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August 4th, 2009
The Unintended Consequences of Cash for Clunkers
photo credit: prophoto2008
Frédéric Bastiat once wrote that "the worst thing that can happen to a good cause is, not to be skillfully attacked, but to be ineptly defended." Throughout his life, Bastiat contributed a great deal of forceful arguments in the defense of free markets and individual liberty. He is most remembered for his short treatise titled "The Law", while one of his other essays—"What Is Seen and What Is Not Seen"—often goes unnoticed.
Indeed, while his arguments in the latter work are well-reasoned and founded on solid principle, they remain either generally unknown or conveniently ignored. However, the basis of this essay is of vital importance to dismantling the incestuous relationship between the government and private businesses. Yet, this specific defense for free markets has not been skillfully attacked, but rather has been relegated to philosophic discussions of theory among economists and patriots who have ineptly defended it.
Bastiat himself clarified which type of economists should be defending these principles:
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
Those who take into account the unseen and unintended consequences of economic actions must loudly and eloquently defend against such intrusions into the marketplace. Opportunities abound, since not a day goes by that the federal government doesn’t manage to continue or create poor policies that pretend to be helpful, but leave in their wake a long trail of suffering, unwise decisions, and lost liberty. The latest intrusion making its rounds in the public eye (though hardly the largest in terms of money being spent) is Cash for Clunkers.
This "successful" program has already handed out $1 billion to individuals looking for a reason to upgrade their vehicles. These “clunkers” are vehicles that get less than 18 miles per gallon and upon trade-in are destroyed and turned into scrap metal. The proposed benefits of this program are two-fold: first, that by offering incentives for people to upgrade their vehicles they will have a higher MPG efficiency and thus use less oil (thereby minimizing their “carbon footprint”), and second, that the languishing automobile industry will receive an infusion of (government-created) cash through the purchase of new vehicles (thus helping clear an accumulating supply of unwanted new vehicles).
One economist has articulated why these reasons both fall on their face, concluding with this summary:
Government policy should not favor some industries at the expense of others, but that is exactly what cash for clunkers does. The program helps consumers who can take advantage, and it increases profit and employment in the auto industry. But funding for the program comes from all other taxpayers, so it harms the consumers and industries not supported by the program.
Thus cash for clunkers creates winners and losers based on political considerations, not economic values. Whether or not government spending is a good way to stimulate the economy, the specific kind embodied in this program is misguided because it distorts the economy’s allocation of resources across consumers and industries.
The government’s near-perfect (through long experience) sleight of hand must be recognized for what it is; good economists naturally set aside the stated benefits and look for the effects that this $4,500 incentive has on car owners, car manufacturers, and the economy as a whole. Instead of focusing on the personal economic benefit (distorted though that reality truly is) of a select few, it is imperative that these government-created distortions of natural market exchanges be scrutinized from beginning to end. Only then can we adequately weigh the proposed benefits of a program (ignoring that obvious fact that this and nearly every other economic incentive is un-constitutional) and understand what its effects—all of them—might actually be.
Cash for Clunkers is not about giving out $1 billion to 0.075% of the population in order to get them to destroy their functioning cars and buy new ones from companies whose lobbyists are persuasive and powerful. Rather, it is about the allocation of money that would have been spent in other (likely more productive) ways, or saved. It is about the government continually spending money it does not have, and it is about a handful of political appointees thinking they are wise enough to outsmart Adam Smith’s invisible hand. And it is about constant distortions in the marketplace which so warp our market reality that people out of habit and long experience base their economic decisions on opportunities to game the system and save a few dollars—without questioning who is subsidizing their purchase.
Every government program that regulates, taxes, subsidizes, or otherwise controls private economic exchanges will have unintended consequences. Bad economists will find data and reasons that support the government’s wild claims, and continually shift their opinion based on whatever the latest trend happens to be. Good economists, on the other hand, challenge these propositions and demonstrate the oft-ignored downside to each new program. Naturally, the good economists are pushed to the fringe by politicians and their friends whose predictions and assertions are threatened by such contrarian arguments. But they cannot launch an effective attack on these sound ideas, and so they strive to make them unpopular and ultimately ignored.
