August 21, 2009
In his book “Applied Economics: Thinking Beyond Stage One,” Thomas Sowell brilliantly explains how politicians often fail to consider (or inform constituents of) the potential adverse consequences of government policies.
While buying my new Ford (I’m trying to support the last private-sector U.S. car manufacturer) and fixing up to sell my Lexus hybrid, I learned firsthand about the unintended adverse consequences of the “Cash for Clunkers” program. The media says it’s “wildly popular” – but I assure you, it isn’t among the auto-body shop and mechanic crowd, used car dealers or even dealers of new American cars.
At the auto-body shops where I got estimates, I learned how dramatically their small businesses were affected, not just because they lost repair business on clunkers, but because the program disallows salvaging spare parts from the clunkers. Spare parts, not to mention used cars, just got more expensive, so charities and low-income people who can’t afford a new car will pay more to purchase or repair a used car, thanks to their government!
Furthermore, many clunker drivers who couldn’t have afforded a new car are incentivized by the government to take on debt and trade up for an expensive new car. The government that lambasted predatory mortgage lenders and credit-card companies for luring unsuspecting lower-income people into greater debt than they could afford is now incentivizing the same practice with cars. Isn’t that ironic?
You’d think the Ford dealer would be ecstatic with a deal to transfer U.S. taxpayer dollars to car dealers in order to stimulate the economy. But the majority of the new car demand is going to Japanese brands, and though Ford receives the bulk of the remaining demand for U.S.-made cars, my Ford dealer told me that the government bureaucracy set up to administer this program is so unresponsive and disorganized that it is as much a headache as a benefit!
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Even the environmental benefits are likely offset by the environmental cost of destroying the clunkers rather than recycling them. MIT professor Henry Jacoby points out that the amount of carbon we are saving per federal expenditure is very, very small. What’s more, economists remind us that these new car purchases are one-time only, so the effect on the U.S. economy is simply a timing one and won’t create new permanent jobs.
“Cash for Clunkers” is boosting the Japanese economy while hurting U.S. small businesses and lower-income people. These are the unintended adverse consequences when the blunt tool of government subsidy is used to fine-tune a free-market economy. In the end, our government is merely taking money out of one pocket (U.S. taxpayers) and putting it in another pocket (foreign car manufacturers), while subsidizing the purchase and financing of an asset (car) that is more expensive than it would otherwise have been. But the politicians love it because it is “wildly popular”!
Does that sound familiar? If not, you have got to read Thomas Sowell’s most recent book, “Housing Boom and Bust”!