept alive. Yes, but we could keep nearly any industry “alive” by paying people to continually destroy its products. This only proves that the industry probably shouldn’t be kept alive anyway. By the time it needs this kind of help, it should be allowed to fail.
  • The environmental effects will be positive. Yes, but they’ll be tiny when we consider the effects of manufacturing and running the replacement car — and you’re still paying people to destroy goods.
  • A lot of those cars were more or less junk anyway. Yes, but you’re making them 100% junk — the program’s own terms demand that they be rendered completely inoperative. How’s that an improvement?
…[But] countries can’t grow wealthy by destroying goods in exchange for pieces of paper. If they could, then there would be absolutely no reason to stop at cars…
No, the appropriate course would be to generalize, and to destroy all goods in exchange for government scrip. Then we could play Monopoly, I guess, for what all good the money would do. But we’d have to scrape a board in the dirt to do it.

That’s because money isn’t wealth. Money is at best a measure of wealth, which actually consists of goods. Money retains its value as long as there are goods to be traded for it. When the goods disappear, the economy grows poorer, regardless of how the money is shuffled around.

And the payback isn’t long in coming — today’s used car prices are soaring owing to reduced supply. (This link gives even more dramatic numbers, but I’m less sure of them. h/t Radley Balko.)

See how that works? You can’t get something for nothing. Cash for Clunkers turns out to have been a highly inefficient wealth-transfer program, that is, one that destroyed a bunch of wealth along the way. It gave wealth to those already relatively wealthy people who did the government’s bidding (that is, those who could afford to part with a used car and buy a new one). And now it’s taking wealth from those relatively poor people who need a used car today — in the form of higher prices.

Along the way, it destroyed hundreds of thousands of cars — that’s the real wealth these poor people don’t have access to anymore, because the scrapped cars aren’t a part of the economy.

And this is what passes for a successful government program.

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