If good economists do not rally together and more convincingly publicize their ideas, Cash for Clunkers will be a pittance compared to other and larger economic stimuli thrown to money-hungry Americans, and chained to the backs of their yet-born offspring. That any unintended consequences exist at all for such programs should be reason enough for every concerned citizen to at a minimum demand more debate and discussion before adding on new government spending to an already-large pile of federal debt.
31 Responses to “The Unintended Consequences of Cash for Clunkers”
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Thanks for making me aware of “What is Seen and What is Not Seen.” I look forward to reading it.
Reminded me of chapter 13 of “The Life of Colonel David Crockett” by Edward Ellis. http://www.amazon.com/Life-Colonel-David-Crockett/dp/1410217663
The chapter contains a compelling true story of how David Crockett learned that government using money in this way is unconstitutional.
The message in this chapter is so important for every American to learn that my mom typed the entire chapter into an email for our entire family. The subject of the email was “Not Yours To Give.”
I’ve previously posted that (excellent) story here. Thanks for the reminder, Royal, it’s well worth the read.
Government policy should not favor some industries at the expense of others? Then can I presume you’re in favor of ending subsidies for oil and gas, nuclear power, timber and mining?
Then can I presume you’re in favor of ending subsidies for oil and gas, nuclear power, timber and mining?
This program is the very crux of what role can/should the government play in the economy. Certainly auto manufacturers and dealers, as well as the people who work for them, are seeing an increase in revenue as a direct result of this program. That is a boost to the economy.
In effect, we’re using a line of credit to boost our current productivity. Businesses do this all the time. The idea is that with the increased productivity future revenues will be such that the bill will be repaid with ease. ie. by helping out the auto industry and all that they employ the government will see higher future tax revenues.
That is a boost to the economy.
No, it’s not. That’s what Bastiat argues—that claiming this infusion of cash (created out of thin air) is a boost ignores the “unintended consequences” the action had.
In the article I linked to, Bastiat explains the broken window fallacy, which has particular relevancy to your assertions. It’s flat out wrong to claim that money artificially allocated to a certain area of business will boost the economy, when you ignore the other ways in which that money might have been used.
In effect, we’re using a line of credit to boost our current productivity. Businesses do this all the time.
Business (in theory) borrow money from others who already have it. This creates no net increase in the money supply (ignoring fractional reserve banking for the purposes of simplification). Government, on the other hand, can indeed (and almost always does) increase the money supply, thus diluting everybody’s hard-earned savings to benefit a select few individuals who have more political clout.
…government will see higher future tax revenues.
So are these stimuli done in order to help the people, or the government?
To be clear, I’m not necessarily advocating for this plan, but fleshing out what in my mind is the prevailing economic theory behind programs like this one.
It’s a boost to the immediate economy of the auto industry and all those they employ. My car salesman neighbor is a big fan of anything that helps him sell more cars and enables him to keep paying his mortgage.
Now, theoretically the government would borrow money to pay for this program the same way a business would borrow money to pay for expansion. If the program/expansion is successful, then the government/business will have higher future revenues to pay off the debt incurred.
If the government is simply printing money, then all bets are off. Much of any short term gain auto industry employees feel will be lost to future inflation.
But, for the sake of argument we assume it’s a simple borrow situation. Does the government have a role in adjusting the economy in this way? You argue that the apparent success or failure of these programs ignores the other ways the money could have been spent. This makes sense to me if it were actual today tax dollars being spent since that would be taking money out of the economy in order to arbitrarily allocate it in certain areas. But if it’s borrowed money, then it was never in the economy in the first place. So all of the current private money is still being used in our theoretically free market, but now we have an influx of additional capital – just as a business does with a line of credit at the bank. We use the additional capital to get through a dry spell and then pay it off when higher future revenues allow.
I know that’s not how it does work, but is that something that should be a role of government?
Bummer. I was hoping you had some concrete example of bad side-effects of “Cash for Clunkers”. I believe Ron Paul pointed out some problems for the poor here:
I wish I had a transcript! I hate searching through videos for what I want.
