Crackpot Economics

I thought this was a good editorial in the WSJ about why the 'cash for clunkers' program really isn't good economics:

Americans are streaming back into auto showrooms, and one reason is the "cash for clunkers" subsidy. Democrats are naturally claiming this is a great success, while Republicans are claiming that because the program has run out of clunker cash so quickly, this proves government can't run the health-care system. How do we elect these people? What the clunker policy really proves is that Americans aren't stupid and will let some other taxpayer buy them a free lunch if given the chance.

The buying spree is good for the car companies, if only for the short term and for certain car models. It's good, too, for folks who've been sitting on an older car or truck but weren't sure they had the cash to trade it in for something new. Now they get a taxpayer subsidy of up to $4,500, which on some models can be 25% of the purchase price. It's hardly surprising that Peter is willing to use a donation from his neighbor Paul, midwifed by Uncle Sugar, to class up his driveway.

On the other hand, this is crackpot economics. The subsidy won't add to net national wealth, since it merely transfers money to one taxpayer's pocket from someone else's, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years.

It isn't clear this will even lead to more auto production over time, since the clunker cash may simply cause buyers to move their purchases forward. GDP will get a fillip in the third and perhaps fourth quarters, which will please the Obama Administration. But the test will be if auto sales hold up next year and into the future once the clunker checks go away. The debate over the subsidy may even have prolonged this year's auto slump as buyers delayed their purchases waiting for the free lunch.

All of Washington professes to be surprised that the $1 billion allocated to the subsidy has been used up so quickly, but giving away money is one thing government knows how to do. The Clunkers who are in Congress are now patting themselves on the back for their great success, and the House quickly voted to pass out another $2 billion in clunker coupons. With a $1.8 trillion budget deficit, who's going to notice this pocket change?

Clearly, we spoilsports need an attitude adjustment to Washington's new economics. And since money is no object, let's give everyone a $4,500 voucher for other consumer goods. Let's have taxpayers subsidize the purchase of kitchen appliances, women's clothing, the latest Big Bertha driver—our Taylor-made is certainly a clunker—and new fishing boats. These are hardly less deserving of subsidies than cars, and as long as everyone thinks we can conjure wealth out of $4,500 giveaways, let's go all the way.

This just underscores the fact that subsidizing any activity promotes more of that activity, and taxing that activity reduces that activity.  The WSJ is right on the money - if we can subsidize car sales to 'stimulate' the economy, why stop there?  Why not go all the way?

As any thinking human being can understand, we can't possibly go down that road because there is no logical stopping point unless we want to subsidize literally everything, and any moron can see that leads to a complete bankruptcy of everyone (though I'm sure some would still argue against the fact that it would ever happen).

As such, this should be our first clue that subsidies are not a viable way to do business, or to 'stimulate' the economy.  Rather than increasing government intervention, we need to cut it back to the absolute minimum -- and by that I mean just enough regulation and oversight to prevent fraud, crime, etc. -- and let the free market dictate as much as possible.  It works every time it's tried.

On a related note, GM has announced further layoffs.  Huh.  How about that.

Also, have you stopped to think about exactly what is happening here?  All of these rebates are being funded by taxpayer dollars, right?  So, there's no net increase in the generation of income or wealth, is there?  It's simply the redistribution of money from one citizen's pocket to another citizen's pocket.  But who's benefiting?  Well, the people who work at these car companies, to be sure, since they keep their jobs.  That's a great thing.  But who owns the car companies?  Of the Big 3, Obama owns two of them, right?  Hmmm...

Now, what happens to the 'clunkers' after they get traded in?  They are destroyed, even if they still have value left in them.  What about the used car dealerships that would normally thrive on such trade-ins?  Why do they get the shaft?  And what about the lower income folks who would love to trade in their own 'clunker' but can't afford to buy a new car (Obama's program only applies to new vehicles)?  The destruction of these vehicles is thinning the stock (and thus raising the price) of pre-owned vehicles that would be worth a lot to those folks, too.

So, what we really have here is a thinly veiled ploy to stimulate Obamamotors, making it look like they're doing better than they actually are, while at the same time assets are being destroyed that have real value and could be sold for low cost to the very people Obama is supposedly helping with all of this.

Welcome to Obama's America.

There's my two cents.