Robert Murphy

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.

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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.

None of this happened, unfortunately, because the Fed decided to prop up bankrupt investment banks by taking “toxic” assets off their books in exchange for dollar reserves that Ben Bernanke created out of thin air. At the same time, the federal government began its assault on the private sector, and began taking over (or threatening) car companies, banks, energy markets, and now health care.

It is because of government meddling that this recession has been so long and so painful. It is no coincidence that the two periods of the biggest power grabs in Washington—the 1930s and right now—coincided with the worst economies in U.S. history. Having the feds borrow a few more billion, to pay people to buy cars, does nothing to alleviate the underlying problems. The economy can’t return to normal when every business decision needs to consider what politicians might announce next week.

The ultimate irony is that the cash-for-clunkers program isn’t even good from an environmental viewpoint. Its proponents naively assume that someone who trades in, say, a 10 mpg clunker for a spiffy 35 mpg vehicle are thereby avoiding a tremendous volume of gasoline consumption. But what these fans of the program overlook is that most people will drive more miles in their new cars. For example, someone might trade in a rusty pickup that’s been sitting in the garage for years.

Some leading environmental advocates agree. “As a carbon dioxide policy, this is a terribly wasteful thing to do,” according to Henry Jacoby, co-director of the Joint Program on the Science and Policy of Global Change at MIT. “The amount of carbon you are saving per federal expenditure is very, very small.”

The cash-for-clunkers plan is a giant waste of tax dollars. It further distorts the economy, making industry even more vulnerable to the changing whims of D.C. politicians. To add insult to injury, the alleged environmental benefits are minimal. The only virtue of the program is that it steers billions of dollars into the pockets of those with friends in high places.


Robert Murphy

Robert Murphy has a Ph.D. in economics and is the author of The Politically Incorrect Guide to Capitalism (Regnery 2007).

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