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Monday, August 24, 2009

A Clunker of a Government Program

Guest Post by Jason Bedrick
Former State Representative

Almost three years after the passing of the great economist, Milton Friedman, the pooh-bahs who run our government have all but forgotten his exhortation to judge government programs by their outcomes, not the intentions of their designers.

The "Cash for Clunkers" program, which ends today, is a classic example of a well-intentioned program rife with unintended consequences. Proponents of the program argue that it will stimulate the economy and reduce the "carbon footprint" of America's automobiles. However, the actual outcome of the program is far from what was intended.

There are three groups of people who utilized the program:

1) Those who were going to buy a car anyway.

2) Those who can afford a new car, but weren't going to buy one because their car works well.

3) Those who can't afford a new car without the program.

Those who were already going to purchase a new car received some "free" money from their neighbors, often to purchase a more expensive model. That doesn't stimulate the economy, it merely robs some citizens of their hard-earned income to pay for their neighbor's new automobile.

Moreover, by persuading some to purchase a car who otherwise would not have, the government harmed other industries. As Jonah Goldberg has noted, this is the "unseen" aspect of the program. While the program encouraged car sales, it slowed sales in other industries in a way that's all but impossible to quantify. Those in the second group would have otherwise purchased electronics, home furnishings, or any number of other products. In this sense, "Cash for Clunkers" is really a handout to Obama's friends at United Auto Workers. Obama stole General Motors away from the bondholders who put their own money at risk to keep it afloat, violated their contracts, and gave a majority ownership to the UAW. Now Obama is favoring the UAW and the entire auto industry (including foreign manufacturers) at the expense of other industries. When politicians interfere with the economy, they ultimately make political, not economic decisions.

Finally, there are those who couldn't afford a new automobile, yet chose to buy one using taxpayer money. How short is the memory of our political class? The program is creating a bubble just like Fannie Mae and Freddie Mac did for houses. What happens when, years later, those in the third group can't afford to pay off their car loans? Answer: The same thing that happened when the government gave people an incentive to purchase homes they couldn't afford. The bubble will burst and there will be an outcry for another government handout (i.e. -- wealth redistribution from the responsible to the irresponsible).

But at least we're saving energy, right? Well, not quite. Aside from being wasteful, the government policy to destroy all automobiles traded in through the "Cash for Clunkers" program -- whether or not they are serviceable -- consumes a lot of energy. So does producing new ones. Millions of people who might have purchased fuel-efficient used cars instead had their vehicles destroyed and purchased a new ones. As the editors of National Review noted, "a 1994 Geo Metro gets mileage as good as the Prius’s without incurring the 13 million BTUs of energy necessary to build a new one."

In short, the "Cash for Clunkers" program failed to meet either of its goals. Instead, we're left with wealth transfers, market distortions, more citizens in debt, and the wasteful destruction of serviceable vehicles. We can take some measure of solace in the fact that it was one of few "temporary government programs" which actually turned out to be temporary, but it's still a shame that it was ever given an opportunity to wreak so much havoc in the first place.

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