Bastiat, and the Folly of Cash for Clunkers

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WASHINGTON: In sponsoring the recently enacted Consumer Assistance to Recycle and Save Act (CARS), Betty Sutton, a Copley Township Democrat, had her biggest moment as a U.S. House memeber. Better known as ''cash for clunkers,'' this federal program provides vouchers of up to $4,500 to U.S. residents toward the purchase of new, more fuel-efficient vehicles when trading in a vehicle that gets no more than 18 miles per gallon. The trade-in vehicles can be any age, and while many of them still work perfectly well, they must be scrapped.

The federal dollars are in addition to a dealer-designated scrap value of the trade-in, all applied to the purchase price of the new vehicle.

Sutton's efforts led to solid congressional majority votes for the program, which enjoys wide support. For instance, noted economist and former Federal Reserve Vice Chairman Alan Blinder says that clunkers is a ''public policy trifecta - [by] stimulating the economy, improving the environment and reducing income inequality all at the same time.''

And the Akron Beacon Journal editorial board adds that it is a ''sound investment'' which shores up employment in the auto industry and its many suppliers, while reducing dependence on foreign oil.

Unfortunately, that's not accurate. Cash for clunkers is best seen as a perfect example of why economic illiteracy - evident both in our politicians and even sometimes in noted economists - is so damaging to our economy now.

The clunkers program is the latest example of French economist Frederic Bastiat's warning to always analyze secondary, unseen effects as well as the primary effects of any policy; that is to say, to fully reflect all costs, as well as benefits of a program, when determining its efficacy.

Bastiat's famous 1850 parable on the matter is instructive for today, and is modernized as follows: A boy breaks a windowpane in a shop-keeper's storefront. Soon, a crowd gathers to sympathize with the shopkeeper's distress at his loss. But then someone points out that this will in fact ''stimulate'' the local economy. After all, the shopkeeper will hire a glazier to cut and install a new glass windowpane. The glazier will in turn spend his windfall elsewhere, perhaps by buying a new suit from the tailor. The tailor will likewise spend money buying shoes from the cobbler, and so on, in a continual round of transactions later known as the ''Keynesian multiplier'' effect.

Voila! Far from scolding the boy, we should thank him for the jobs he has created!

This spending-creates-wealth theory is at the heart of much current economic policy, including cash for clunkers. But it's a giant fallacy; Bastiat reminded us to remember the unseen effects, too.

The shopkeeper is now poorer, and instead of buying a new refrigerator, he must now buy the replacement window. So the glazier's gain is the appliance-maker's loss. And instead of having a window and a new refrigerator, now the shopkeeper has only the replacement window. In turn, the appliance-maker now cannot buy the new computer he needs, and a whole series of transactions ensuing from that will not happen.

A lesson from the parable is that government spending cannot create wealth; it can at best redistribute it, often accompanied by waste. The clunkers program certainly helps auto manufacturers, sellers and participating buyers, today; this is what's seen. But it hurts used-car buyers, who now face constricted supply, along with used-car dealers, repair shops, parts suppliers, mechanics and a myriad number of businesses in other industries who face lower sales revenues.

These are often people of modest income, whom U.S. Rep. Sutton claims to care about. It also means fewer new car sales tomorrow, and more burden on hard-pressed taxpayers.

Americans now recognize that trillions in ''stimulus'' spending actually means trillions in new taxes (along with, eventually, higher inflation and interest rates, and a weaker dollar).

Further, for whatever percentage of the 700,000 or so scrapped vehicles that are still serviceable, the program represents sheer destruction of valuable property, just like the broken window. And even environmental advocates such as MIT's Henry Jacoby admit that the benefit from this in terms of reduced carbon emissions is negligible: The Department of Transportation figures that replacing 700,000 clunkers will reduce carbon-dioxide emissions by just one ten-thousandth of 1 percent per year, or about 57 minutes' worth of a full-year's greenhouse emissions.

Likewise, America will be using nearly 72 million fewer gallons of gasoline a year because of the program, based on the first quarter-million vehicles replaced. The Department of Energy says U.S. drivers go through that amount of gas every 41/2 hours.

There is another aspect to the clunkers program as a ''teachable moment'': The government was supposed to have the program activated on July 1, for a period estimated to last until Nov. 1. Instead, federal administrative glitches held up the commencement until July 24, and funds were almost exhausted after one week. This from the same federal government that spent $425 billion on Medicare in 2009 after assuring us that the program would never exceed more than $5 billion per year back in 1965, and the same federal government that carves out a monopoly for itself in first-class mail delivery, but still cannot turn a profit.

Overall, cash for clunkers is another lesson in how a bureaucratic economy operates, one which denizens of European welfare states and their 30 percent lower standard of living know all too well.



John Chapman is an economist and merchant banker at Hill & Cutler Co. in Washington, D.C. 

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