But, for the sake of argument we assume it’s a simple borrow situation. Does the government have a role in adjusting the economy in this way?
Not under the Constitution, and not under any moral principle of which I’m aware. The idea that a few elected (and mostly unelected, appointed) individuals can masterfully guide the economy seems to me to be not only arrogant, but doomed to failure. (This is the same reason why the Federal Reserve needs to be shut down.)
You argue that the apparent success or failure of these programs ignores the other ways the money could have been spent. This makes sense to me if it were actual today tax dollars being spent since that would be taking money out of the economy in order to arbitrarily allocate it in certain areas. But if it’s borrowed money, then it was never in the economy in the first place.
The equation has to not only factor in the government money, but the money being spent by the individual who would have otherwise saved it for retirement, paid a local mechanic to fix his existing car, donated it to charity, etc. The $4,500 is one issue, the extra money being spent (or borrowed) by the individual is entirely another. Both matter.
The reason that it is so difficult to defend the unseen consequences is that they are, well, unseen. This means that the playing field is almost always tilted in favor of statists, because they can point to visible benefits as part of their public relations campaign to promote more statism.
I am with Trent. I wanted some concrete examples of why it is bad. I am too lazy to think about it myself right now, I was hoping you would do my homework for me. Oh well, interesting article. I will have to read the links someday.
I wanted some concrete examples of why it is bad.
For concrete examples of why it’s bad, the argument could rely solely upon constitutionality of the program. Or an economic argument explaining how the government has no money to do this in the first place.
But unseen and unintended consequences (as Reach pointed out) are hard to notice, and they often take longer to manifest themselves.
One example of this is the availability of spare parts for older vehicles. Under this program, automobiles traded in are completely destroyed, without the opportunity to strip the car for spare parts able to be reused in other vehicles. Basic supply and demand influences mean that prices for existing old parts will go up since the supply has been decreased.
Who does this hurt? Poor people who lack the money and credit to upgrade their vehicles to the latest, “greenest” model. These individuals are stuck with their 1985 Mazda, and now when their alternator croaks, they’re forced to pay a premium to buy a used replacement.
So while claiming to boost the economy, you’ve now put a huge financial burden on a family that no longer has a functioning car. Stories like these are difficult to quantify since the effects trickle down over time and do not easily fit into an economist’s formula, but they are real and keenly felt by those who bear the brunt of poor policies enacted by a lawless government doing whatever it pleases.
As is your follow up comment immediately preceding this one. It will be very interesting to learn what affect the destruction of these cars will have in the coming years.
On that note, there ought to be examples of this type of activity done in the past along with their accompanying unintended consequences.
On that note, there ought to be examples of this type of activity done in the past along with their accompanying unintended consequences.
Cash For Clunkers is gratuitous even for program-heavy Obama; it’s overkill, and it’s a dramatic example of an inability to prioritize. It just makes me tired.
One example of this is the availability of spare parts for older vehicles. Under this program, automobiles traded in are completely destroyed, without the opportunity to strip the car for spare parts able to be reused in other vehicles.
Oops, you overlooked something here. Dealers are allowed to strip “clunkers” for parts as long as they are not part of the engine or drive train. (Reference) So spare engine and drive train parts may end up in shorter supply in the future, but the “clunker” parts will not 100% disappear from future used parts inventories.
However, now that we have cleared up that particular issue, I do agree with your point that there will be some unseen/unintended consequences of this program. The biggest issue that comes to my mind has been pointed out already: the government spending even more money it doesn’t have.
A bigger problem than our Congress not thinking of what the unseen/unintended consequences might be is their lack of even acknowledging that any such could exist even if you can’t predict what they might be.
Thanks for the clarification, Jason. I had read differently elsewhere.
In addition to your point on Congress, I think it should also be noted that some of the consequences we might deem unintentional may very well be intentional after all. But instead of these intentions being offered to the public as valid reasons for the program’s existence, they are devious desires for possible outcomes of the programs—side-effects of which the program’s sponsors are aware, but would never dare admit in public.
