Posted by
Dave Smith on Wednesday, August 05, 2009 7:06:49 PM
In only a week's time, the government's much ballyhooed "Cash for
Clunkers" program (officially the "Car Allowance Rebate System"), has
blown through a billion dollars and become the darling of the
mainstream media, automobile corporations, and politicians.
It is credited with Ford's first sales increase in over two years
(on a year-over-year basis), and in slowing the decline of
government-owned GM and Chrysler. It's supposed "success" has fueled
Congress's desire to allow it to blow through
another $2 billion
of taxpayers' money. The bill has the support of the groups across the
spectrum of special interests -- AFL-CIO, the United Autoworkers, the
U.S. Chambers of Commerce, and the National Association of
Manufacturing -- and of politicians on both sides of the aisle.
So
what's not to like about getting old, gas guzzling cars off the road,
replaced by (ostensibly) safer, more environmentally-friendly
vehicles? Especially when doing so is "stimulating" the economy,
providing demand for new automobiles?
The answer is multi-fold.
First of all, it is important to remember something about the very
definition of economics -- the study of the allocation of scarce
resources
that have alternative uses is how economist Thomas Sowell puts it in his book
Basic Economics.
If you have $10 in your pocket or $10 thousand, every dollar you spend
on candy is not available to spend on gasoline for your car, or
clothes, or your electric bill. Likewise, every dollar a family
spends on a new car is a dollar
not being spent on food, health
care, or clothing, or invested for retirement or a college fund, or put
away in a savings account for a rainy day.
The automobile
industry is very large and very visible, and has very vocal supporters
-- unions, manufacturers, dealers, etc. Plus, don't forget: the
government now owns majority stakes in two of our three largest auto
makers (GM and Chrysler). So now add the entire government to the mix
as a stakeholder. So offer a tax credit for the purchase of a new car
(trading in a "clunker", defined in this case based on gas mileage, not
actual physical condition), and watch the sale of new cars get
"stimulated". The purchase of new cars increases, satisfying the those
vocal stakeholders -- but at what price? It's easy to measure the
increase in new car sales, but much harder to measure the
decrease
in the purchase of other goods and services, the money that individuals
and families would have spent elsewhere if not buying a new car -- the
"alternate uses" of the family's income.
Of course, for the
government to spend money, it has to get it from somewhere -- either
taxation, borrowing (which basically means future taxation), or by
printing money. In each case, nothing of value is created by the
government, resources are just shifted from one part of the economy
(present or future) to another, or the value of money already held by
individuals and institutions is decreased. Taking a slice of pizza
from my plate and putting it on yours doesn't increase the total amount
of pizza, it just merely changes who consumes it. Tax credits like the
"cash for clunkers" program distorts price signals and reallocates
resources throughout the economy. This, by definition, means a less
efficient economy.
Lost in much analysis of the new car buying
spree is the lesson learned in the recent subprime mortgage crisis:
when the government distorts the market by artificially created demand
for something, people tend to borrow money that might not be able to
pay it back. We have seen a rash of mortgage foreclosures, as people
took advantage of government incentives to purchase homes; thanks to
"cash for clunkers", are we setting ourselves up for a rash of auto
loan foreclosures as well? Only time will tell. One can be sure that
if so, we can look for a government proposal to help people who "get
behind" on their car payments -- another government bailout.
Finally,
there's the usual nature of waste, fraud, and abuse endemic to any
government program, particularly one initiated in a hurry. The "CARS"
program sets very specific criteria for what constitutes a "clunker"
that is eligible for the tax credit; however, auto dealers have every
incentive to qualify as many people as possible for the program and
thus sell more new cars. What will be the audit and enforcement
process involved to ensure taxpayer money isn't spent on "credits" for
unqualified "clunkers", or even on fictitious car sales?
A more
comprehensive analysis shows that the "cash for clunkers" is no benefit
to the overall economy, just another transfer of property to special
interests, facilitated by the government and subject to fraud and
inefficiency. Congress should not reauthorize another round of
billions in tax dollars for this program.