Just when you thought the wizards in Washington couldn’t distort the economy any more, along comes the “cash-for-clunkers” program. Spending billions of tax dollars to bribe people to buy new cars is always a silly idea, but it’s especially ludicrous with unemployment near 10% and the federal budget deficit near $2 trillion. What’s especially ironic is that the allegedly “green” program will barely put a dent in carbon dioxide emissions. Cash-for-clunkers is a loser even on its own terms.
For those who haven’t heard, cash-for-clunkers offers tax rebates of up to $4,500 to people who turn in their older vehicle and buy a new, fuel-efficient model. (The credit is actually given to the dealer who sells the new car.) The Senate has just approved a $2 billion expansion of the program. The official rationale is that cash-for-clunkers will stimulate the economy and at the same time reduce the threat of global warming. But the program fails on both counts.
As far as “stimulus,” it is a basic error to assume that the way to fix an economy is to get people to spend more. This has things exactly backward. The problem during a recession is that people aren’t producing enough. The hard part in life is going to work all day; it’s easy to consume. No matter how many green pieces of paper consumers have in their wallets, they won’t be able to buy products if workers haven’t already made those products.
Every dollar the government spends comes from either taxes, borrowing, or inflation. In all cases, the citizens are ultimately paying for it. You don’t make the country wealthier by taking money from some citizens and giving it to others so that they can buy a car that’s too expensive for their budget.
Right now, the economy is in recession because of the mistakes made during the housing bubble years. From 2002-2006, too many resources—such as bricks, lumber, and labor power—went into housing and related sectors. After the bubble popped, workers and resources needed to shift out of these bloated sectors and into those areas where they were more efficient.
Had the government and Fed kept their hands off, there would have been a sharp but short recession, as this readjustment took place. Unemployment would have spiked upward, but businesses in other sectors would have hired new workers as wages fell.