I liked Peter Schiff’s take on the issue from Takimag.com:
“The recently passed “cash for clunkers” program (currently on-hold, as it ran out of funding in one week) is a perfect example of how government policy can make the economy worse. By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy. The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Don’t they realize that is precisely the behavior that got us into this mess?
Think about it this way. If your friend were in trouble because he had too much debt, would you encourage him to take on even more? Wouldn’t a real sign of progress be a reduction of debt, even if he had to cut back on his everyday expenses? What is true for an individual is also true for a collection of individuals, even if they call themselves a ‘government.’ If, as a country, we are even deeper into debt now than we were before, we are worse off. Period. The fact that the additional debt enabled better short-term GDP numbers is a long-term negative. “
I think the main measure of success most are using for this program is how many cars are being traded in. Both political parties are taking this tactic – Democrats calling it successful because of the high number of people taking advantage of the program and Republicans calling it a failure because of the high number of people taking advantage of the program.
The Fox News fallacy that it’s a failure on its own (limited) terms drives their own “then how can I trust the government to run healthcare?” talking point, but few are arguing against the project’s very necessity. I have yet to see a single conservative talking head argue against the project on ideological grounds, only that it’s too expensive.
Dr. Paul briefly mentioned the market for used cars being “undermined”, in the video Trent linked to.
To expand upon this, the cars being destroyed are 25 years old or newer. That means the ones being destroyed are the most reliable and affordable ones in the used car market, as the classic cars have been mostly relegated to the budgets of hobbyists, and cars much older than the late 80’s are beginning to have problems with transmissions,etc. that render them too much of an investment for lower income Americans.
Reducing the inventory of these cars will obviously raise the prices the remaining vehicles will fetch, making it harder for lower income Americans to purchase reliable vehicles. In addition, there will be a shortage of these cars for the used car dealers to sell in general, hurting business.
As for the parts discussion, here is an interesting article.
Apparently, dealers are supposed to use a “chemical mix that replaces the lube oil and junks the engine” before sending the vehicles to the salvage yard, and some dealers are so overwhelmed they are not doing this.
I suppose there could actually be a boon to the used parts market instead of a shortage then…
I guess the only sure thing about government programs is that you can never be exactly sure of their full consequences.
I will say that I have seen for myself that most government programs for the poor provide more harm than good.
And a local flavor of unintended consequences found in the Deseret News.
This has also brought to my mind something that’s been bouncing around my head for a while. Next to my 10 year old neighborhood is a new development. There are many houses for sale around me, most with incredibly low price tags but still not selling. The new development had come to a screeching halt over the last 10 months or so, but lately has seen much more activity. Coincidentally, this activity coincided with the federal and state tax credits for new houses. So my average, middle class neighbors who need to sell their home can’t because the relatively affluent home builder next door has a $14.000 price advantage courtesy of government tax credits.
Excellent post, Connor.
The state of Arizona had a program years ago that gave money to individuals who wanted to buy new cars and convert them to run on “cleaner burning fuels”. People would buy big trucks and SUV’s, convert them to run on propane or LPG and then would never actually fuel them with either fuel. The law never mandated that people had to use the LPG or propane. Consequently, the state was simply discounting trucks and SUV’s for people to buy.
Good stuff Connor. I love that Bastiat Essay. It’s time I give it another read since it’s been a couple years.
Another thing the cash for clunkers scam does is put people more in debt. They will most likely be going into a dealership thinking they’re going to make out on a car, when in reality they will drive off the lot immediately upside down and usually more in debt. It also targets a small amount of vehicles, because of the gas mileage restrictions. Even some cars made in the 80’s don’t meet the requirements. The way I see it, is they want to pull some SUV’s off the street. This is just unamerican plain and simple. Liberty vs tyranny.
Case in point.
Charities are now suffering too.
Connor, I love Bastiat. And I think you’re right—I don’t hear people refute his reasoning so much as ignore it.
I used “The Seen and the Unseen” once to make a point about repentance. Read the article here:
Bastiat and Repentance: How Not to Get Out Of a Recession
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