Thursday, July 30, 2009

Cash for Clunkers or just a Clunker?

In a previous post I cited Henry Hazlitt's Economics in One Lesson, as a brilliant read. This book is a must for all who want to learn economics. The lesson is given in pages 15 through 22. The essence of the lesson is shown by the broken window fallacy. In that fallacy, some mistake the job creation for the glazier as growth and not as the destruction of the opportunities that now can not be done. For example, if someone had not broken the window, the glazier could have been putting in a window for someone else resulting in a net growth of 1 window. Replacement of the destroyed window results in a net growth of zero.

So I read with interest an AP story tonight titled Government to Suspend Cash for Clunkers. The reason is they might run out of the 1 billion dollars in rebates. What they should see is the cash for clunkers is a case of the broken window fallacy. In order to get your $3,500 or $4,500 rebate you have to bring in an old car and buy a new car. So far so good, the government is incentivizing you to buy newer fuel efficient cars, I get it. But instead of the clunker moving into the used car market as it would in a private market transaction, the government is requiring dealers to destroy the trade in automobile. The government is breaking one car to get you to buy another. While there may be some benefit for growth here, it is far less than it might have been.

Once again, the government interfers in a market and everyone focuses on what is seen (people buying new cars) and not what is unseen. When the used car market is deprived of supply, the prices of used cars goes up and the sales of used cars goes down. So the same policy that seems to enhance consumer spending and create growth has this indirect component that causes the desired effects to have far less appeal.

With economic freedom comes liberty and in this care both are harmed. Cash for Clunkers is a clunker.

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